Real Asset

DEFINITION of 'Real Asset'

Physical or tangible assets that have value, due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land and oil. They are appropriate for inclusion in most diversified portfolios - with their proportion dependent on the investor's risk tolerance and preferences - because of their relatively low correlation with financial assets , such as stocks and bonds. They are particularly well-suited for inflationary times, because of their tendency to outperform financial assets during such periods.

BREAKING DOWN 'Real Asset'

Real assets are a separate and distinct asset class from financial assets, whose value is derived from a contractual claim on an underlying asset, which may be real or intangible. For example, commodities and property are real assets, but commodity futures and ETFs, as well as real estate investment trusts, constitute financial assets whose value depends on the underlying real assets.

Higher carrying and storage costs, increased transaction fees and lower liquidity, are some common drawbacks of real assets in relation to financial assets.

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