President Donald Trump recently signed an executive order directing the Treasury secretary and Commerce secretary to compile a plan within 90 days for creating a U.S. sovereign wealth fund.
We're still in the early stages and funding it would need an act of Congress which means we're months away from any of this becoming a reality. But it's still potentially a massive development, and the U.S. would be joining China, the United Arab Emirates, Singapore, Norway and a host of other nations, primarily major oil exporters, with active sovereign wealth funds.
But what exactly is a sovereign wealth fund and why is it potentially a big deal? And what are President Trump's plans for it?
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What is a sovereign wealth fund?
A sovereign wealth fund (SWF) is a state-owned investment fund that manages a country's financial assets. The fund is typically derived from surplus revenues from commodity exports (e.g., oil and gas), foreign exchange reserves from exports, or budget surpluses from tax revenue. Governments establish these funds to achieve long-term economic stability, reduce dependence on volatile oil or other commodity exports, and preserve wealth for future generations.
SWFs give countries a potentially bigger return than they'd get by simply holding their excess funds in government bonds. And there can also be non-financial considerations. Though this is more controversial, sovereign wealth funds can be used to finance political or diplomatic priorities or to spread a country's influence globally.
Where does the money come from?
Most, though certainly not all, of the world's largest SWFs are funded by oil and gas exports. For example, the funds of the United Arab Emirates ($2.3 trillion), Norway ($1.6 trillion), Saudi Arabia ($1.3 trillion) and Kuwait ($804 billion) are all funded with the revenues from oil and gas exports. These countries know that the gravy train from fossil fuels may not last forever, so they are investing their windfall for future generations.
Excess foreign exchange reserves from years of trade surpluses can also be used. China and Singapore each have multiple sovereign wealth funds adding up to a combined $2.8 trillion and $2.1 trillion, respectively. These were funded primarily with decades of excess reserves due to trade surpluses.
SWFs can also be funded with tax revenues or budget surpluses, though in an age of persistent budget deficits, this method tends to be rare.
It's worth noting that this isn't an entirely new concept for the United States. The country has 21 "sovereign wealth funds" at the state level. The largest are in Alaska, New Mexico and Texas and are funded primarily with oil, gas and mineral revenue.
In the case of President Trump's proposed SWF, it's not entirely clear where the funds would come from to launch it. The U.S. Congressional Budget Office projects a budget deficit of $1.9 trillion in fiscal year 2025 and has run trade deficits for decades. Trump's initial comments suggested that the fund would be seeded with tariff revenues, but we don't have a lot of specific details for now.
What do sovereign wealth funds buy?
The short answer is "just about anything."
While each fund is subject to rules set by its respective government, there is really no limit to what a fund could potentially buy. Most will have portfolios that resemble those of pension funds or endowments: stocks, bonds, real estate, private equity, hedge funds, etc.
For the most part, these investments tend to be passive and apolitical. Though as owners of publicly traded stock, the sovereign wealth fund would be able to vote in shareholder meetings, so you do have the potential for governments meddling in the management of companies they invest in.
SWFs can also take a more hands-on approach and invest in infrastructure and development projects. For example, the China-Africa Development Fund is a Chinese sovereign wealth fund that finances investments in Africa by Chinese companies in power generation, transportation and other sectors. China's objectives go beyond merely earning a return; the fund is also a diplomatic tool.
President Trump indicated that an American sovereign wealth fund could be used to buy TikTok, the Chinese social media company that has been ordered to either sell itself to an American buyer or cease operations in the United States.
Will a U.S. sovereign wealth fund happen?
Republicans have the majority in both houses of Congress. So, passing a bill to create Trump's sovereign wealth fund would likely not be exceptionally difficult.
However, funding it may prove to be more challenging given the United States' $1.9 trillion budget deficit. Any dollar used to fund the SWF would be a dollar that had to be borrowed or taken from other budget priorities. Using an existing pool of cash, such as the Social Security trust fund, would be an option. But even this is problematic given that the trust fund is projected to be depleted by the year 2034 or shortly thereafter.
The Federal Reserve's $6.8 trillion balance sheet could also be an option for initial funding, though this would be controversial. Indeed, it could potentially stoke inflation or possibly politicize the Fed.
Related content
-
Stock Market Winners and Losers of the 'Big, Beautiful' BillDefense, manufacturing and tech should prosper, while health care and green energy stocks face hurdles.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have MillionsPrivate market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It HelpsSaving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
With Buffett Retiring, Should You Invest in a Berkshire Copycat?Warren Buffett will step down at the end of this year. Should you explore one of a handful of Berkshire Hathaway clones or copycat funds?
-
I'm a Financial Planner: How to Dodge a Retirement Danger You May Not Have Heard AboutTiming is everything, and sequence of returns risk can mean the difference between a retirement nest egg that's overflowing … or empty.
-
Caring for Aging Parents: An Expert Guide to Easing the Financial and Emotional StrainEarly conversations, financial planning and understanding the progression of care needs can help to mitigate stress and protect family relationships.
-
Dow Adds 238 Points as UNH, CAT Pop: Stock Market TodayThe lack of a September jobs report didn't seem to worry market participants, with the data delayed due to the ongoing government shutdown.
-
I'm a Financial Adviser: The OBBB Is a Reminder for Older People to Have a Long-Term PlanThe new tax bill presents a good opportunity for retirees to revisit tax plans, look into doing some Roth conversions and consider plans for long-term care.
