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The main asset classes for ETF investors

Many people immediately think of equities when it comes to investing. However, this is just an asset class and there are 4 more asset classes available to motivated investors, plus subcategories.

Investors typically use different asset classes for portfolio diversification. A common rule of thumb here is that normally, when an asset class such as equities has heavy losses, other asset classes like real estate, bonds, etc. make profits and the overall loss is offset or at least minimized.

We have summarized and explained the most important asset classes for you in this article.

Stocks / Shares

This is the best- known and probably the most common asset class.

Shares are company shares that are traded on the stock market.

To a certain extent, the investor participates in the company's success via these securities. In many cases, companies distribute their shareholders dividends once a year, which is a proportional share of the profits.

In addition, the investor ideally makes a profit, of course, by increasing the stock market price. However, this also logically implies that the investor has to accept losses in the event of a price decline. Yields can be relatively high, but one carries a relatively high risk accordingly.

The risk is to be counteracted with the so-called diversification of the portfolio , whereby the principle is best not to put all the eggs in one basket.

Historically, equities in well-developed markets such as Germany and the US have historically delivered the best returns in all asset classes. However, as already mentioned, they were also exposed to the greatest risks due to price fluctuations and stock market crashes.

Usually, the shares that contain a voting right (called ordinary shares in Germany, English: Common Stock) are more expensive than the non-voting preferred stock. Often, a higher dividend will be paid out to compensate for the lack of voting rights in the preference share. However, this is by no means always the case - so you should really look very closely.

The term "preferred stock" is basically completely wrong, because preference can be no question. Ordinary shares are therefore popular with strategic investors as well as the founding families of a company because they can secure control of the company.

Ordinary shares also rise significantly in value if the risk of an unwanted takeover threatens.

Bonds / Debt Securities / Fixed Income Securities

These names are used synonymously for this asset class.

Bonds are interest-bearing securities. The issuer of the bond is indebted to the buyer of the bond, whereby the investor holds a monetary claim against the issuer. Bonds are therefore also called bonds or debt securities.

The terms of the loan, or more precisely interest, term and repayment, are determined in advance exactly.

Unlike stocks, bonds are not traded in a specific currency but in percent. Thus, the investor buys no number of a bond, but a certain nominal amount. Bonds are traded on the bond market.

The advantage for the issuer of bonds lies in the option of having capital without having to provide collateral, as would be the case, for example, with a normal bank loan.

The buyer of bonds has no say, unlike ordinary shares. He becomes a creditor by the purchase, not by the partner.

The benefits to the investor are certainly the regular, pre-determined interest payments. And of course, at the end of the term, he gets 100% of his capital back.

However, there are also risks:

Credit Risk

This means the risk that the issuer of the bond may be in default of payment or even completely insolvent. To assess the credit rating, the ratings are used by rating agencies, which provide a general statement of the credit worthiness of the publisher. The most important rating agencies are:

  • Standard & Poor's
  • Moody's
  • Fitch Ratings

Although all these three are private companies, they are strictly monitored by regulators. There are also many smaller agencies that specialize mostly in niches or only operate regionally.

The rating levels of the three agencies are not 100% comparable, but still largely. The best rating is AAA (triple A), the worst C (single C).

According to the rating, the bond markets are divided into two segments:

  • AAA-BBB ratings are called Investment Grade. In particular, institutional investors may invest the money only or almost exclusively in this segment.
  • Ratings of BB and below are called Speculative Grade. Investments in this segment are referred to as junk bond (literally: garbage bond or junk bond) or as high yield bond.

Interest Rate Risk

This indicates the risk that the market interest rate changes while you have a bond in your portfolio. Logically, the market rate also changes the price of the bond and it can lead to losses.

The market interest rate is influenced by policies of the state, the respective central bank and economic events. When interest rates fall, this means rising bond prices. Conversely, when interest rates rise, the value of the bond falls.

This is particularly important when a bond is to be sold before it is actually due. Should the market interest rate then be above the bond interest, then the investor will suffer losses. On the other hand, if the market interest rate is below the bond interest rate, one makes profits.

