CNBC believes that the newly launched "Trump Account" in the United States helps to initiate long-term investments for children at an earlier age, but it is insufficient to cover all the needs of families for children's education, liquidity, and asset diversification. Several financial advisors say that such accounts are better suited as a supplement to existing family financial planning.
Default investment is directed to S&P 500 funds.
Currently, eligible children's accounts are invested by default in an ETF that tracks the S&P 500 index. According to the U.S. Treasury Department, four more ETFs will be added for account holders to choose from in the coming months. The article states that this means parents will now face a practical question: whether to continue with the default fund or switch to a broader range of U.S. stock funds.
According to the U.S. Treasury Department, all initial funds in the "Trump account" are currently flowing into the SPDR Portfolio S&P 500 ETF managed by State Street. The four funds to be launched in the future will also primarily invest in U.S. stocks, with fees similar to existing products.
- The default fund is SPDR Portfolio S&P 500 ETF.
- Subsequent options include IVV, VTI, SPTM, and ITOT.
- Most new funds have an expense ratio of approximately 0.03%.
Consultants value distributed allocation more
The article states that some advisors are inclined to shift funds to broader U.S. market ETFs once new options become available, arguing that the S&P 500 currently has a relatively concentrated weighting, large-cap stocks have seen significant gains in recent years, and the concentration of a single index has increased accordingly.
Supporters of this approach argue that funds holding a larger number of shares can diversify the impact of fluctuations in a single company or sector, making them particularly suitable for children's accounts with long holding periods. In contrast, some advisors have stated they will continue holding S&P 500 funds, diversifying their portfolios across other family accounts.
The article mentions that several advisors do not recommend holding multiple highly overlapping US equity ETFs in the same account simultaneously, because these funds have similar constituent stocks, and their long-term returns may have limited differences. Continuous investment and long-term holding are more important than the subtle differences between funds.
Other arrangements are still needed besides the account.
CNBC argues that families relying solely on the "Trump Account" will struggle to meet their children's financial needs at different stages of life. The account is designed primarily for retirement savings, with funds remaining in the market for extended periods, resulting in low liquidity.
According to the article, eligible children can receive a one-time start-up fund of $1,000 from the U.S. Treasury Department. Families, friends, and employers can continue to contribute to the account annually, up to a maximum of $5,000. If the funds are withdrawn before the age of 59 and a half after the child turns 18, income tax is usually payable, and a 10% penalty may be imposed, with some higher education expenses being exceptions.
Therefore, if a family has additional investable funds, advisors generally recommend using them in conjunction with other accounts. Tools listed in the article include 529 education savings plans, UGMA and UTMA accounts, and ordinary taxable brokerage accounts. Some advisors also mention that families should not only consider a single account in their overall asset allocation but also take into account international market exposure to increase portfolio diversification.
Overall, the article argues that the "Trump Account" is more of a policy tool to encourage children to enter the capital markets early, rather than a complete alternative to education savings, household liquidity, and cross-market allocation.
