Introduction to Asset Classes

In this section, we feature everything you need to know about asset classes as ingredients of your portfolio.

  1. What are asset classes?
  2. What are the most important asset classes?
  3. How do I invest in asset classes?
  4. Overview over asset classes

 

Introduction

What are asset classes?

Asset classes are different types of investments that distinguish themselves from others by their risk profile, returns and correlation to other asset classes. Specifically, they have different inflation risks and volatility risks. Equities, for instance, pose little inflation risk (as companies can easily raise their prices for products according to inflation and redistribute those profits to their investors through dividends) while bonds post significant inflation risks (when inflation goes up, your coupon will not, thus you will receive less in real terms when inflation goes up).

What are the most important asset classes?

The most important asset classes are equities, bonds, convertibles (a mixture of equities and bonds), real estate, commodities, alternative investments and cash (yes, cash is an asset class!).

How do I invest in asset classes?

As part of your asset allocation, you naturally will have to invest in different asset classes. The easiest and most productive way to do so is to invest in them via ETFs, which are Exchange-Traded funds and replicate an entire asset class. An ETF is much like a mutual fund, except for three big differences: First of all, they are very cheap (they cost around 0.2% p.a.), they are very diversified (most ETFs have dozens if not hundreds of individual securities of an asset class) and are solely passive, meaning all they do is replicate an asset class, which is the most productive way to secure your asset allocation.

For instance, take a look at the SPDR S&P 500 ETF, which is an ETF that replicates the S&P 500 Index, an equity index of the 500 largest American corporations that are traded on a stock exchange. This fund costs less than 0.1% per year, and when you buy a share of this ETF, you automatically own (in proportion) all 500 stocks.

Below, you will find an overview over the major asset classes. Each fund you see is a low-cost ETF that replicates an asset class. The S&P 500, Dow Jones, QQQ (Nasdaq-100), Russel 2000, DAX Germany and MSCI Emerging Markets are equity indices. They are followed below by an ETF on convertibles, bond funds (ranging from short-duration to longer duration, both sovereign issuers and corporate issuers), as well as a REIT (real estate) ETF (Dow Jones REIT ETF), a Gold ETF and an overall commodity ETF that replicates the asset class of commodities for you.

Check out how these asset classes performed over the last days, months and year by clicking on them below.