Investing in Real Assets via ETFs

Posted by FlexShares on Jun 13, 2017 9:04:10 AM

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Real assets are different than financial assets like stocks and bonds. Real assets include gold and other precious metals, commodities, real estate, and oil, among others. These assets have value due to their physical properties rather than as a financial vehicle. Our analysis shows that real assets are generally not highly correlated with stocks and bonds, thus potentially adding diversification to a portfolio. Asset correlation is a measure of how investments move in relation to one another and when. When assets move in the same direction at the same time, they are considered to be highly correlated. When one asset tends to move up when the other goes down, the two assets are considered to be negatively correlated.

We believe ETFs are a great way to add this diversification to a portfolio. Here are some thoughts on ETFs that invest in real assets.

Pros and cons of real assets

We believe real assets have some distinct advantages over financial assets, including less sensitivity to economic factors like inflation and fluctuations in currencies. On the other hand, real assets are often less liquid than financial instruments like stocks that are traded on open, public exchanges.

Investing directly in many physical real assets such as gold and precious metals may be difficult and costly. There are potential costs for storage and insurance as well as transaction costs when it comes time to buy and sell. The same may hold true for many other physical commodities. Direct ownership of real estate can be costly and real estate is illiquid. If you need to sell the property quickly, you will most likely have to reduce the price, potentially resulting in a loss on your investment.

Using ETFs to invest in real assets

ETFs may provide a liquid, diversified vehicle to invest in real assets without the hassle and expense of buying the actual physical asset. We believe ETFs provide daily liquidity and allow investors to participate in this asset class with a lower dollar investment than buying the actual physical assets. Additionally, our research shows that the use of an ETF can potentially make investing in real assets in an IRA easy and hassle-free, which may generally not the case with the actual physical asset.

While ETFs in the real assets category often invest in stocks of companies engaged in the use, sale, or mining of physical assets in some capacity, the portfolios often may generally track the performance and characteristics of the real assets they are trying to emulate.

Moreover, we believe the variety of the underlying holdings of the ETF portfolio provides a level of diversification and management within the asset class that is difficult to emulate when buying physical real assets.

The FlexShares approach

We offer four ETFs investing in real assets:

  1. FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR)
  2. FlexShares Real Assets Allocation Index Fund (ASET)
  3. FlexShares Global Quality Real Estate Index Fund (GQRE)
  4. FlexShares Global STOXX® Broad Infrastructure Index Fund (NFRA)

For example, GUNR is designed to follow a rules-based approach to invest in natural resource companies based upon a proprietary index created by Morningstar®. The fund provides investors with exposure to companies in five sectors: energy, agriculture, metals, timber, and water.

Exposure to these sectors, plus the global nature of the ETF, is designed to provide investors with a solid diversification alternative from investments in the actual physical commodity.

 

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