How to Make Money with ETFs (2026): Returns, Risk, and the Real Timeline

If you’ve been told that ETFs are the easiest way to invest your money and watch it grow, that’s mostly true. But “easy” and “fast” aren’t the same thing — and that distinction trips up a lot of people.

Exchange-traded funds have become the default recommendation for new investors, and for good reason. They’re cheap, diversified, and simple to buy. You don’t need to pick individual stocks. You don’t need a financial advisor. You can start with $50 and a phone.

But here’s what the “just buy ETFs” crowd often fails to mention: the average annual return of the stock market is around 10% before inflation. On a $10,000 investment, that’s $1,000 in your first year. Not per month. Per year.

That’s not a knock on ETFs. It’s context. If you’re investing for retirement 20–30 years from now, ETFs are one of the best tools available. If you’re trying to generate meaningful monthly income within the next year or two, you need to understand what ETFs can and can’t do — and plan accordingly.

This guide covers how ETFs actually make you money, the difference between income and growth ETFs, realistic return expectations backed by historical data, and who this strategy genuinely serves best.

First — This Is Important…

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Now — here’s how ETFs actually work, and what you can realistically expect.

What ETFs Are

An ETF — exchange-traded fund — is a basket of investments bundled into a single security that trades on a stock exchange, just like a regular stock. When you buy one share of an ETF, you’re buying a tiny piece of every investment inside that basket.

Think of it this way: instead of buying shares in 500 individual companies, you buy one share of an S&P 500 ETF and instantly own a sliver of all 500. The ETF handles the diversification for you.

ETFs can hold stocks, bonds, commodities, real estate (through REITs), or a mix of everything. The specific mix depends on what the ETF is designed to track. Some track broad market indexes. Others focus on specific sectors like technology, healthcare, or energy. Some target dividend-paying companies. Others track the price of gold or Bitcoin.

The key differences between ETFs and mutual funds: ETFs trade throughout the day at fluctuating prices (like stocks), while mutual funds trade once per day at the closing price. ETFs generally have lower expense ratios. And ETFs don’t typically require minimum investments — you can buy a single share or even fractional shares at most brokerages.

How ETFs Make You Money

There are exactly two mechanisms. Understanding both matters, because they work on very different timelines.

1. Capital Appreciation (Price Goes Up)

When the underlying investments inside the ETF increase in value, the ETF’s share price rises. If you bought an S&P 500 ETF at $400 per share and it rises to $440, your investment has gained 10%. You realize that profit when you sell.

This is how most ETF wealth is built — through long-term price appreciation as the overall market grows over years and decades.

2. Dividend Distributions

Many ETFs hold dividend-paying stocks or interest-paying bonds. The ETF collects those payments and distributes them to you, usually quarterly. You can take the cash or reinvest it to buy more shares (which most brokerages automate for free).

The dividend yield on a broad market ETF like the S&P 500 is typically 1.3–2.0%. Higher-yield ETFs focused specifically on dividend stocks or bonds can pay 3–7%, but often with lower price appreciation potential.

Total return — the combination of price appreciation and dividends — is what actually determines how much money you make. An ETF that appreciates 8% and pays a 2% dividend gives you a 10% total return.

Passive vs. Active ETFs

Not all ETFs work the same way behind the scenes.

Passive (index) ETFs simply track a specific index, like the S&P 500 or the total U.S. stock market. A computer rebalances the fund to match the index. No human is making buy/sell decisions. These have the lowest fees, often 0.03–0.10% annually.

Active ETFs have a human fund manager (or team) making investment decisions, trying to beat the market rather than match it. These charge higher fees, typically 0.50–1.00% annually. Research consistently shows that most active managers fail to outperform their benchmark index over long periods. As of 2025, roughly 90% of actively managed large-cap funds underperformed the S&P 500 over a 15-year period, according to S&P Dow Jones Indices data.

For most investors — especially beginners — passive index ETFs are the smarter choice. Lower fees compound into significantly more money over time, and you’re not paying a premium for management that statistically underperforms.

