A recent executive order from the Trump administration has renewed interest in the concept of a sovereign wealth fund (SWF) run by the United States Government. We have received some client questions on this topic and wanted to address the fundamentals of SWFs, the potential benefits and drawbacks, and the likelihood of establishing such a fund in the U.S.
A sovereign wealth fund is defined as an investment fund owned and operated by a government entity. Examples of nations with SWFs include Norway (the largest, at $1.8 trillion)1, Saudi Arabia, and China. SWFs are typically funded through budget surpluses, most often in countries with high natural resource export revenue or large foreign exchange reserves from trade surpluses. Funds are not limited to national governments; in the U.S., 20 states already operate sovereign wealth funds2. As an example, North Dakota places 30% of its oil and gas tax revenue into their fund monthly; the state can then access 5% of the fund’s value in any two-year budget cycle to help pay for projects and to provide tax relief (consequently, the state is in the process of phasing out property taxes over the next decade)3. Funds within SWFs are then invested largely in financial (e.g. stocks, bonds) or tangible (e.g. real estate, infrastructure) assets domestically and/or internationally.
Sovereign wealth funds seek to capitalize on the financial resources of the sponsoring government, often as a diversification tool to reduce the concentration of natural resource-rich economies. SWFs function well when attempting to generate long-term wealth for the sponsoring government’s citizens, to help address shortfalls in pension obligations, or to fund critical infrastructure, technological, or health projects. Additional potential benefits of SWFs include higher returns on capital, enhanced economic growth, and employment gains.
The largest drawback to sovereign wealth funds is the potential for fraud, mismanagement, and abuse. Problems tend to arise when funding decisions are not transparent, investment decisions are made by a singular individual rather than a group, or when overall governance of the fund is limited. These conditions can lead to improper investments, lacking or non-existent auditing of funds, and corruption. The most successful SWFs have substantial governance, transparency, and decision-making guidelines that emphasize the long-term stability of the fund. Additionally, vesting the power to determine investments in a board, rather than in the hands of a single individual, can reduce the opportunity for improper or bogus investments.
The Feb. 3 executive order from President Trump – directing the Secretaries of Treasury and Commerce, along with the Office of Management and Budget and other administration officials, to develop a plan in the next three months addressing the structure, funding, and governance of a U.S. sovereign wealth fund4 – has led to questions about how this type of investment vehicle could work in the U.S.
The U.S. does not have budget surpluses, of course, but there are other potential sources for funding a SWF. The current administration, for example, has floated using tariff revenue. Previous ideas for funding a domestic SWF included using highly valued assets that the U.S. holds – property, loans receivable (e.g. student loans), plants and equipment – as well as potentially issuing new debt (albeit challenging to justify considering our current national debt predicament).
The idea of a SWF in the U.S. has historically garnered some bipartisan support, although coming to consensus today on details such as structure, governance, and investment decision-making centered on long-term viability may prove difficult in our hyper-politicized environment. If a SWF is to be established in the U.S., Congressional action is likely necessary – especially if debt funding is necessary. According to Treasury Secretary Scott Bessent, establishing a U.S. SWF could take a year5. This timeline could be optimistic, given the myriad other financial issues facing Congress and the administration in the near term – a looming government shutdown, negotiations over tax policy, and the need for yet another debt ceiling increase.
Sovereign wealth funds have proven successful in some other countries, and in multiple American states. As a result, U.S. politicians on both sides of the aisle have previously considered the viability of a fund on a national level. Although the recent action of the Trump Administration may prove to be the impetus for creating an American SWF, working out the necessary details to ensure such a fund’s success could prove challenging. As the idea of a domestic sovereign wealth fund evolves from the concept stage, we will continue to monitor the situation and keep clients abreast of key developments should they materialize.
The information provided is for educational purposes only. It is not meant to be considered investment advice or any solicitation to purchase and or sell any security. Planning Alternatives is an investment advisory firm registered with the Securities and Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or expertise.
References:
4,5. www.msn.com/en-us/money/economy/a-u-s-sovereign-wealth-fund-is-coming-how-others-work/ar-AA1yLRr9
Additional background material:
1. www.bloomberg.com/opinion/articles/2025-02-10/trump-shouldn-t-go-near-a-sovereign-wealth-fund
2. www.thewealthadvisor.com/article/trumps-executive-order-us-sovereign-wealth-fund-what-could-mean
3. www.wsj.com/opinion/sovereign-wealth-fund-donald-trump-executive-order-scott-bessent-a3bcf648