US Sovereign Wealth Fund A Behemoth in the Making?
Via an executive order issued on February 3, 2025, the Trump administration has announced plans to create a sovereign wealth fund at the federal level.
Sovereign wealth funds (SWF) are government-owned investment funds that invest in a variety of assets to generate returns or fulfill strategic objectives. They are typically associated with energy exporters with large balance of payment surpluses. Although the US is the largest energy producer in the world, it has no such surplus – quite the opposite.
The idea to establish a US sovereign wealth fund, nevertheless, is not as farfetched as it sounds. The US government holds lots of assets – monetizing even a part of these could create a fund that would rank among the world’s largest.
The political and economic backdrop is also supportive. When debt is high, a fund is one way of creating fiscal space. And fiscal firepower is a source of advantage in a more competitive global order into which we are heading – to fund defense spending, industrial policies, and the like. In other words, a SWF is not only a possibility, but also a logical solution in current circumstances.
SWF’s Source of Wealth
As a vehicle in itself, a SWF is neither original nor controversial. There are many examples around the world of funds created on the back of state-owned assets.1 Although a fund at the national level would be new for the US, many US states already have SWFs with decades of established histories and management practices.
The capital of the fund could come from different sources but would probably comprise state-owned assets. Per the government’s own calculation, the US government has assets worth US$5.7 trillion. This number is somewhat misleading, as most are illiquid in nature. But the liquid portion in itself is impressive.
Consider, for example, the nearly US$750 billion of assets in gold, if priced at market value. According to data from the Sovereign Wealth Fund Institute, a fund capitalized to this amount would be the world’s 8th largest. There are other possibilities, too, such as monetizing the preferred stock position in Fannie Mae and Freddie Mac, the two housing-related government-sponsored enterprises. That value alone is estimated at over US$300 billion, though not straightforward to liquidate. In addition, the government possesses a large real estate portfolio and sizable cryptocurrency assets (close to US$20 billion in market value). And of course, any SWF fund could also be levered to increase its size.
SWF’s Purpose
As yet little has been said about what the fund would do. But the executive order and statements made by people involved offer some clues. In a nutshell, it would focus on generating fiscal revenue and directing spending into priority areas. In terms of effectiveness, the impact on fiscal metrics is likely to be modest, even in the most ambitious scenario.
Consider a simple example – assuming fund returns in the range of 6%-7%, which is in line with the historical average for global SWFs, a US$1 trillion unlevered fund would generate roughly 0.3% of GDP revenue annually (Figure 1). Doubling its size with leverage yields only an extra 0.15% of GDP.2
This is immaterial, given the size of the federal deficit and debt. Not to mention that it would take several years to generate this amount and there is a risk that investments could become politicized, affecting returns. So, by definition, a US SWF will not be a meaningful fiscal tool any time soon.
But the fund would be more meaningful in terms of directed spending. A SWF would be much nimbler than the federal budget in facilitating public capex, particularly in strategic industries, and as a vehicle to promote innovation. Priority areas are not yet defined, but there is a clear consensus around domestic manufacturing in general and supply chain security in particular, especially in relation to semiconductors and critical technologies. Energy, mining, and healthcare are possibilities.
SWFs in the Gulf and elsewhere have been used successfully as geo-economic tools to channel co-investment with strategic allies. Given restraints on fiscal spending, the US would find having such a quasi-fiscal tool for geo-economic outreach useful. Then again, this is easier done in the Gulf or Asia where governments can operate strategically over long-term horizons.
Implications
The SWF’s creation should not have a material impact on any asset class if it is rolled out judiciously and slowly. Downside risks exist for gold if existing reserves would be designated for sale to fund future SWF allocations. US housing finance would be vulnerable to any corporate governance change of Fannie Mae and Freddie Mac if it altered investors’ perception of the credit guarantee, a remote but not impossible outcome.
Similarly, bond markets could take cues from the manner of SWF creation as it relates to the overall US fiscal trajectory. There is a possibility that the SWF would be used for market interventions – for instance, in bond markets by targeting parts of the yield curve. Such interventions could be temporarily market moving, though they would probably not have a durable impact. All things being equal, the experience from the Middle East and elsewhere shows that SWFs are generally credit positive for a sovereign.
But we are just at the beginning of the road on this topic with the Treasury and Commerce departments due to issue more detailed plans.