Trump Accounts Bring Windfall for Babies — and Also This One Fund

(Bloomberg) — Whether you admire him or cringe at the mention of his name, US President Donald Trump has long had a penchant for putting his name on things. Once it was condos, steaks and Bibles. More recently, it’s been Trump Gold Cards, Trump IRAs (coming next year) and, as of this month, Trump Accounts. The newest addition is a government-funded savings program that gives eligible newborn Americans $1,000 to begin building wealth from birth. Parents and other eligible contributors can give up to $5,000 a year, making the program one of the most ambitious efforts yet to bring more Americans into the stock market. Bloomberg Money spoke with Eric Balchunas, Bloomberg Intelligence’s senior ETF analyst, about what parents should know — and why one little-known ETF emerged as the biggest winner.

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ETFs figure prominently in the investment offerings for Trump Accounts. What should new parents know about the options?

Parents should be happy. The US government did a good job selecting five ETFs that are very diversified and low-cost. The default option, the State Street SPDR Portfolio S&P 500 ETF (SPYM), has a fee of only 0.02%; everything else is 0.03%. That’s about as cheap as it gets in investing.

The only real decision that parents will have to make is whether to use an S&P 500 ETF (SPYM or IVV), which tracks only large caps, or a broad-market ETF (ITOT, VTI or SPTM), which include mid-caps and small caps. Most investors these days prefer S&P 500 ETFs; they take about five times the flows as broad market ETFs. But in the end, the long-term returns won’t look all that different. Assuming a 7% annual return and maximum annual contributions, the investments could grow to about $200,000 by age 18.

How big of a winner is SPYM here?

It’s hard to overstate how big of a coup this was for SPYM. State Street secured one of the biggest distribution victories in ETF history, potentially winning an entire generation of investors. The initial $1,000 contribution from the US goes into SPYM upon a child’s birth. Any additional funding will as well, unless the parents switch to one of the other ETFs. Bloomberg Intelligence estimates that SPYM should see about $12 billion a year of inflows, which should increase each year depending on how many parents decide to contribute and how popular the accounts become. SPYM was already having a good run — assets have doubled to $160 billion in the past 12 months — and this will only help its cause.

What does this mean for S&P 500 funds? What about other “copycat” ETFs?

On one hand, this was a blow to SPYM’s rivals — especially IVV and VOO but also SPY, SPYM’s storied older sibling. That said, those three tickers are the biggest ETFs in the world and are doing just fine, accounting for about 17% of all ETF assets.

What’s interesting is that SPYM is basically the new kid on the block, but now it’s quickly becoming a force to be reckoned with. SPYM is considered a copycat because it gives you the exact same exposure as SPY but for a fraction of the price. We’re seeing more copycat ETFs, and that’s usually a good thing for investors because investing gets cheaper in the process.

What concerns do financial advisers have about Trump Accounts?

Most advisors have called them a no-brainer as far as the free money goes. Newborns get $1,000 — and free money is free money. The big question is whether to contribute to the Trump Accounts or to prioritize other plans, such as 529s, that parents may already have established for their kids. One big difference is that Trump Accounts keep the money inaccessible until the child turns 18 whereas other accounts may provide some flexibility for making withdrawals. Another point is that the only investment options are passive ETFs that invest in US equities. Some people have said they’d like to see international or active options. Yet whether either of those would return more than a US equity ETF over 18 years isn’t very likely, according to historical data.

What are some new implications now that millions of young Americans will have Trump Accounts?

Currently, 58% of Americans own stocks, which is by far the most in the world. That number could rise to 70-80% with Trump Accounts. On one hand, this adoption should help close the wealth gap, much of which is caused by the increased value of the stock market. On the other hand, many more investors will put even more pressure on the US stock market to become America’s retirement fund, a public utility as important to society as the electric grid. The problem is that stocks are, by nature, risky; they sometimes go through long periods of negative returns. The political pressure for the government to step in to backstop the market will be even greater than ever before given the vast majority of voters will now also own stocks.