Realistic Return Expectations

This is where honesty matters most. Here’s what historical data actually shows for U.S. stock market ETFs.

Historical Average Returns

The S&P 500 has returned approximately 10% annually on average over the past 90+ years, including dividends. Adjusted for inflation, that drops to roughly 7%.

But “average” is deeply misleading. The market doesn’t return 10% every year like clockwork. Here’s what actual year-to-year performance looks like:

Period	Annualized Return (S&P 500 with dividends)
2014–2024 (10 years)	~12.8%
2004–2024 (20 years)	~10.5%
1994–2024 (30 years)	~10.2%
Best single year (recent)	+31.5% (2019)
Worst single year (recent)	-18.1% (2022)

The lesson: over any single year, returns are wildly unpredictable. Over 20+ years, they’ve historically averaged out to roughly 8–12%.

Growth Examples at Different Investment Amounts

Here’s what consistent investing in a broad market ETF looks like at a 9% average annual return (conservative for planning):

Monthly Investment	After 10 Years	After 20 Years	After 30 Years
$100/month	~$19,500	~$66,800	~$183,700
$300/month	~$58,500	~$200,400	~$551,100
$500/month	~$97,500	~$334,000	~$918,500
$1,000/month	~$195,000	~$668,000	~$1,837,000

Those numbers are powerful — but look at the timeline. Even investing $500/month, you don’t hit six figures until about year 10. The magic of compounding is real; it’s also slow. This is a retirement strategy, not a “quit your job next year” strategy.

Types of ETFs and What They’re Best For

Different ETFs serve different purposes. Matching the right ETF to your goal is the most important decision you’ll make.

Broad Market ETFs

These track the entire U.S. stock market or large indexes like the S&P 500. Examples include the Vanguard Total Stock Market ETF (VTI), the SPDR S&P 500 ETF (SPY), and the iShares Core S&P 500 ETF (IVV). These are the default recommendation for long-term investors because they provide maximum diversification across the entire market. Expense ratios are extremely low — often 0.03%.

Dividend ETFs

These focus on companies that pay consistent or growing dividends. Examples include the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG). Yields typically range from 2.5–4.5%. Best for investors who want some current income alongside growth.

Bond ETFs

These hold government or corporate bonds and pay interest income. Examples include the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG). Lower returns than stock ETFs (historically 4–6% average) but significantly less volatile. Useful for reducing portfolio risk, especially as you approach retirement.

International ETFs

These invest in companies outside the U.S. Examples include the Vanguard FTSE Developed Markets ETF (VEA) for developed countries and the Vanguard FTSE Emerging Markets ETF (VWO) for emerging economies. Adding international exposure diversifies beyond the U.S. economy and can capture growth in other regions.

Sector and Thematic ETFs

These target specific industries like technology (XLK), healthcare (XLV), energy (XLE), or themes like AI, clean energy, or cybersecurity. Higher potential returns but higher risk due to concentration. Best used as a smaller allocation alongside a broad market core.

Income vs. Growth ETFs: The Tradeoff

This is the same fundamental tension that exists across all of investing, and understanding it prevents common mistakes.

Growth ETFs prioritize price appreciation. They hold companies that reinvest profits into expansion rather than paying dividends. Higher long-term return potential but minimal current income. You make money when you sell.

Income ETFs prioritize current cash flow. They hold dividend stocks, bonds, or REITs that distribute regular payments. Lower long-term growth potential but provide income you can live on (if you have enough invested). You make money while you hold.

Most people under 50 should lean heavily toward growth ETFs and reinvest dividends. Most people near or in retirement should shift toward income ETFs. Almost everyone benefits from owning some of each.

Risk Discussion: What Can Go Wrong

ETFs reduce risk compared to individual stocks, but they don’t eliminate it.

Market risk. If the overall market drops 30%, your broad market ETF drops 30%. Diversification protects you from individual company failure — not from market-wide downturns. The S&P 500 lost roughly 50% during the 2008 financial crisis and roughly 34% during the initial 2020 COVID crash. Both times it recovered, but recovery took months to years.

