Real AssetsDefined along with Types and Examples

Written By:
Lisa Borga

Reviewed By:
FundsNet Staff

Real assets are tangible assets that possess an inherent value due to their physical nature and utility in creating goods and services.

Common examples of real assets for investors include metals, natural resources, real estate, equipment, and commodities.

Real assets are an appealing option for investors due to their high current income and favorable tax treatment due to the ability to claim depreciation.

These assets offer investors strong protection against inflation and store value well due to their connection to hard assets.

Real assets also offer an opportunity for diversification due to their low correlation with financial alternatives such as equity markets.

Real Assets Explained

Real assets are tangible physical assets that hold an inherent value due to their physical nature.

As investments, the return on real assets is expected to come from their potential to generate income, and as a result, their value is tied to this utility.

In a broad sense, all wealth in an economy stems from real assets such as land, infrastructure, and commodities which are necessary inputs in creating goods and services.

Real assets are classified into three primary categories, which are described in the table below.

Because the value of real assets comes from their inherent physical worth, they often store value better than financial investments.

The value of a real asset will generally rise with greater utilization or scarcity of supply, and historically real assets have performed better during a period of high inflation and economic downturns.

Even when the valuation of real assets declines, it is generally assumed that their value will recover in time.

As a result, they are often used as a tool to hedge against the risk of inflation and economic downturns.

Real assets also offer significant benefits for the diversification of investment portfolios due to their low correlation with financial assets.

The performance drivers for real assets are fundamentally different from other types of assets and can act to protect a portfolio against unexpected downturns in other types of investments.

Classifications of Assets

Assets include any resource which holds economic value to an individual, corporation or country that holds it with the expectation of future benefits.

More simply, if something can be sold for money, then it is an asset.

Assets can be divided into several categories, including financial assets, intangible assets, and real assets.

Intangible Assets

An intangible asset is an economic resource without any physical substance.

These include common examples such as patents, goodwill, copyrights, trademarks, and brand recognition.

Though intangible assets do not have any physical substance or create any contractual claim to economic benefits, they can be valuable, such as brand recognition ability to create meaningful impacts on sales.

Financial Assets

Financial assets are an investment that represents a claim against an underlying institution.

As a result, the value of a financial asset depends upon the value of the underlying asset, such as shares of stock in a corporation.

Common examples of financial assets include stocks, sovereign and corporate bonds, bank deposits, and cash.

Financial assets can have physical substance, such as a nation’s currency, or they can be non-physical such as an equity holding in a corporation.

Real Assets

Real assets always hold physical substance, and their value comes from their physical nature.

These assets are necessary inputs in generating goods and services such as land, oil, natural gas, metals, roads, and grain.

As a result, the intrinsic value of real assets comes from their utility in producing goods and services.

Real Assets Vs. Financial Assets

Real and financial assets are the two most common classes of investments that individual investors will interact with, and collectively these assets are often referred to as tangible assets.

However, these assets have significant differences between them, which are important for investors to understand.

These assets share many similarities, such as in both cases, their valuation is largely dependent upon their potential for generating positive cash flows, and the Internal Revenue Service (IRS) requires both financial and real assets to be reported collectively as tangible assets.

However, unlike real assets, which possess intrinsic value, financial assets derive value from a contractual claim to an underlying asset that may or may not be tangible.

For example, a stock share in a corporation or a real estate investment trust.

In some cases, these assets can become easily confused, such as in commodity futures and exchange-traded funds (ETFs).

The value of these financial assets depends upon the value of underlying real assets, which often results in confusion for investors in categorizing their assets.

For example, physically backed ETFs such as State Street’s iShares Gold Trust are a popular investment that invests in precious metals.

Though the performance of an investment in this ETF will often mirror the performance of gold, it is still a financial investment, whereas the actual gold owned by State Street would be a real asset.

A significant difference for investors between investing in real assets versus financial assets comes down to their liquidity.

The marketplace for real assets has significantly less volume and frequency of trades than those for financial assets.

In addition, the market efficiency for these assets is lower than that of financial assets. Price spreads for real assets are often much larger and updated with less frequency than for financial assets.

Advantages & Disadvantages of Real Assets

Advantages of Real Assets

• Real assets are generally more stable than other classes of assets. Economic factors such as currency values and inflation typically have less impact on the value of real assets than financial assets, which makes them a strong investment option for hedging against periods of high inflation and economic downturns.
• Real assets typically have little correlation with other classes of assets and often have a negative correlation with financial markets. As a result, real assets are often used as a tool to diversify investment portfolios and protect against the risk of downturns in the financial markets.

Disadvantages of Real Assets

• Real assets are less liquid than financial assets, which can often be traded in seconds. In addition to taking longer to trade, real assets generally face higher transaction fees.
• Real assets generally come with greater carrying and storage costs. For example, storing precious metals often requires third-party storage facilities, which means incurring rental and insurance fees.
• Markets for real assets are generally less efficient than those for financial assets. This means less frequently updated information. The prices listed in a market for real assets generally are also rougher with a larger spread.

Example of Real Assets

In order to better understand real assets, consider one of the most famous examples, which is gold.

Precious metals have a long history of being used as an investment due to their relatively stable value.

To this day, they are still a popular option for investors, and many major ETFs attempt to replicate the performance of gold and other precious metals to provide an easy-to-use financial alternative.

Key Takeaways

• Real assets are physical assets with inherent value due to their physical nature and utility in generating goods and services.
• Common examples of real assets include real estate, infrastructure, metals, natural resources, and commodities.
• Real assets are commonly used in diversifying investment portfolios due to their low correlation with financial assets such as stocks and bonds.
• Due to lower volume and trading efficiency, real assets are generally less liquid than financial assets.