The introduction of Trump Accounts, a government-funded savings program offering eligible newborn Americans $1,000 to build wealth, has sparked interest and debate. This initiative, despite its controversial namesake, presents an opportunity to educate parents about investment options, particularly Exchange-Traded Funds (ETFs).
Eric Balchunas, Bloomberg Intelligence's senior ETF analyst, highlights the significance of the US government's selection of five ETFs for Trump Accounts. These ETFs are highly diversified and low-cost, with the default option, the State Street SPDR Portfolio S&P 500 ETF (SPYM), boasting an incredibly low fee of 0.02%. This fee structure is a boon for parents, as it provides an affordable way to invest in the stock market.
The key decision for parents lies in choosing between S&P 500 ETFs and broad-market ETFs. While S&P 500 ETFs are currently more popular, the long-term returns of both options are expected to be similar. For instance, with a 7% annual return and maximum annual contributions, the investments could grow to approximately $200,000 by the time the child turns 18.
The Trump Accounts have had a substantial impact on the SPYM ETF, which has seen a significant increase in assets, doubling to $160 billion in the past 12 months. This surge in popularity has positioned SPYM as a formidable player in the ETF market, despite being considered a copycat of the SPY ETF. The low cost and accessibility of SPYM make it an attractive choice for parents.
Financial advisors generally view Trump Accounts favorably, emphasizing the free money aspect. However, they also raise valid concerns. The question of whether to contribute to Trump Accounts or prioritize other savings plans, such as 529s, is a complex one. Trump Accounts keep the money inaccessible until the child turns 18, while other accounts may offer more flexibility. Additionally, the lack of international or active investment options in Trump Accounts is a point of contention, as some argue that these options could potentially yield higher returns over 18 years.
The widespread adoption of Trump Accounts could have far-reaching implications for the US stock market. With a projected increase in the number of Americans owning stocks, the pressure on the market to serve as a retirement fund will intensify. However, the inherent risk of stocks, including periods of negative returns, cannot be overlooked. This raises a deeper question about the role of the government in stabilizing the market and addressing the concerns of a growing number of stock market participants.
