Sectors and Countries

Question 1

IVV

Answer 1

iShares Core S&P 500 ETF

1. Provider = Black Rock
2. Net Expense Ratio = 0.03%
3. Inception = 05/15/2000
4. Category = Large Cap Blend
5. Goal = The investment seeks to track the investment results of the S&P 500, which measures the performance of the large-capitalization sector of the U.S. equity market.
6. Sector =
   
   1. Tech = 24.24%
   2. Healthcare = 14.44%
   3. Financial Services = 12.91%
   4. Consumer Cyclical = 11.17%
   5. Communication Services = 10.93%
   6. Industrials = 8.49%
   7. Consumer Defensive = 7.46%
   8. Real Estate = 2.65%
   9. Energy = 2.50%
   10. Basic Materials = 2.25%

Question 2

Information Technology

Answer 2

Information Technology

1. Subsectors
   
   1. Communications Equipment
   2. Electronic Equipment, Instruments, & Components
   3. IT Services
   4. Semiconductors & Semiconductor Equipment
   5. Software
   6. Technology Hardware, Storage & Peripherals
2. Considered one of the more volatile sectors
3. Largest sector in terms of market capitalization; deep and diverse set of companies and industries
4. Offers potential exposure to growth associated with the rise of cloud computing, big data, and mobile computing

VGT - Vanguard Information Technology ETF

10 largest holdings = 59.80% of total net assets​

1. Apple Inc.
2. Microsoft Corp.
3. Visa Inc.
4. Mastercard Inc.
5. NVIDIA Corp.
6. PayPal Holdings Inc.
7. Adobe Inc.
8. Intel Corp.
9. Cisco Systems Inc.
10. salesforce.com Inc.

Investment Note -

1. 5G Wireless presents unique opportunity.
2. Particularly watching companies with leadership in cloud computing, artificial intelligence (AI), and machine learning (ML)
3. Think of factory floors with connected machines, or retail stores with real-time inventory management.
4. Once 5G infrastructure is in place, companies further down the value chain should benefit: In particular, handset and other hardware makers, and ultimately providers of applications and software.
5. 4G
   
   1. Mobile broadband was the key advancement provided by 4G networks

Question 3

Health Care

Answer 3

Considered a Defensive Sector

1. Health Care Subsectors
   
   1. Healthcare Equipment & Supplies
   2. Health Care Providers & Services
   3. Health Care Technology
   4. Life Sciences Tools and Services
   5. Biotechnology
   6. Pharmaceuticals
2. Two Real Groups
   
   1. Manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations.
   2. Research, development, production and marketing of pharmaceuticals and biotechnology products.
3. Stable demand can make the sector less sensitive to economic cycles.
4. Tends to perform better in the later stages of the business cycle
5. Offers potential exposure to investment themes, such as personalized medicine and the highly innovative biotechnology industry

VGHCX - Vanguard Health Care Fund Investor Shares

10 largest holdings = 42.10% of total net assets

1. Pfizer Inc.
2. UnitedHealth Group Inc.
3. AstraZeneca plc
4. Bristol-Myers Squibb Co.
5. Novartis AG
6. Regeneron Pharmaceuticals Inc.
7. Eli Lilly and Co.
8. Abbott Laboratories
9. Eisai Co. Ltd.
10. Boston Scientific Corp.

Investment Note

1. The transformation of the US health care economy to a payment model that incentivizes value over utilization
2. These companies are working toward building a new and innovative health care infrastructure that can address patients in lower-cost settings, such as through cloud/telemedicine that can be delivered to patients in their homes. They are also providing a better consumer experience by using digital technologies to engage patients in health care decisions, thus bringing greater understanding of health to people, which in turn allows them to make better decisions and lower their long-term medical costs. This more personalized, lower-cost approach to health care also saves money for the entire health care system.