Concentration risk in sector ETFs. A technology ETF concentrates your money in one industry. If that sector crashes (like tech in 2000–2002), your losses are severe even if the rest of the economy is fine.

Interest rate risk for bond ETFs. When interest rates rise, bond prices fall. Bond ETFs lost money in 2022 when the Fed raised rates aggressively — unusual for what many considered “safe” investments.

Expense ratios. While ETF fees are low, they compound over decades. A 0.03% expense ratio vs. a 0.75% expense ratio on $500,000 invested over 30 years means a difference of over $200,000 in returns. Check the expense ratio before buying.

Tracking error. Some ETFs don’t perfectly match their target index. The difference is usually tiny for major ETFs but can be larger for niche or international funds.

Liquidity risk in niche ETFs. Popular ETFs like SPY trade millions of shares daily with tight spreads. Obscure thematic ETFs may trade thinly, meaning you could pay more to buy or receive less when selling.

Pros and Cons

Pros: Instant diversification across hundreds or thousands of investments. Extremely low fees (many under 0.10% annually). Simple to buy and sell through any brokerage. No minimum investment at most brokerages (fractional shares available). Tax-efficient compared to mutual funds. Transparent — you can see exactly what the ETF holds. Historically strong long-term returns for broad market ETFs. Fully passive once purchased.

Cons: Returns are market-rate — you won’t beat the market with a passive ETF. Short-term volatility can be stomach-churning (30%+ drops happen). Meaningful wealth building requires 10–30 years of consistent investing. Current income from dividends is modest unless you have substantial capital invested. Sector/thematic ETFs carry concentration risk. No protection against market-wide downturns.

Who ETFs Are For

ETFs are an excellent fit if you’re building long-term wealth for retirement (10–30+ year horizon), want a simple, low-maintenance investment approach, are comfortable with market-rate returns and don’t need to beat the market, have regular income you can contribute monthly, understand that short-term losses are normal and won’t panic-sell, or want diversification without the complexity of picking individual stocks.

Who ETFs Are NOT For

ETFs aren’t the right primary strategy if you need significant monthly income within the next 1–2 years, have limited savings and need to build income from scratch quickly, are looking for returns that outpace the market (ETFs deliver the market return by design), or cannot tolerate seeing your portfolio drop 20–30% during downturns without selling.

If you’re in the “limited capital, need income soon” camp, building an income-generating asset first — then investing the profits into ETFs — is a far more practical path. See best business model for long-term income and realistic online income expectations.

How to Start Investing in ETFs

Step 1: Open a brokerage account. Fidelity, Charles Schwab, and Vanguard are the most popular options. All offer commission-free ETF trading and fractional shares. The process takes 10–15 minutes.

Step 2: Decide on your allocation. For most beginners, a simple two- or three-fund portfolio works well: a U.S. total stock market ETF (like VTI), an international stock ETF (like VEA or VXUS), and optionally a bond ETF (like BND) if you want lower volatility. A common starting allocation for someone in their 20s–30s is 80% U.S. stocks, 15% international stocks, 5% bonds. Adjust toward more bonds as you age.

Step 3: Set up automatic investing. Most brokerages let you schedule recurring purchases — weekly, biweekly, or monthly. This is dollar-cost averaging, and it removes emotion from the equation. You buy consistently regardless of whether the market is up or down.

Step 4: Reinvest dividends. Enable automatic dividend reinvestment (DRIP) to compound your returns without thinking about it.

Step 5: Leave it alone. This is the hardest and most important step. Don’t check your portfolio daily. Don’t sell during downturns. The investors who earn the best returns are the ones who buy consistently and resist the urge to tinker. Set a calendar reminder to rebalance once per year.

For additional research tools and market analysis, see stock newsletters.

ETFs vs. Index Funds: What’s the Difference?

This confuses a lot of beginners because the terms are often used interchangeably — but they’re not identical.

An index fund is any fund that tracks a market index. It can be structured as either a mutual fund or an ETF. An ETF is a structure — a fund that trades on an exchange like a stock.

