- Real asset prices relative to financial assets are at the lowest level seen since 1925.
- BofA sees new fiscal and trade policies meant to raise wages sparking a bull market in real assets.
- The bank lays out nine ways investors can implement the real assets theme.
- See more stories on Insider’s business page.
The time has come for investors to turn to real assets for hefty returns this decade as high valuations in the stock and bond markets are likely to generate volatile and lower returns, according to Bank of America’s chief investment strategist Michael Hartnett.
Unlike financial assets like stocks and bonds, real assets are physical and have fundamental value to them. Some examples include commodities, real estate, and collectibles like art and diamonds. They are also more correlated to inflation, meaning that when the purchasing power of the dollar declines, real assets prices rise.
Yet, the prices of real assets look cheap versus Treasuries and stocks, which have soared partly on the back of the Fed’s efforts to inject money into the economy. More specifically, real asset prices relative to financial assets are at the lowest level seen since 1925, Hartnett wrote in a recent note to clients.
Also, the chart above demonstrates that bull markets in real assets simultaneously occurred when powerful fiscal stimulus programs in the 1940s and advances in trade policy in 2001 took place. Consequently, new fiscal and trade policies that are meant to raise global wages will probably trigger a new
in real assets, he wrote.
Additionally, real assets offer higher and more “attractive” yields than stocks and bonds. Physical assets such as timber and infrastructure have a higher yield than US government bonds and equities, he said.
Investors are already starting to acknowledge the benefits of owning this asset class and are appropriately positioning themselves.
“5.5% of total ETF market cap is exposed to real assets, and we see potential for this figure to rise in coming years,” Hartnett wrote.
9 ways to apply the real assets theme
For many, the simplest way to gain access to the asset class is indirectly through exchange-traded funds. However, there are many ways to build exposure to real assets by buying directly.
Harnett and his team recommend both approaches for exposure to real estate, farmland, energy and agriculture infrastructure, wine, art, diamonds, cars, as well as precious and industrial metals.
One way to gain exposure to commercial real estate is by investing in real estate investment trusts, or REITs. The Invesco S&P 500 Equal Weight Real Estate ETF, for example, seeks to replicate the investment results of an index that equally weights members of the S&P 500 real estate industry group.
The second way to apply the real assets theme is by investing in infrastructure which includes pipelines, airports, and cellphone towers. One way to achieve that is through the iShares Global Infrastructure ETF, which aims to tracks an index made up of developed-market infrastructure stocks.
Another way includes betting on energy pipelines through master limited partnerships, or MLPs. As such, the Tortoise North American Pipeline ETF is an option, as it tracks an index of pipeline companies structured as corporations, limited liability companies, and MLPs.
Investors can also gain the benefits of real asset exposure by betting on funds focusing on transportation infrastructure. One to consider is the SPDR S&P Global Infrastructure ETF, which aims to provide the same performance of an index that tracks 75 global companies that represent the industry.
Another way for investors to apply the real asset theme is by investing in homebuilder funds like the SPDR S&P Homebuilders ETF, which tracks an index of stocks that are part of the GICS homebuilding sub-industry.
And if one chooses to jump into a more specific asset like timber, they might want to consider the Invesco MSCI Global Timber ETF, which measures the performance of securities that are involved in the ownership and management of forest timberlands and the making of products that use timber as a raw material.
However, investors should also consider getting a hold of Treasury inflation-protected securities, or TIPS given rising rates and inflation expectations. Just like the name suggests, TIPS are linked to inflation to protect investors from a decline in the purchasing power of their money.