Could Investing $10,000 in IWM Make You a Millionaire?

If you’re feeling nervous about recent downturns in tech stocks and want to invest your money into a different part of the market, the iShares Russell 2000 ETF (NYSEMKT: IWM) might be on your radar. This small-cap stock ETF gives you exposure to nearly 2,000 small publicly traded U.S. companies. Buying small-cap stocks can be a good strategy to diversify your portfolio, especially if you’re heavy on major tech names.

But can IWM make you a millionaire? One downside to this small-cap stock ETF is that it has underperformed the S&P 500.

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Let’s see what it takes to become a millionaire by investing in IWM and why it might not be the best choice for investors who want long-term growth.

The iShares Russell 2000 ETF began trading for investors on May 22, 2000. That means the fund has a track record of almost 26 years since its inception date. In the past (nearly) 26 years, IWM has delivered average annual returns of 8.06%. That’s a lower growth rate than the S&P 500 index’s long-term average of 10% annual returns.

While 8.06% average annual growth can still make you a millionaire, it will take a long time.

Let’s say you invested $10,000 in IWM and the ETF keeps delivering its average annual return of 8.06%, year after year, and you leave your money invested to grow from compounding. After 30 years, you’d have $102,317. After 45 years, you’d have $327,283. And after 60 years, you’d finally get to $1 million. That’s an awfully long time to wait — longer than most people’s investing lifetimes.

So why do people buy small-cap stocks? A big reason is diversification. Sometimes investors want to include a wider range of stocks in their portfolios. If you’re worried about a possible artificial intelligence (AI) bubble or feel like the S&P 500 and Nasdaq-100 have gotten too top-heavy with just a few major tech stocks, owning small-cap stocks could be a good defensive play.

IWM contains thousands of stocks that might become tomorrow’s fastest-growing companies. The ETF’s top holdings by sector include:

• Industrials (18.3% of the fund)

• Healthcare (17.4%)

• Financials (17.1%)

• Information technology (14.7%)

• Consumer discretionary (8.3%)

The fund charges an expense ratio of 0.19%, which includes a management fee.

Buying this small-cap ETF can offer you exposure to different parts of the stock market that might be less risky in case of an AI bubble bursting or a bear market in tech stocks. But one big risk of IWM is that it will grow too slowly to make you a millionaire before you retire. Most investors who want long-term growth should buy other diversified ETFs, such as S&P 500 index funds.

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Ben Gran has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Could Investing $10,000 in IWM Make You a Millionaire? was originally published by The Motley Fool