Sub-Asset Class

What Is a Sub-Asset Class?

A sub-asset class is a sub-portion of a broad asset class that is broken down to give more identification or more granular detail of the assets inside the subclass. Sub-asset classes are grouped by common qualities, likewise showing attributes of the broad asset class.

Stocks, for example, are an asset class, and investment trusts are an illustration of a sub-asset class inside the broader universe of stocks. These trade in basically the same manner to stocks, however have a few unique qualities. Commodities likewise create a broad asset class, while metals and agricultural commodities each make up separate sub-asset classes.

Understanding the Sub-Asset Class

Sub-asset classes are generally defined by certain qualities that make them unique inside the greater universe of the asset class. They are most commonly used to break down broad market asset classes like equity, fixed income, and commodities.

Sub-asset classes can be an important perspective for style investing and standard investment management strategies, which depend on diversification and modern portfolio theory. Enhancing asset classes in a portfolio balances its exposure to risks and lessens the volatility of the overall portfolio. Sub-asset classes help to additionally distinguish areas where the portfolio can be diversified.

Buying a random pack of stocks, for instance, will not be guaranteed to make a diversified portfolio. Buying stocks across various asset classes, sub-asset classes, industries, and sectors will make a more diversified portfolio.

Equities

Inside the equity universe, various investments have unique qualities that accommodate sub-asset class order. Real estate investment trusts (REITs) and master limited partnerships (MLPs) are two models. These investments trade alongside different stocks on the stock market, nonetheless, they have unique attributes associated with their incorporation that characterize them as an equity sub-asset class.

Other equity highlights may likewise be utilized to characterize sub-asset classes. Capitalization allows for sub-asset classes like enormous cap, mid-cap, or small-cap. Equities may likewise be additionally portrayed by qualities, for example, growth, value, or blend.

Fixed Income

Inside the fixed income universe, a number of sub-asset classes exist for investors. Cash, loans, and bonds are a couple of models. Each has fixed-income credits with its own unique investment qualities.

Fixed income sub-asset classes may likewise be grouped by duration (maturity) and quality. Durations can be short, intermediate, or long. Credit quality sub-asset classes for fixed income investments may likewise be defined by their credit rating, which is given by a rating agency. Junk bonds (likewise called high-yield bonds) have low credit ratings and are riskier investments and make up a distinct asset class.

Bonds additionally are classified by the issuer, whether these are sovereign or municipal governments, agencies, or enterprises; as well as whether the issuer is domestic or foreign.

Preferred shares are technically a sub-asset class of equity, however in numerous ways, they are hybrid assets that lie among stock and bonds. They offer more unsurprising income than common stock and are rated by the major credit rating agencies.

Commodities

Commodities offer a scope of sub-asset classes that can incorporate metals, oil and gas, as well as grains and different types of agricultural products. While these are totally called commodities, these sub-asset classes are altogether different. Metals are mined, while agricultural commodities are developed or raised.

A soft commodity alludes to commodities that are developed as opposed to extricated or mined. Soft commodities address the absolute most seasoned types of futures known to have been actively traded. This group of agricultural products might incorporate products like soybeans, cocoa, coffee, cotton, sugar, rice, and wheat, as well as every kind of livestock.

This is rather than hard commodities like mined metals (copper, gold, silver, and so on) and energy extraction (crude oil , natural gas, and products refined from them), which are waiting in the earth for extraction, rather than being planted and supported to maturity. Hard commodities can likewise be found in comparable land deposits around the world, though soft commodities rely upon regional climate conditions to develop.

Model Using Sub-Asset Classes in Investing

Sub-asset classes can be important for targeted investing or while seeking to build a diversified portfolio. By determining specific attributes of sub-asset classes, investors can make centered investments across risk levels.

For instance, a 60/40 asset allocation fund might characterize its strategy as investing 60% of assets in equity and 40% in debt. While this is a balanced portfolio, the investment managers actually have an extensive variety of sub-asset class options they can browse for each portion.

They might additionally choose to put half of their stock purchases into growth investments, and the other half into value investments. They may likewise specify that all stock investments must be in basically mid-cap in size or greater.

For the bonds part, they might choose to put 20% in cash or cash equivalents like certificates of deposit (CDs). They might put 35% in short-term commercial paper, 25% in government and municipal bonds, and the leftover 10% in high-grade corporate bonds.

These rates could be broken down even further. For instance, the 25% (of the 40% of the portfolio allocated to government and municipal debt) could be 10% long-term treasuries, 10% short-term treasuries, and 2.5% of both short-term and long-term municipal bonds.

Investors can determine their own optimal asset allocation strategy, or search out the guidance of a financial advisor for help.

Highlights

• A sub-asset class is a group of assets that share comparable qualities with one another, and furthermore with the broader asset class it is part of.
• Peering down to the sub-asset level is important if hoping to build a diversified portfolio.
• Stocks, fixed income, and commodities are common asset classes that all have sub-asset classes inside them.