(Bloomberg) — Whether you admire him or find his name off-putting, President Donald Trump has a long history of branding. He’s put his name on things like condos, steaks, and Bibles. Recently, we’ve seen the Trump Gold Card and a Trump IRA set to launch next year. Now, there’s something new: the Trump Account, which is a government-backed savings initiative. This program provides $1,000 for eligible American newborns to help them start building wealth right from birth, with parents and other approved contributors able to add up to $5,000 a year.
This initiative stands out as one of the most significant attempts to increase stock market participation among Americans.
I had a chat with Eric Balchunas from Bloomberg Intelligence, who shared insights on what parents need to consider and how lesser-known ETFs have become popular picks.
ETFs prominently featured for Trump accounts: What should new parents know about options?
There’s good news for parents: the U.S. government has chosen five low-cost, highly diversified ETFs for these accounts. The default investment, the State Street SPDR Portfolio S&P 500 ETF (SPYM), has an impressively low fee of just 0.02%, while the alternative option is 0.03%. Not too shabby for an investment.
Parents mainly have to choose between using an S&P 500 ETF focused on large-cap stocks (either SPYM or IVV) or a broader ETF that includes mid- and small-cap stocks (like ITOT, VTI, or SPTM). Most investors seem to lean toward the S&P 500 ETF these days, which usually garners much more attention than broader market ones. But, honestly, the long-term returns probably won’t differ much. If we assume a 7% annual return with the maximum contribution over the years, by the time a child turns 18, that could total around $200,000.
How significant is the victory for SPYM?
The impact of this development for SPYM is massive. State Street has made a significant win in ETF distribution, which could engage a whole new generation of investors. The initial $1,000 donation from the government is set to go into SPYM when a child is born, with further contributions expected unless parents opt for another ETF. Bloomberg Intelligence suggests that SPYM could receive about $12 billion a year in new investments, a figure likely to grow as more parents participate and its popularity rises. SPYM is already seeing a surge, with its assets doubling to $160 billion this past year, and this initiative will only help further that growth.
What are the implications for S&P 500 funds and copycat ETFs?
This development does pose a challenge for SPYM’s competitors, especially IVV and VOO, as well as for SPYM’s predecessor, SPY. However, these three ETF tickers remain at the top of the rankings globally, comprising around 17% of all ETF assets.
Interestingly, although SPYM is relatively new, it’s carving out a powerful niche. It’s often seen as a substitute for SPY, offering similar exposure at a smaller cost. The rise of these copycat ETFs tends to benefit investors, as they usually lower the prices associated with investing.
What concerns do financial advisors have about Trump accounts?
Most financial advisors agree that when free money is involved, it’s hard to say no. With newborns receiving a $1,000 boost, the question arises: should parents opt to contribute to a Trump account or focus on other accounts they might have set up for their child?
There’s a crucial distinction to note—the Trump Account restricts access to funds until the child is 18 years old, while other accounts may allow for withdrawals before that age. Plus, investment options are limited to passive ETFs connected to U.S. stocks. Some parents might prefer to have international or more actively managed choices available. Yet, historically speaking, it hasn’t been very promising for non-U.S. stock ETFs to outperform their U.S. counterparts over 18 years.
What are the potential implications now that millions of young Americans will have Trump accounts?
Currently, Americans hold 58% of stocks, which is quite significant globally. With the introduction of Trump accounts, this could increase to 70% or even 80%. While this move may help address the wealth gap fueled by rising stock market values, it also means a larger number of investors could be increasing pressure on the U.S. stock market. There’s a chance that Americans might start seeing their retirement funds as essential utilities in society, akin to the power grid. On the downside, investing in stocks carries inherent risks, including long periods of negative returns. Since many voters also invest, the political push for government intervention in the markets may intensify.
