Money Matters: Where do real estate, commodities fit in a broad market profile?

 David Peartree, The Daily Record Newswire

This is a relevant question at a time when some investors no longer believe that a traditional stock and bond portfolio will get the job done for them.

Last month’s article looked at the global market portfolio for stocks and bonds — both the size of the market and the proportions of its basic components. (“Helping investors break down the market portfolio,” The Daily Record, Aug. 15). We noted that the investable global market portfolio exceeds $212 trillion, consists of far more bonds than stocks, to the surprise of many, and is far more international than U.S. focused.

Here we take a look at real estate and commodities as the two other broad asset classes available to investors. The immediate objective is not to make the case for including real estate and commodities in an actual portfolio. That’s another discussion entirely.

The objective is simply to identify the size and relative proportions of real estate and commodities as potential investments and to understand how they fit in a hypothetical market portfolio that investors can use as a default or starting point.

It’s surprisingly difficult to make definitive statements because the data is so fragmented and sometimes locked in proprietary databases. Still, we can arrive at approximations that are good enough to understand what a hypothetical global market portfolio might look like.

Real estate

Commercial real estate includes healthcare, hospitality, retail, multi-family, office and industrial properties. Getting a handle on the size and composition of the commercial real estate market is more difficult and less certain than it is for stock or bond markets.

As an asset class, commercial real estate does not trade on an exchange. No single entity maintains a tally of the value of all commercial buildings around the world and publishes a figure. Other methodologies are used such as estimating the percentage of GDP that consists of commercial real estate. The task is so challenging that academic papers have been written about how to go about estimating the size of the market.

The point for investors is that this is an asset class that is far less transparent and liquid than stocks, and the relevant data is never quite as current as it is for stocks and bonds. Investors forget these things at their peril.

Global commercial real estate was estimated to be worth $24 trillion as of start of 2011. U.S. commercial real estate was estimated at about 28 percent of the total, about $6.6 trillion. Far and away, the U.S. holds the largest concentration for a single country.

The rest is split roughly as follows: 36 percent in Europe, 11 percent in Japan, and most of the rest is dispersed across other parts of Asia and Latin America. Developed countries represent around 80 percent of the global real estate market.

Another approach is to consider the value of securitized real estate, a much small market. The market capitalization of U.S. equity REITs (real estate investment trusts) was about $544 billion as of 2012. The total market capitalization of REITs around the world is approximately $1.1 trillion, not all of which are traded on an exchange.

The universe of traded real estate securities funds is even smaller, approximately $250 billion globally as of 2012.

Commercial real estate as a whole is only about 10 percent of the global capital markets, whatever its larger impact on the economy may be. That portion in which individual investors can readily invest is barely 1 percent of the whole. A simple test for “investability,” by the way, is whether an asset can be bought and held in a conventional brokerage account.


Commodities are trickier because they encompass a wider range of asset types, most of which are not suitable for investors taking physical possession. In broad terms, they include energy, metals and agricultural products.

Commodities are traded on exchanges, the largest being the NYMEX in New York. Others include the Chicago Mercantile Exchange, the Chicago Board Options Exchange and the London Commodities Exchange.

Annual global production across eleven major commodity categories covering energy, metals and agricultural was in excess of $5 trillion in 2010. A significant sum in its own right, it is small relative to the total global capital markets.

The portion of the commodities market in which investors can readily invest is much smaller, approximately $410 billion as of 2011. This includes investments in broad-based commodity index funds and exchange-traded products, many of which use derivative contracts to replicate the returns of a particular commodity index.

How does knowing the size of these markets matter to an investor? If one’s objective as an investor is to capture a fair share of market returns, it helps to know what the “market” looks like.

Real estate and commodities present some challenges as elements of a portfolio. They are inherently less liquid and more complicated than stocks and bonds. Much of it is not suited for ownership by individual investors. 

Real estate and commodities are clearly not core positions like stocks and bonds.

Unless investors are willing to take positions in these asset classes far greater than their place in a total market portfolio, stocks and bonds will remain the dominant asset classes for most investors.


David Peartree, JD, CFP® is the principal of Worth Considering, Inc., a registered investment advisor offering fee-only investment and financial advice to individuals and families. Offices are located at 160 Linden Oaks, Rochester, NY 14625; email


  1. No comments
Sign in to post a comment »