Health Care Sector Risk -

1. The profitability of companies in the healthcare sector may be affected by government regulations and government healthcare programs, increases or decreases in the cost of medical products and services, an increased emphasis on outpatient services, demand for medical products and services and product liability claims, among other factors.
2. Many healthcare companies are heavily dependent on patent protection, and the expiration of a company’s patent may adversely affect that company’s profitability. Healthcare companies are subject to competitive forces that may result in price discounting, and may be thinly capitalized and susceptible to product obsolescence.

Question 4

Financials

Answer 4

Considered a Cyclical Sector

The Financial Sector contains companies involved in activities such as

1. Subsectors
   
   1. Banks
   2. Capital Markets
   3. Consumer Finance
   4. Diversified Financial Services
   5. Insurance
   6. Mortgage REITs
   7. Thrifts & Mortgage Finance
2. Sensitive to changes in the economy, monetary policy (interest rates), and regulatory policy
3. Tends to perform well at the beginning of the business cycle

VFH - Vanguard Financials ETF

Vangard 10 largest holdings = 40.60% of total net assets

1. JPMorgan Chase & Co.
2. Berkshire Hathaway Inc.
3. Bank of America Corp.
4. Citigroup Inc.
5. Wells Fargo & Co.
6. BlackRock Inc.
7. S&P Global Inc.
8. Goldman Sachs Group Inc.
9. American Express Co.
10. CME Group Inc.

Investment Note -

1. Financial stocks also looked inexpensive, with the second-lowest relative price-to-earnings and price-to-book ratios
2. We generally have exposure to the biggest banks through preferreds
3. Long-term gain potential due to the low valuation.
4. Even though rising longer-term interest rates are not a primary consideration in our outperform rating, as we expect rates to remain relatively low, the gradual rise amid growing economic optimism had helped Financial outperform in late spring

Question 5

Consumer Discretionary

Answer 5

Considered a Cyclical Sector

1. Subsectors:
   
   1. Auto Components
   2. Automobiles
   3. Distributors
   4. Diversified Consumer Services
   5. Hotels, Restaurants, & Leisure
   6. Household Durables
   7. Internet & Direct Marketing Retail
   8. Leisure Products
   9. Multiline Retail
   10. Specialty Retail
   11. Textiles, Apparel & Luxury Goods
2. Performance is closely related to the health of the overall economy
3. Tends to perform well at the beginning of a recovery, when interest rates are low, but can lag during economic slowdowns
4. Offers potential exposure to growth in high-end, luxury brands

VCR - Vanguard Consumer Discretionary

10 largest holdings = 54.60% of total net assets​

1. Amazon.com Inc.
2. Home Depot Inc.
3. Tesla Inc.
4. McDonald’s Corp.
5. NIKE Inc.
6. Lowe’s Cos. Inc.
7. Starbucks Corp.
8. Booking Holdings Inc.
9. Target Corp.
10. TJX Cos. Inc.

Investment Notes

1. Historically, a jump in the personal savings rate has been especially supportive of consumer discretionary stocks. The rate recently reached its highest level on record. After periods in which the personal savings rate has been in the top quartile of its historical range, consumer discretionary has outperformed the broad market by 2.4%, on average, during the next 12 months
2. Banks may be lending more to businesses, but they’ve become less willing to lend to consumers. Does bankers’ reluctance to lend to households undermine the case for consumer discretionary? History suggests that the answer, surprisingly, may be no: After big declines in banks’ willingness to lend to consumers, consumer discretionary has been the sector most likely to outperform. The explanation may be that lending tends to be cyclical, so rebounds in lending may have helped power greater spending.
3. There is significant divergence in the retail industry between the “haves” and “have nots” as it relates to technology—and the gap between the 2 is widening. Consumer demands and expectations continue to rise—sometimes at warp speed—and companies need to respond rapidly. This means the cost of doing business is also rising (including both hard costs and the associated labor and other expenses related to technology, logistics, and other capabilities). This trend is particularly striking in retailing, where the overall ratio of capital spending (capex) to sales has increased over the past few years, underscoring companies’ need to spend in order to grow their margins. While not all retailers are keeping pace, companies making the necessary investment in technology have been rewarded with better sales margins
4. As the popularity of the buy-online-pick-up-in-store model grows, so too does the need for more sophisticated and expensive technology for inventory management in order to match online orders with products available across a retailer’s fleet of locations—all in real time. Radio-frequency identification (RFID) technology using radio waves to track tags or smart labels allows retailers to improve the accuracy of their inventory and meet demand for an item. It can also capture in-store traffic patterns, giving retailers the ability to generate data from how people, products, and equipment move about the store. For example, the RFID technology could pick up on an item that shoppers repeatedly take into the fitting room but rarely buy, revealing a possible garment flaw. The technology can also assist at the checkout by automatically recognizing items in a cart, improving checkout speed and minimizing theft.