So an “S&P 500 index fund” could be a mutual fund (like Vanguard’s VFIAX) or an ETF (like Vanguard’s VOO). They track the same index and deliver nearly identical returns. The differences are mechanical: ETFs trade throughout the day; mutual funds trade once at market close. ETFs have no minimum investment; some mutual fund index funds require $1,000–$3,000 minimums. Tax treatment is slightly more favorable for ETFs in taxable accounts.

For more on the index fund side specifically, see how to make money with index funds.

Tax Considerations for ETF Investors

Taxes affect your real returns, and ETFs are taxed differently depending on your account type and how long you hold.

In a taxable brokerage account: You’ll owe capital gains tax when you sell ETF shares at a profit. Hold longer than one year and you pay the long-term capital gains rate (0%, 15%, or 20% depending on income). Sell within a year and you pay your ordinary income tax rate, which can be significantly higher. Dividends received from ETFs are also taxable — qualified dividends at the lower capital gains rate, non-qualified dividends at your ordinary income rate.

In a tax-advantaged account (IRA, 401k, Roth IRA): No taxes on dividends or capital gains while the money stays in the account. Traditional IRAs and 401ks defer taxes until withdrawal (then taxed as ordinary income). Roth IRAs are funded with after-tax money, so withdrawals — including all gains — are completely tax-free. For long-term ETF investing, Roth accounts are powerful.

ETFs vs. mutual funds on taxes: ETFs are generally more tax-efficient than mutual funds due to their “in-kind” creation and redemption mechanism, which minimizes capital gains distributions. This is a meaningful advantage in taxable accounts over long holding periods.

Practical tip: If you’re investing for retirement, maximise tax-advantaged accounts first (especially employer-matched 401k and Roth IRA). Only after those are funded should you invest in a taxable brokerage account, where tax efficiency becomes more important.

Frequently Asked Questions

Can you get rich from ETFs? Yes — over a long enough timeline with consistent contributions. Investing $500/month in a broad market ETF averaging 9% annual returns for 30 years would produce roughly $918,000. Getting “rich quickly” from ETFs is not realistic.

What’s the best ETF for beginners? A total U.S. stock market ETF (VTI) or an S&P 500 ETF (VOO or SPY) is the most common starting point. Low fees, maximum diversification, and decades of strong historical performance.

How much money do I need to start investing in ETFs? As little as $1 with fractional shares at most brokerages. There’s no meaningful minimum. Start with what you have and add consistently.

Are ETFs safer than stocks? Individual stocks can drop 50–100%. A diversified ETF holding hundreds of companies is far less likely to experience catastrophic loss. An individual company can go bankrupt; the entire S&P 500 going to zero is essentially impossible. That said, ETFs still decline during market downturns.

How often do ETFs pay dividends? Most stock ETFs pay quarterly. Some bond ETFs pay monthly. You can find the distribution schedule in the ETF’s prospectus or on your brokerage platform.

Do I pay taxes on ETF gains? Yes. In a taxable brokerage account, you’ll owe capital gains tax when you sell at a profit and income tax on dividends received. In tax-advantaged accounts (IRA, 401k, Roth IRA), taxes are deferred or eliminated depending on the account type.

The Bottom Line

ETFs are one of the most accessible, low-cost, and historically reliable ways to build wealth over time. For long-term investors, they’re hard to beat. The simplicity of buying a single broad market ETF, contributing monthly, and letting compounding work over 20–30 years has created more millionaires than most people realise.

But they’re a long game. If your goal is income now — within the next 6–12 months — ETFs alone won’t get you there without significant starting capital. The returns are real, but they need time.

That’s why the approach I recommend starts with building a business that generates cash flow first, then redirecting that income into investments like ETFs that compound over decades. You get the near-term income from the business and the long-term wealth from the market.

That’s exactly what I do — and if you want to see the business model behind it, here’s how I build simple websites that rank in Google and generate $500–$1,200/month each in recurring lead generation revenue.