Sub-asset Class: What it is, How it Works, Examples

Sub-Asset Class – What It is

A sub-asset class is a subset of an asset class that is further subdivided for the purpose of easier asset identification or more specific subclass information.

Sub-asset classes are categorised according to shared features, exhibiting those of the parent asset class as a whole.

Examples of asset classes include stocks and investment trusts, two types of sub-asset classes within the stock market.

These are traded in a manner similar to stocks but with a few notable differences.

Metals and agricultural commodities are two sub-asset classes within the broader commodity asset class.

• Sub-asset classes can be defined as groups of assets that are similar to one another and to the asset class to which they belong.
• Creating a diversified portfolio requires drilling down to the sub-asset level.
• Sub-asset classes exist within the more general asset classes of stocks, fixed income, and commodities.

comprehending Sub-Asset Class

Sub-asset classes can be separated out from the larger asset class by their distinguishing features.

They are typically employed to dissect major market asset categories like stocks, bonds, and commodities.

Style investing and standard investment management strategies can benefit from sub-asset class diversification and modern portfolio theory.

When a portfolio is diversified across multiple asset classes, its overall risk and volatility are mitigated.

Finding additional opportunities for portfolio diversification through sub-asset classes.

For example, if you buy a bunch of stocks at random, you might not end up with a diversified portfolio.

A more diversified portfolio can be achieved by investing in stocks from various asset classes, sub-asset classes, industries, and sectors.

Equities

Numerous investments within the equity universe can be separated into their own sub-asset classes due to their individual characteristics.

A couple of examples are master limited partnerships (MLPs) and real estate investment trusts (REITs).

These securities trade on the stock market just like common stocks, but they are considered a special type of equity due to their incorporation.

Sub-asset classes may also be defined based on other characteristics of equities. Large-cap stocks, mid-cap stocks, and small-cap stocks are all examples of capitalization-based asset sub-classes.

Growth stocks, value stocks, and blended strategies are just a few examples of how equities can be further categorised.

Fixed Income

There are a variety of sub-asset classes available to investors within the fixed income market.

Examples of liquid assets include money, loans, and bonds. Each offers a different set of fixed-income investment characteristics.

Duration (maturity) and quality can be used to categorise fixed income sub-asset classes. Timings can be brief, moderate, or extensive.

A credit rating, issued by a rating agency, can serve as a proxy for the credit quality of a particular sub-asset class of fixed income investments.

High-yield bonds, also known as junk bonds, are a type of bond with a low credit rating and a high associated risk.

It is also possible to classify bonds according to the type of issuer they came from and whether or not they were issued by a foreign or domestic organisation.

Commodities

Metals, oil, gas, grains, and other agricultural products are all examples of sub-asset classes that can be found among commodities.

Despite sharing a common name, the various commodity sub-asset classes are quite distinct from one another. Metals are extracted from mines, while food is grown or raised.

Soft commodities are those that are produced through cultivation rather than mining.

Futures contracts on soft commodities are among the earliest examples of this market segment.

Soybeans, cocoa, coffee, cotton, sugar, rice, and wheat are just some examples of what could be considered part of this category, but it could also include any number of animals.

In contrast, hard commodities like mined metals (copper, gold, silver, etc.) and energy extraction (crude oil, natural gas, and products refined from them) are already present in the earth and waiting to be extracted, rather than needing to be planted and nurtured to maturity.

Unlike soft commodities, which are grown in greenhouses, hard commodities can be found in similar geological deposits all over the world.

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Example Investing in Different Types of Assets

If you’re looking to diversify your holdings or make a specific investment, it may be helpful to focus on a specific sub-asset class.

Investors can better diversify their portfolios across risk levels by identifying the unique features of sub-asset classes.

For instance, the investment strategy of a 60/40 asset allocation fund could be defined as allocating 60% of assets to equity and 40% to debt.

Even though this portfolio is diversified, the investment managers still have a lot of leeway in deciding which specific sub-asset class to allocate each portion to.

They might also choose to split their stock purchases in half, allocating the first half to growth investments and the second half to value investments.

All stock investments may be required to be in companies of mid-cap or larger size.

Twenty percent of the bond allocation could be invested in liquid assets such as certificates of deposit.

Short-term commercial paper (35%), government and municipal bonds (25%), and investment-grade corporate bonds (10%) are all possible allocations.

There is room for further subdivision of these percentages.

Ten percent of the portfolio could be invested in long-term treasuries, ten percent in short-term treasuries, and 2.5 percent in both short-term and long-term municipal bonds, for a total of 25 percent.

An investor can either figure out their own optimal asset allocation strategy or consult a financial advisor for assistance.

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