Question 6

Communication Services

Answer 6

The Communications Services

1. Subsector
   
   1. Diversified Telecommunication Services
   2. Entertainment
   3. Interactive Media & Servies
   4. Media
   5. Wireless Telecommunication Services
2. Offers exposure to investing themes, such as increasing demand for broadband and faster internet connections, alongside growth in global mobile data traffic
3. Provides a diverse mix of defensive telecom companies as well as exposure to internet stocks with higher growth profile
4. Companies in this sector are generally sensitive to economic cycles

VOX - Vanguard Communication Services

(70.30% of total net assets) as of 07/31/2020

1. Alphabet Inc.
2. Facebook Inc.
3. Verizon Communications Inc.
4. Netflix Inc.
5. Comcast Corp.
6. Walt Disney Co.
7. AT&T Inc.
8. Charter Communications Inc.
9. T-Mobile US Inc.
10. Activision Blizzard Inc.

Investor Note

1. The initial iterations of 5G wireless networks will emerge in 2020.
2. Wireless networks have evolved incrementally and have reshaped the world of connectivity, commerce, and entertainment on the go.
3. 2G enabled mobile voice capabilities for consumers.
4. 3G, data texting and the ability to send low-resolution photos became possible,
5. 4G launched the mobile broadband revolution that essentially put connected computers in the palms of our hands. 4G also enabled speeds allowing for rich media, video calling and streaming, social networking, and new business opportunities such as ride-sharing and mobile payments.
6. Many of the bellwether companies in the communication services sector gave power to 4G, and others showed us truly world-changing use cases for mobile broadband.
7. From a consumer standpoint, 5G will be dramatically faster but less of an improvement over the last generational shift, which introduced mobile broadband to the world. So, what is revolutionary about 5G? The answer lies with the proliferation of connected devices, appliances, systems, and more—also known as the internet of things—and where that collected data can take us.
8. When we pair this ability with machine learning and other types of artificial intelligence, 5G could have a profound impact on many industries. To say the least, there will be experimentation with how 5G can improve a business, such as with innovative software solutions that can manage this new, more-connected environment and capture or automate insights derived from the data collected.
9. The most immediate impact of 5G will be increased consumer engagement with mobile devices. Take, for example, the ability to download a movie on a mobile device. Ten years ago, it would have taken an entire day to download a 2-hour movie, but with 5G, it will take seconds. In short, 5G will allow consumers to engage with richer mobile content, stoking demand for devices and applications that can deliver 5G capabilities.

Question 7

Industrials

Answer 7

Industrials

1. Subsector
   
   1. Aerospace & Defense
   2. Air Freight & Logistics
   3. Airlines
   4. Building Products
   5. Commercial Services & Supplies
   6. Construction & Engineering
   7. Electrical Equipment
   8. Industrial Conglomerates
   9. Machinery
   10. Marine
   11. Professional Services
   12. Road & Rail
   13. Trading Companies & Distributors
   14. Transportation Infrastructure
2. Performance tends to be sensitive to economic cycles.
3. Tends to perform better in the early-to-middle stages of the business cycle
4. Offers potential exposure to growth associated with the global need for infrastructure replacement

VIS - Vanguard Industrials ETF

10 largest holdings = 31.00% of total net assets​

1. Union Pacific Corp.
2. Honeywell International Inc.
3. United Parcel Service Inc.
4. Lockheed Martin Corp.
5. 3M Co.
6. Raytheon Technologies Corp.
7. Boeing Co.
8. Caterpillar Inc.
9. Illinois Tool Works Inc.
10. CSX Corp.

