By Andrew Welsch

The Department of the Treasury unveiled the fund lineup for Trump Accounts, giving parents access to five low-cost index funds to invest in on behalf of their children.

Trump Accounts, which launch July 4, offer parents another tax-advantaged investment account in addition to popular 529 plans for college savings. Newborns from 2025 through 2028 get $1,000, courtesy of the U.S. Treasury. All five funds in the lineup for Trump Accounts are exchange-traded funds that boast low fees and invest in a basket of U.S. stocks that represent broad market indexes.

The Treasury Department said Wednesday that the default investment option for Trump Accounts at launch will be the State Street SPDR Portfolio S&P 500 ETF (SPYM). The fund tracks the performance of the S&P 500 index and carries an expense ratio of just 0.02%. The department said it picked SPYM to provide broad exposure to the U.S. stock market at a low cost.

The other four investment options that will be available to Trump Accounts in the coming months include index funds from BlackRock's iShares and Vanguard. The funds are:

  • iShares Core S&P 500 ETF (IVV)
  • Vanguard Total Stock Market ETF (VTI)
  • State Street SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)
  • iShares Core S&P Total U.S. Stock Market ETF (ITOT)

All four funds have expense ratios of just 0.03%. For buy-and-hold investors, low fund fees mean they keep more of their investment returns.

The funds are based on different indexes, but the returns track each other closely (see table). Investors deciding between them would primarily be choosing whether to invest in an U.S stocks index that represents 500 stocks or thousands.

The S&P 500 benchmark index includes the nation's largest publicly traded companies and the index represents about 80% of the total market capitalization of the U.S. stock market. It has performed extremely well over the past decade thanks to technology stocks. Tech sector stocks now make up 37% of the holdings of SPYM and IVV, which also tracks the S&P 500.

The other three funds available to Trump Account investors — Vanguard's VTI, iShares ITOT, and State Street's SPTM — offer exposure to smaller publicly traded stocks in addition to companies in the S&P 500. That means investors can get more diversification, though small-cap stocks haven't performed as well as large-cap stocks in recent years.

Diversification? Portfolio diversification options are lacking in the lineup because the fund list doesn't currently include bond and international stock funds. That is by design. The law establishing Trump Accounts limits them to index funds composed of U.S. companies.

Bonds can generate income, dampen volatility, and provide diversification within a portfolio. Historically, when stocks do poorly, bonds can outperform. A traditional 60/40 portfolio would comprise 60% stocks and 40% bonds.

The stock portion of a balanced 60/40 portfolio would also typically include exposure to international stocks, which sometimes outperform U.S. equities — as has happened over the past year. Vanguard's VTI is up 11% this year and 23% over the past 12 months. The Vanguard Total International Stock ETF (VXUS) is up 12% and 26% over the same periods.

The U.S. stock market is by far the biggest in the world. But how much international exposure a U.S. investor should have is a hot topic of debate among investment professionals, but a 60/40 split is sensible. The Vanguard Total World Stock ETF (VT), which tracks the performance of the FTSE Global All Cap Index, has 62% of its holdings in U.S. stocks and 38% in international stocks.

Landing the default fund option is a coup for State Street. Shares of the giant asset management company were down 0.64% Thursday compared to a 0.22% decline for the S&P 500.

Seed money. The Treasury Department will seed Trump Accounts with $1,000 for babies born between Jan. 1, 2025 and Dec. 31, 2028. Parents can also open accounts for older children who are ineligible for the bonus. Parents can contribute up to $5,000 a year to a Trump Account.

Approximately 6 million parents have applied to open Trump accounts, according to the Treasury Department. Of that number, 1.4 million accounts are eligible for the newborn bonus, which should add up to $1.4 billion.

Whether most parents choose to contribute to Trump Accounts remains to be seen. The accounts, named after the current president, have different advantages than 529 plans. Some financial advisors recommend parents of newborns get the free $1,000 bonus, but use 529 plans to save for college because of their superior tax benefits.

Some Americans may have other incentives for opening an account. Companies, such Charles Schwab and Robinhood, have announced plans to match the government's $1,000 contribution for employees with eligible newborn children. The Treasury Department said on Thursday that it will accept philanthropic contributions of readily tradable public company stock to support Trump Accounts.

Trump Accounts generally carry the same tax-deferred advantages of a traditional individual retirement account (IRA). Once children turn age 18, control of the account switches from the parents to the adult child who can withdraw funds for eligible expenses like higher education or a first home. The withdrawals would be taxed at ordinary income rates with no additional penalty. Withdrawals for non-eligible expenses before age 59 1/2 would be taxed at ordinary income rates plus a 10% early-withdrawal penalty.

Withdrawals from 529 plans for eligible expenses like education aren't taxed at all. 529 plans are administered at the state level and, depending on the state, they can offer a wider range of investment options than Trump Accounts and can have higher contribution limits. There can be additional benefits to parents in high-tax states. For example, New York taxpayers can deduct up to $5,000 annually or $10,000 if married filing jointly.

Unused funds in a 529 plan can also be rolled over into a Roth IRA (up to a lifetime limit of $35,000) where they grow tax-free. Roth IRAs carry two notable distinctions from a traditional IRA: There are no taxes on withdrawals from a Roth IRA after age 59 1/2 and there are no required minimum distributions.

Write to Andrew Welsch at andrew.welsch@barrons.com

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