New Asset Classes or Market Mirage? A Closer Look at Modern Investments
by Timothy J. Videnka, CFA, CFP®
“You can measure opportunity with the same yardstick that measures the risk involved. They go together.”
– Earl Nightingale
An asset class is a group of financial instruments that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. According to a simple Google search, the primary asset classes traditionally include:
- Equities (Stocks): Shares in companies that represent ownership in the firm, allowing for participation in the profits of the business.
- Fixed Income (Bonds): Debt instruments issued by entities like governments or corporations that promise periodic payments and the return of principal at maturity.
- Cash or Cash Equivalents: Highly liquid assets that include currency, Treasury bills, and money market funds. This is a subset of fixed income yet are lumped together for their short maturities and liquidity.
- Real Estate: Property investments, both residential and commercial.
- Commodities: Physical goods such as gold, oil, or agricultural products.
Let’s take a look under the hood of the last two – Real Estate and Commodities – to examine the interplay of an asset class versus a sector or group of stocks that operate in similar markets.
Blurring Lines: Innovation or Repackaging?
According to S&P Global, the Global Industry Classification Standard – or GICS structure – consists of 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries. For the purpose of this discussion, we will focus on the 11 sectors that constitute the S&P 500 Index and divide the U.S. economy into separate categories of large, publicly traded companies.
The 11 sectors are as follows: Consumer Discretionary, Consumer Staples, Health Care, Energy, Financials, Industrials, Information Technology, Communication Services, Utilities, Materials, and Real Estate. If one wanted to invest in Real Estate or Commodities (read: Materials and Energy), they might come across popular Exchange Traded Funds (ETFs) such as stock symbol IYR, iShares US Real Estate, or NANR, the SPDR North American Natural Resource ETF. This begs the question: What do you really own if you buy these ETFs? The top five holdings of IYR are as follows: Prologis, American Tower, Equinix, Welltower, and Public Storage. These five holdings are publicly traded Real Estate Investment Trusts (REITs) that reside in the Real Estate Sector of the S&P 500. In fact, the entire fund is made up of publicly traded REITs . How about NANR? The top five holdings are: Exxon, Chevron, Freeport-McMoRan, Newmont, and Conoco Phillips. Once again, the entire fund consists of publicly traded companies in the Energy, Materials, and Consumer Staples sectors.
Upon further review, it becomes clear that the so-called asset classes of Real Estate and Commodities are, in fact, sectors of the S&P 500 Index. Furthermore, investments in these sectors can be expressed directly with common stocks as evidenced by the underlying holdings of the aforementioned ETFs, not products that use common stocks as investments.
New Kids on the Block: Cryptocurrencies
Cryptocurrencies have been heralded as a new and cutting-edge asset class, yet they lack several characteristics that typically define the asset class framework laid out earlier. In our opinion, here’s why cryptocurrencies – such as Bitcoin or Ethereum – don’t fit into the asset class framework and should not be considered an asset class.
1. Lack of Intrinsic Value
Asset classes like stocks and bonds represent underlying value or income-producing assets. Stocks provide ownership in a company; bonds offer interest payments and return of principal at maturity. Cryptocurrencies, on the other hand, have no inherent value or claim on cash flows. Their value is based entirely on what others are willing to pay for them, which makes them a speculative vehicle rather than a productive asset.
2. High Volatility and Speculation
Cryptocurrencies exhibit extreme price volatility, much higher than stocks or bonds. While all assets fluctuate in price to some degree, the sheer unpredictability of crypto markets — driven by speculation, market manipulation/bad actors, and regulatory concerns — makes them resemble speculative assets rather than a stable asset class. For instance, Bitcoin has experienced price swings of over 50% in short periods, which is uncommon for more established asset classes.
3. Regulatory and Structural Uncertainty
Asset classes are generally defined and regulated by established financial systems. Cryptocurrencies operate in a largely unregulated or inconsistently regulated environment. The lack of legal frameworks, inconsistent tax treatment, and regulatory scrutiny further separate cryptocurrencies from traditional asset classes that have established rules and protections for investors.
4. No Universal Definition of Value
For an asset to be considered a class, it must be universally recognizable and its value determinable. To be clear, cryptocurrencies don’t have a universal measure of value. Some people view them as a digital alternative to gold, while others see them as a speculative tool or simply a medium for transactions. This lack of consensus adds to the ambiguity about whether they can be classified as an asset class.
While cryptocurrencies can be traded like assets, they don’t fit neatly into the traditional definitions of asset classes due to their speculative nature, lack of income generation, regulatory uncertainty, and volatility. They are better considered as a high-risk, speculative instrument rather than a core component of a traditional investment portfolio.
Conclusion
As we’ve highlighted before, risk management is essential and closely tied to pursuing long-term returns. A key aspect of managing risk is understanding what you own and why, including digging down to the underlying holdings of an investment product and their effects on your portfolio.