Sub-Asset Class

A sub-asset class is a sub-segment of a broad asset class that is broken down to provide identification or more granular detail. Sub-asset classes are grouped by common characteristics, also displaying characteristics of the broad asset class.

Sub-asset classes are generally defined by certain characteristics that make them unique within a broad universe. They are most commonly used to break down broad market asset classes like equity, fixed income and commodities.

Sub-asset classes can be an important aspect for style investing and standard investment management strategies, which rely on diversification and modern portfolio theory. Diversifying asset classes in a portfolio balances its exposure to risks and reduces the volatility of the overall investment. Sub-asset classes help to further identify and diversify the risks associated with the superclass.

Within the equity universe, numerous investments have unique characteristics that provide for sub-asset class categorization. Real estate investment trusts (REITs) and master limited partnerships (MLPs) are two examples. These investments trade alongside other stocks in the market, however they have unique characteristics associated with their incorporation that define them as an equity sub-asset class.

Other equity features may also be used to define sub-asset classes. Capitalization can allow for sub-asset classes such as large cap, mid cap or small cap. Equities may also be further delineated by characteristics such as growth, value or blend.

Within the fixed income universe a number of sub-asset classes exist for investors. Cash, loans and bonds are a few examples. Each has fixed income attributes with their own unique investment characteristics.

Fixed income sub-asset classes may also be grouped by duration and quality. Durations can be short, intermediate or long. Credit quality sub-asset classes for fixed income investments may also be defined by their credit rating, which is provided by a rating agency.

Commodities offer a range of sub-asset classes that can include metals, oil and gas, as well as grains and other types of agricultural products.

Sub-asset classes can be important for targeted investing or when seeking to build a diversified portfolio. By determining specific characteristics of sub-asset classes, investors can make focused investments across risk levels.

For example, a 60/40 asset allocation fund may define its strategy as investing 60% of assets in equity and 40% in debt. While this is a balanced portfolio, the investment managers still have a wide range of sub-asset class options they can choose from for each portion.