Currency Risk

For bonds, there are basically two types of currencies: the nominal currency, which is the currency in which the issuer repays the bond to the buyer at the end of the term, and the so-called coupon currency, in which the interest is paid out.

Normally both currencies are the same. The risk of currency risk concerns those bonds where these two currencies are not identical. - the so-called coupon currency - identical. This risk therefore applies to bonds issued in a foreign currency.

If the nominal currency falls against the home currency of the buyer of the bond, the buyer incurs losses. However, conversely, he can make better returns if the nominal currency gains in value against its home currency.

Inflation Risk

Inflation risk is the uncertainty about the real amount of interest payments. So if the purchasing power of money falls sharply, then this may not be offset by the compounding of the bond and the investor thus makes a net loss. Although the repayment price is then higher than the issue price, the return has in the end nevertheless fallen.

Strategies with Bonds

If you want to develop an investment strategy with bonds, you should see to find answer to the following questions:

  • In which market segment would you like to invest?
  • Which rating category interests you for your system?
  • In which currency do you want to invest your money?
  • Which term corresponds to your individual investment needs?

Bonds ETFs are typically used to minimize the risk of a portfolio. To fulfil this purpose, a government bond - unlike a corporate bond - is certainly one with the highest credit rating (ideally Triple A) and short maturities in the home currency of the investor.

Among the countries with a corresponding credit rating are Germany, Switzerland, The Netherlands, Norway and Canada among others.


Real estate is popular with high net worth individuals, because of its good risk-return profile as an investment class.

Investors invest their money mainly in commercial real estate such as offices and shopping centres. An advantage is that buildings can experience an increase in value. In addition, the investor receives monthly rental payments.

Of course, ETF investors do not invest their money directly in real estate, but in real estate companies are listed on the stock exchange.

The famous quote from Warren Buffett: "Half of the world's wealth is in real estate" illustrates the high value of real estate in the overall wealth context. At around €6 trillion, well over half of Germany's private wealth is invested in real estate.

Due to the global financial and debt crisis and the associated low interest rate phase, asset values ​​are clearly favored by many investors, not least as inflation protection.

If you would like to find out more about the real estate asset class and the possibilities of real estate investment, read on here .

Raw Materials

Raw materials are unprocessed bulk commodities such as gold, oil or corn. For trading on the capital markets their future prices are used.

In principle, investors can invest in commodities in two different ways. Either directly, for example, by buying gold or silver, or indirectly by investing in commodity companies.

There are two options for direct investment: physical buying - eg gold coins or bars - or the purchase of securities.

It is obvious that, except in special cases such as gold, diamonds, the physical purchase of raw materials is rather difficult. Iron ore for 10,000 euros cannot be kept in the safe.

Therefore, when investing in commodities, futures (futures contracts) are usually used. However, investors must make sure that it is a differential transaction and not a delivery transaction.

As a rule, commodities are added to a portfolio for diversification purposes as they significantly reduce the overall risk. This is due to the historically negative correlation to equities.

To invest your money in ETFs in commodities, you can choose from numerous scattered commodity indices that are replicated by the corresponding ETFs.

The components in a commodity index can be roughly divided into the following categories, with the weighing, then varying from index to index:

  • Energy Resources
  • Fossil Fuels
  • Fuels
  • Metals
  • Industrial Metals
  • Precious Metals
  • Agriculture
  • Agricultural Commodities
  • Livestock

An example of a commodity index is the S&P GSCI (formerly Goldman Sachs Commodity Index) index, which is highly energy-intensive, and contains 24 commodities. The weightage is adjusted once a year according to its worldwide production volume:

  • 63% Energy (Oil and Gas)
  • 16% Agricultural Products (Wheat, Corn, Soybeans, Coffee, Sugar, Cocoa and Cotton)
  • 9% Industrial Metals (Aluminium, Copper, Lead, Nickel and Zinc)
  • 8% Livestock
  • 4% Precious Metals (Gold and Silver)

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