Biden and Trump are both eyeing a sovereign-wealth fund. Why?

White House officials say they have been working for several months on the design of such a fund. The fund would provide capital to advance strategic interests such as early-stage technology and energy security as competition with China heats up.

The disclosure comes after former President Donald Trump in an appearance last week called for a sovereign-wealth fund to “invest in great national endeavors for the benefit of all of the American people," such as infrastructure and medical research.

What are sovereign-wealth funds?

Sovereign-wealth funds, a catchall term for an investment fund owned by a national government, have become prominent players in global markets. They are particularly dominant investors in private markets such as private equity, private credit and infrastructure, where their long investment horizons and deep pockets have made them sought-after partners.

Historically, oil-rich countries used such funds to bank the proceeds of hydrocarbon exports. Of the $12.4 trillion managed globally by sovereign-wealth funds, 59% comes from surplus revenue generated by natural resources, such as in oil-rich Norway and Saudi Arabia, according to data from fund-tracker Global SWF.

The U.S., however, has wide budget and trade deficits and deep private markets. These aren’t the usual criteria for a country with a sovereign-wealth fund.

How would such a vehicle be funded?

Trump said he would build the fund using revenue from his planned tariffs, but that money is also supposed to pay for his proposed tax cuts.

White House officials are looking at a number of funding streams, though haven’t yet decided on one. Congress would have to seed the fund either with appropriated funds or a dedicated revenue stream.

A portion of the fund, one official said, could invest in traditional assets, such as stocks and bonds, generating market-like rates of return. Those returns could then be used to finance investments in riskier strategic assets, where returns are lower or lumpier. Issuing debt could also be considered, though these discussions are at very early stages, the official said.

What are Trump and the White House proposing?

Trump only offered a few details. It would invest, the former president said, in highways, airports, healthcare and food production. It wasn’t clear if it would also invest in stocks, bonds, private equity and real estate. Hedge-fund manager John Paulson, an adviser to Trump, suggested in an interview that it might, noting that many countries invest public pensions in diversified assets. (Paulson said the Social Security trust fund, which currently invests only in Treasury debt, could do the same.)

White House officials are looking at funds operated by India, Ireland and Singapore, and Britain’s National Wealth Fund announced in July as possible models, in addition to those of Saudi Arabia and the United Arab Emirates. They are also looking at historical U.S. examples such as the Reconstruction Finance Corp., which lent to banks, municipalities, railroads and other enterprises during the 1930s.

It isn’t clear how far the White House plan, overseen by national security adviser Jake Sullivan and his deputy Daleep Singh, is from completion, or whether Vice President Kamala Harris, the Democratic presidential candidate, supports it. A Harris spokesman didn’t respond to a request for comment.

Bloomberg reported Friday that Biden aides had been working on a sovereign-wealth fund proposal.

That fund’s mandate would be to invest where the U.S. as a whole would benefit but the time horizon and risks are too great for private investors.

For example, China’s dominance in critical minerals such as lithium and rare earths is widely seen as a national security threat. But that same dominance enables China to flood the market at will, driving the price down enough to deter Western investment in alternatives. White House officials think a sovereign-wealth fund could address such market failures by supporting companies needing scale to compete against China with equity, loan guarantees or bridge financing.

By taking on risks that the private sector avoids, this would differentiate it from most public pension funds, and many sovereign-wealth funds such as Norway’s, whose mandate is to maximize return.

Is this actually going to happen?

Global SWF founder Diego López said he sees the establishment of a U.S. sovereign-wealth fund as “very unlikely." He noted that to the extent U.S. natural resources such as oil and gas are government-owned, they tend to be controlled by states.

Indeed, the U.S. already has 23 state-level sovereign-wealth funds, managing some $332 billion in assets, according to Global SWF. Alaska Permanent Fund, the largest and best known, invests the state’s oil proceeds and manages $78 billion. States and local governments also own and operate far more infrastructure, such as highways and airports, than the federal government.

Even if the U.S. could find a way to finance a sovereign-wealth fund, it isn’t clear why it would need one, according to Zubaid Ahmad, managing partner of Caravanserai Partners, which advises sovereign-wealth funds. There are already sizable pools of federal money set aside for areas like infrastructure, technology and defense, including those established in 2022 by the Inflation Reduction Act and the Chips Act.

A sovereign-wealth fund “sounds sexy, but when you cut through it, you have tons of funds that are doing it already," Ahmad said.

He said a better use for a new fund might be to help close the funding gap for Social Security by investing a portion of payments in something that earns more than U.S. Treasurys, similar to Paulson’s suggestion.

Determining who would manage a sovereign-wealth fund and what it would be allowed to invest in could also be politically fraught. State pension fund managers, for example, must often balance the goals of their politically appointed boards with their aim of providing the highest returns for their constituents.

Write to Greg Ip at greg.ip@wsj.com and Miriam Gottfried at Miriam.Gottfried@wsj.com