What is a Real Asset
Real assets are physical assets that have value due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land, machinery and oil. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets such as stocks and bonds.
BREAKING DOWN Real Asset
Real assets, such as real estate, infrastructure and sustainable resources, are particularly well-suited investments during inflationary times because of their tendency to outperform financial assets during such periods. In a 2017 report, asset management firm Brookfield cited a global value of real asset equities totaling $5.6 trillion, with 57% comprised of natural resources, compared to 23% in real estate and 20% in infrastructure.
Most businesses own a range of assets, which typically fall into real, financial or intangible categories. Real assets, like financial assets, are considered tangible assets. For example, imagine XYZ Company owns a fleet of cars, a factory and a great deal of equipment. These are real assets. However, the company also owns several trademarks and copyrights, which are intangible assets. Finally, the company owns shares of stock in a sister company, and these are financial assets.
Difference Between Real Assets and Financial Assets
Real assets are a separate and distinct asset class from financial assets. Unlike real assets, which have intrinsic value, financial assets derive their value from a contractual claim on an underlying asset that may be real or intangible. For example, commodities and property are real assets, but commodity futures, exchange-traded funds (ETFs) and real estate investment trusts (REITs) constitute financial assets whose value depends on the underlying real assets.
ETFs, for example, can invest in companies that are involved in the use, sale or mining of real assets, or more directly linked ETFs can aim to track the price movement of a specific real asset or basket of real assets. Physically backed ETFs include some of the most popular ETFs in the world based on volume, such as State Street's SPDR Gold Trust and iShares' Silver Trust.
Advantages and Disadvantages of Real Assets
Real assets tend to be more stable than financial assets. Inflation, shifts in currency values and other macroeconomic factors affect real assets less than financial assets. In its 2017 report on real assets as a diversification mechanism, Brookfield noted that long-lived real assets tend to increase in value as replacement costs and operational efficiency rise over time. Further, cash-flow from real assets like real estate and infrastructure can provide predictable and steady income streams for investors.
Real assets, however, have lower liquidity than financial assets, as they take longer to sell and have higher transaction fees in general. Finally, real assets have higher carrying and storage costs than financial assets. For example, physical gold, often stored in third-party facilities or home vaults, well illustrates the carrying and storage costs that may be associated with real assets.
Difference Between Financial, Tangible and Intangible Assets
Intangible assets and financial assets: Intangible assets include trademarks, brand recognition and other intangible items, but this asset category does not include stocks and bonds. Similarly, financial assets include stocks and bonds, but the category does not include goodwill, patents or other intangible assets.
Tangible assets and intangible assets: Meanwhile, tangible assets include stocks, bonds, property, cash, vehicles and a host of other things, while intangible assets include only a small sliver of items. Tangible assets include both financial and real assets, while intangible assets include items that exclusively fall into the intangible category.
For tax purposes, the Internal Revenue Service (IRS) requires businesses to report intangible assets differently than tangible assets, but it groups real and financial assets together under the tangible asset umbrella.