Investment Note -

1. The Industrials sector has suffered significantly from the global economic recession, with industrial output faltering as a manufacturing downturn has broadened globally. While defense spending is likely safe, the sharp retrenchment in the economy and travel has weighed on airlines and the transportation industry in general. Together, this has prompted business leaders around the world to put nearly all capital spending on hold, stalling revenue growth.

Industrial Sector Risk -

1. Aerospace and defense companies, a component of the industrial sector, can be significantly affected by government spending policies because companies involved in this industry rely, to a significant extent, on U.S. and foreign government demand for their products and services. Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by governmental defense spending policies which are typically under pressure from efforts to control the U.S. (and other) government budgets. Transportation securities, a component of the industrial sector, are cyclical and have occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance costs.

Question 8

Consumer Staples

Answer 8

Considered a Defensive Sector

1. Subsectors:
   
   1. Beverages
   2. Food & Staples Retailing
   3. Food Products
   4. Household Products
   5. Personal Products
   6. Tobacco
2. Performance is generally less sensitive to changes in the economy; tends to be resistant to economic downturns.
3. One of the least volatile sectors, due to stable underlying demand for staple goods and services
4. Offers potential exposure to growth associated with middle-class consumption in emerging markets

VDC - Vanguard Consumer Staples

10 largest holdings = 65.10% of total net assets

1. Procter & Gamble Co.
2. Coca-Cola Co.
3. PepsiCo Inc.
4. Walmart Inc.
5. Philip Morris International Inc.
6. Costco Wholesale Corp.
7. Mondelez International Inc.
8. Altria Group Inc.
9. Colgate-Palmolive Co.
10. Kimberly-Clark Corp.

Investment Note

1. As digital transformation continues to disrupt retail shopping patterns, one place where US consumers seem reluctant to change their purchasing habits is at the grocery store. In 2017, less than 1% of US food & beverage sales took place online, demonstrating exceptionally low e-commerce penetration both on an absolute basis and relative to many other major developed and emerging markets. This less-than-1% figure also is very low compared with online sales in other retail categories, such as toys, apparel, and consumer electronics. At the same time, grocery accounts for the largest chunk of consumer spend—about 21% of total US retail sales (excluding gas stations and motor vehicles & parts). Ramifications of this disparity reach broadly across the grocery industry’s retail operators and brands, creating opportunity to invest in companies well-positioned to capitalize on this changing landscape.
2. However, the technology required to facilitate current modes of online grocery purchasing—home delivery or “click-and-collect,” where shoppers buy items online and pick them up at a store or some other collection point—is complex, especially given the perishable nature of many products (e.g., frozen foods, meat, produce). What’s more, it’s expensive: Retailers must commit substantial resources in order to transform supply chains, develop picking and distribution expertise, manage out-of-stock items, and maintain freshness and customer satisfaction—all before the first basket can be dropped to a shopper, successfully and within a defined time frame.

Investment Risk Note-

1. Consumer staples companies are subject to government regulation affecting their products which may negatively impact such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Tobacco companies may be adversely affected by the adoption of proposed legislation and/or by litigation. Also, the success of food, beverage, household and personal product companies may be strongly affected by consumer interest, marketing campaigns and other factors affecting supply and demand, including performance of the overall domestic and global economy, interest rates, competition and consumer confidence and spending.

