Types of Asset Classes

Categories and characteristics of widely used asset classes such as US/Foreign Stocks, Sectors, Bonds, Commodities and Specialties.

There are many ways to categorize asset classes. Let us review some of the more common asset classes. Many of these assets can be invested in as individual positions or as a basket using Mutual Funds or ETFs.

US Stocks: A style map is used to categorize stocks based on what stage the company is in its lifecycle and its size or market cap (outstanding shares x share price). Newer companies tend to be in their growth phase while more mature companies with established business lines and stable revenue patterns are considered value stocks. Companies with a market cap of <$200M are small caps and >$2B are large caps, and those in between are the mid-caps. The style map percentages show how your portfolio is distributed across these characteristics.

Sector Specific: The S&P 500 index identifies 11 sectors which are composed of 69 industries. These sectors include Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financial, Health Care, Industrial, Technology, Materials, Real Estate, and Utilities.

Foreign Stocks: These are non-US stocks that can be categorized based on their economy (Developed vs. Emerging markets), country (China, India, Russia, Turkey, etc.) or continent (APAC, LATAM, etc.).

Bonds: The style map for bonds include the term of maturity and bond rating. Short-term bonds have a maturity of less than a couple of years and whereas the maturity of long-term bonds is over 10 years. High grade bonds are either AAA or AA rated, investment grade is rated BBB+ or better, and high yield or junk bonds are rated BBB- or below.

Commodities: These are investments in physical assets or their Futures contracts. Common commodity investments include oil, timber, industrial metals (e.g., copper, aluminum, etc.), precious metals (e.g., gold, silver, etc.) and agricultural products (e.g., wheat, corn, etc.).

Specialties: These are focused investment groups with a specific business model. For example, Private Equity companies take public companies private using high leverage and drive value using financial engineering and operational efficiency. REITs (Real Estate Investment Trust) and MLPs (Master Limited Partnerships) derive a steady stream of cash flow respectively from rental income and oil pipelines. They are required to distribute 90% of their income to their shareholders. Preferred stocks have a blend of stock and bond characteristics. These latter have growth potential like a stock while providing higher than average dividend yield as in a fixed income product.

The relative performances of the asset classes are covered in our blogs “Cyclic Nature of Asset Classes” and “Asset Classes 30-Year Performance History.”

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com

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