Is This Simple Index Fund a Millionaire Maker?

The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the largest and most popular exchange-traded funds (ETFs) on the stock market. It tracks the S&P 500 (SNPINDEX: ^GSPC) market index with minimal fees and laser-like precision. This Vanguard ETF may be the only investment you'll ever need if you haven't bought your first stock or fund yet. There's nothing wrong with simply matching the average market returns over a long holding period.

At the same time, maybe you want to build your portfolio around a more opportunistic foundation. Isn't the Vanguard FTSE Developed Markets Index Fund (NYSEMKT: VEA) just as promising in the long run, but also undervalued next to its S&P 500-tracker cousin? In short, wouldn't the Developed Markets ETF have a greater chance of making you a million dollars, mostly thanks to its lower returns in recent years?

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Let's take a look.

What makes the Vanguard Developed Markets fund tick?

First things first. The Developed Markets fund is also one of the top 10 ETFs on today's market, based on its $146.6 billion of assets under management (AUM).

This passively managed index fund comes with extremely low annual fees, matching the Vanguard S&P 500 fund's expense ratio of 0.03% per year. That's a trademark of Vanguard's fund management style, reflecting founder Jack Bogle's focus on low fees and long holding periods.

This ETF tracks a market index with about 3,100 stocks, all found in developed markets outside the United States of America. 55% of its AUM is currently invested in European stocks, followed by 35% in the Asia-Pacific region and 10% in Canada. Specific countries with heavy weightings include Japan (21%), the U.K. (13%), Canada (10%), and France (9%). Long story short, the Developed Markets fund is a bet on international markets, focused on modern and heavily industrialized regions like Japan and Western Europe.

The largest specific stock holdings include German software giant SAP (NYSE: SAP), Dutch chip-making equipment designer ASML Holdings (NASDAQ: ASML), and Danish pharmaceutical veteran Novo Nordisk (NYSE: NVO).

Each one of the 5 largest positions represent approximately 1% of the total fund value. That's a much broader diversification than the S&P 500, where top stocks Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), and Microsoft (NASDAQ: MSFT) each provide more than 5% of the overall fund value. The two indexes share the same market-weighting philosophy, but the international version isn't dominated by a handful of trillion-dollar market caps.

The ETF paid out dividend-like distributions of $1.61 per share over the last year, which amounts to an effective yield of 3.1%. That's pretty generous next to the S&P 500 fund's 1.4% yield on the same basis.

How does this ETF stack up against America's favorite index?

This fund has underperformed the S&P 500 for most of its history.

It's possible to cherry-pick specific periods of weakness in the American economy, setting this international fund up for superior short-term returns. It outperformed the S&P 500 across the all-American crisis you remember as the Lehman mortgage bankruptcy and subprime mortgage meltdown of 2008.

But I had to break out a magnifying glass to find that unique opportunity. Moreover, the international advantage disappears almost completely if I look at simple price changes rather than dividend-boosted total returns. Those payouts make a real difference, you know.

Here's how the ETF compared to the S&P 500 since the fund launched in July 2007:

VEA Total Return Level data by YCharts

Is the Developed Markets ETF a millionaire-maker?

You might want to pick up a few Developed Markets shares if you think the American economy is both deeply overvalued and headed off a cliff. If both of those assumptions turn out to be right, this international fund should outperform an all-American option like the Vanguard S&P 500 ETF for a while.

You might also prefer this fund for its robust quarterly payouts and that beefy 3.1% yield. Income investors who don't really worry about stock price gains can get what they want from this ETF.

But in most cases, investing in the Developed Markets ETF is simply an audacious bet that American businesses will underperform the rest of the developed world in the long run. That hasn't been the case over the last century or so. This alternative fund can add diversification and dividend checks to your portfolio, but it doesn't look like a promising long-term performer on its own.

You can make a million by investing in this weaker fund, but you'd have to start with a very large original investment and/or hold on for several decades longer as compared to an S&P 500 index fund. This could be a useful short-term tool, but it's not an obvious cornerstone of a wealth-building nest egg.

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*Stock Advisor returns as of March 18, 2025

Anders Bylund has positions in Nvidia and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends ASML, Apple, Microsoft, Nvidia, Vanguard S&P 500 ETF, and Vanguard Ftse Developed Markets ETF. The Motley Fool recommends Novo Nordisk and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.