Sovereign Wealth Funds (SWF): Definition & Types

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss sovereign wealth funds (SWFs). We'll give their formal definition, we'll describe the different types of SWFs and give examples of each.

You Just Received a Raise

Imagine, you received a raise at your job last year, yet you still live as if you were on the old, lower salary. You watch your expenses diligently. You rarely shop for yourself. You may eat out once per week, but that's the maximum. On the other days, you cook your own food, and shop at the discount grocery mart. Because of these frugal habits, you've started to accumulate savings. It has now reached the point where you can start investing the savings. That gets you thinking. What type of investment should I make? Should it be in stocks or bonds, currencies, or real estate? And also, for what purpose am I investing? Is it for retirement? Charity? Is it for a dream home? All these questions are swirling in your head.

Countries have similar questions. After years of bringing in more in tax revenue than they pay out in expenses, a surplus can accrue for these countries. The money is pooled into an account often called the sovereign wealth fund (SWF).

In this lesson, we'll give the definition for a SWF, and we'll describe the 5 major types of SWFs, along with why or why not a country may decide to set up a certain type of fund.

Sovereign Wealth Fund (SWF)

A sovereign wealth fund is money a country will set aside and invest to reach a certain goal. That goal may be to decrease unemployment, it may be to build the country's next century transportation system, it may be to invest in domestic start-ups, etc. We'll discuss those different goals/objectives of SWFs below. Generally, you can think of the money that gets collected in the SWF as the equivalent of your savings account. This is money the country gets through taxation, and other forms of revenue (like selling natural resources), and then invests.

Type of SWFs

All SWFs have a similar form. They all represent money from the country's reserves and the money is invested, but SWFs differ in what they invest in and for what purpose they invest. Here are the five major types of SWFs:

  • Stabilization Funds - these are funds that help stabilize a country from rapid price decreases in a commodity that they are dependent on. For example, Russia has an Oil Stabilization Fund. The country is a big oil exporter (i.e. it sells a lot of oil to other countries). If the price of oil decreases sharply and quickly then they may need to cut their budget proportionally. To help smooth out the budget cut, the country transfers money into the SWF during good years and then takes from the fund to 'cushion' the blow during bad years. This is often referred to as a 'Rainy Day Fund'. Money is set aside to stabilize the country/economy if things go bad. These funds are often invested in very liquid investments, so they can be quickly sold to fill budget gaps.

  • Savings Funds - these funds distribute wealth from the current generation to the next. They often deal with converting nonrenewable natural resources, like oil, into financial assets (like stocks or bonds). In other words, the benefits of oil being extracted and sold today, are not just felt by this generation, but instead the profits are invested in an SWF and paid out for the benefit of future generations. Because these SWFs have a long-term horizon, they can take on more risk or volatility with their investments, and may invest upwards of 70% of their portfolio in equities and other 'high risk' assets.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account