What Are Real Assets?
Real assets are tangible investments that have intrinsic value due to their substance and physical properties. These assets span a wide range, including precious metals, commodities, real estate, land, equipment, and natural resources. They are an essential component of diversified portfolios because they typically have a low correlation with financial assets like stocks and bonds.
Key Takeaways
- A real asset is a tangible investment inherently valuable due to its physical characteristics.
- Types of real assets include commodities, real estate, equipment, and natural resources.
- Real assets offer portfolio diversification by often moving opposite to financial assets like stocks or bonds.
- Typically, real assets are more stable but less liquid than financial assets.
Understanding Real Assets
Assets can be categorized into real, financial, or intangible. Any item that can be exchanged for cash is considered an asset. Intangible assets like patents, copyrights, and brand reputation are non-physical yet valuable. Financial assets include liquid properties like stocks, bonds, and mutual funds. Real assets, often termed as non-securities, are physical and their value is derived from their tangible qualities such as gold, oil, machinery, or buildings.
Special Considerations
Financial and real assets are sometimes referred to collectively as tangible assets. Tax-wise, the IRS requires different reporting for intangible and tangible assets but groups real and financial assets under the tangible asset umbrella.
For instance, a business might own cars, factories, and equipment as real assets, trademarks and copyrights as intangible assets, and shares in a sister company as financial assets.
Real Assets vs. Financial Assets
Though both categorized as tangible, real assets differ from financial assets in that they have intrinsic value, whereas financial assets derive value from a contractual claim on underlying real or intangible assets. Commodities and property are definitive real assets, while ETFs and REITs are financial assets whose value depends on the underlying real assets.
For example, ETFs investing in companies that utilize or mine real assets or track the price movement of specific real assets, such as gold or silver bullion whose foremost ETFs are physically backed.
Advantages and Disadvantages of Real Assets
Real assets typically provide stability and an inflation hedge, outperforming financial assets during inflationary periods. For example, the 2017 report by certain asset management firms valued global real asset equities at $5.6 trillion, with real estate, natural resources, and infrastructure making up significant portions. Real assets often generate steady income streams from projects like real estate or energy servicing. However, they also present drawbacks like lower liquidity, higher transaction fees, and carrying costs like storage fees for physical gold bullion.
Pros
- Portfolio diversification
- Inflation hedge
- Steady income stream
Cons
- Illiquidity
- Storage and transport costs
Related Terms: tangible assets, intangible assets, financial assets, commodities, portfolio diversification, inflation.
