The U.S. and the UK each announced they were establishing sovereign wealth funds. We explore the purposes and types of sovereign wealth funds, how they invest, and some concerns with the U.S. establishing one.
Topics covered include:
- What are the four types of sovereign wealth funds, and why the U.S. doesn’t fit the typical use case
- How sovereign wealth funds navigate between politics and generating high returns
- Why a U.S. sovereign wealth fund, depending on its size, could crowd out other investment capital, leading to lower investment returns
- How the U.S. federal government already invests in its economy without a sovereign wealth fund
Show Notes
A Plan For Establishing A United States Sovereign Wealth Fund—The White House
International Forum of Sovereign Wealth Funds
Guardians release 2024 Annual Report—NZ Super Fund
UK Wealth Fund Brings Government And Private Investment Together by Efraim Chalamish—Global Finance
2024 Invesco Global Sovereign Asset Management Study—Invesco
Top 100 Largest Sovereign Wealth Fund Rankings by Total Assets—Sovereign Wealth Fund Institute
The Importance and Perspectives of Sovereign Wealth Funds in the Globalised Economy by Jan Černohorský and Kateřina Tesnerová—SHS Conference
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 511. It’s titled, “What are Sovereign Wealth Funds, and Does the U.S. Need One?”
U.S. Sovereign Wealth Fund Executive Order
On February 3rd, 2025, President Donald Trump signed an executive order titled “A Plan for Establishing a United States Sovereign Wealth Fund.” The order pointed out that it’s the policy of the United States to maximize the stewardship of our national wealth for the sole benefit of American citizens.
To this end, the federal government wants to establish a sovereign wealth fund to promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations, and promote United States’ economic and strategic leadership internationally.
The next steps are for the Treasury Secretary and the Secretary of Commerce to jointly submit a plan in 90 days, detailing with their recommendations for how to fund the plan, the investment strategies, the structure, and the governance model.
What Are Sovereign Wealth Funds
Sovereign wealth funds are investment funds that are owned or controlled by a government organization. These sovereign wealth funds can be at the country level, such as the First Sovereign Wealth Fund, the Kuwait Investment Authority, or it can be at the state level, like the Alaska Permanent Fund.
Around the world, there are over 100 sovereign wealth funds. They manage over $9 trillion in assets. The top 10 make up 78% of assets. The largest is the Norway Government Pension Fund Global, with $1.7 trillion in assets. That’s followed by two Chinese-controlled sovereign wealth funds, the China Investment Corporation, and the SAFE Investment Company. Combined, they have $2.3 trillion in assets.
And then the Abu Dhabi Investment Authority and the Kuwait Investment Authority fill out the top five, each with just over $1 trillion in assets. Collectively, sovereign wealth funds control about 4% of investable assets in the world. That’s more than hedge funds and private equity.
Why do countries establish sovereign wealth funds? Well, there are a number of reasons and a number of types. Sometimes the reasons are more political, and other times they’re more financial. Usually, it’s some combination of both.
Economic Stabilization and Reserve Funds
The first type and purpose for sovereign wealth funds are what are known as economic stabilization and reserve funds. These are usually established by countries that are running big trade surpluses. So it could be a country that has large natural resources reserves and they’re selling oil or other commodities and running trade surpluses. 45% of sovereign wealth funds were funded by natural resource reserves.
These funds can be stabilizing, because if the price of oil spikes, for example, a nation that’s exporting huge amounts of oil is running a trade surplus. That oil is being sold in dollars, and now they have a lot of dollars. And they don’t necessarily want to sell those dollars and buy their local currency, pushing up the value of their currency, potentially distorting their domestic economy. Because then their local, domestic currency could be too strong and make other exports that are not sold in dollars less competitive.
As a result, then, these nations that were running huge trade surpluses—and that includes China, Korea, the Korea Investment Corporation—they establish a sovereign wealth fund to hold these funds that are in currencies outside of the home currency. And then they invest them. A number of those countries, the exports are being controlled by state-owned companies, especially if it’s oil and gas.
So that’s the first reason, economic stabilization, and reserve funds, and it comes out of what’s going on in the macroeconomy. Generally, huge trade surpluses is generating foreign currency reserves that the nation wants to invest.
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