Question 9

Utilities

Answer 9

Considered a Defensive Sector

1. Utilities Subsectors:
   
   1. Electric Utilities
   2. Gas Utilities
   3. Independent Power and Renewable Electricity Producers
   4. Multi-Utilities
   5. Water Utilities
2. Stable demand for utilities can make this sector less sensitive to changes in the economy
3. Can be a defensive investment during a recession or economic downturn
4. Companies in this sector are generally less volatile and pay relatively high dividend yields.
5. Interest Rate Sensitive Sector
   
   1. Rising interest rates can impact utilities more than other sectors because they can make bonds more attractive to conservative investors seeking that yield. The high capital cost/debt levels of operating a utility also increases borrowing costs with rising interest rates eating deeper into earnings.
   2. But the relationship between interest rates and utility stock performance is far more complicated than one of seamless negative correlation
   3. But the relationship between interest rates and utility stock performance is far more complicated than one of seamless negative correlation
   4. Utilities tend to track broader equity markets, albeit at a more measured pace, returning lower highs but higher lows

VPU - Vanguard Utilities ETF

10 largest holdings = 56.00% of total net assets

1. NextEra Energy Inc.
2. Dominion Energy Inc.
3. Duke Energy Corp.
4. Southern Co.
5. American Electric Power Co. Inc.
6. Exelon Corp.
7. Sempra Energy
8. Xcel Energy Inc.
9. WEC Energy Group Inc.
10. Eversource Energy

Investment Note-

1. In 2019, more than half of renewable power generation capacity installed globally was cheaper than the cost of power from new coal plants, bolstering the economic case for transitioning to cleaner energy resources. Several utilities have already set goals, albeit ambitious ones, to generate carbon free electricity to adapt to an uncertain regulatory future.
2. The relatively low P/E for Gas utilities presents an upside opportunity stemming from an improving backdrop for natural gas demand as the world continues its transition towards clean energy
3. Decoupling has gained popularity over the past decade, as only six states had decoupling mechanisms in place for at least some utilities within the state in 2011, per U.S. Energy Information Administration data, while 42 states now have decoupling mechanisms.
4. The most favorable regulatory mechanism, in our view, is full revenue decoupling. Full revenue decoupling mechanisms “allow the utility to adjust rates to reflect fluctuations in customer usage that are brought out by broader economic issues, such as demographic shifts, the migration of large commercial/industrial customers to other service areas, the shutdown of such businesses due to changes in their respective industries and recessions,” according to industry insight provider S&P Global Regulatory Research Associates. We forecast full decoupling mechanisms will help compensate utilities for revenue losses resulting from volume declines due to Covid-19.
5. the coal plant is operated less often, thus earning less revenue and making it a candidate for retirement
6. Most of the new power plant capacity additions came from wind (67,901 MW), natural gas (54,362 megawatt “MW”), and solar (36,588 MW), according to data available at S&P Global Market Intelligence (SPGMI), a source of data for the Utilities sector and a division of S&P Global.
7. Aside from the declines in coal capacity and nuclear capacity, petroleum capacity is also expected to decline in the coming years, contributing to the market’s increased reliance on natural gas, solar, and wind.
8. CFRA thinks that the adoption of renewable energy powered battery storage will negatively impact the Utilities sector, as renewables are a substitute for natural gas and reduce demand for natural gas distribution, eroding the profitability of gas utilities.
9. Covid-19
   
   1. Our fundamental outlook for Utilities is neutral. While we expect relatively flat earnings in 2020, driven by macro-economic headwinds underpinning the global pandemic, we think utilities offer a logical defensive play
   2. As many businesses remain closed, and as more people are staying at home, we have noticed two trends thus far. Commercial and Industrial (C&I) electricity usage is down and residential usage is up (see charts below). We expect these trends to continue for as long as economic restrictions remain stringent and, therefore, we favor those utilities that have a greater exposure to residential customers (and less to C&I).

Porter’s Five Forces Analysis

1. Degree of Rivlary/Competition = Very Low
   
   1. Since utilities are granted franchises to be the sole providers by the states and cities that they serve, there is no competition for customers within their service area; still, the states and cities protect consumer interests through regulation. Utilities with competitive rates can attract businesses to their service area if other operating conditions are favorable
2. Bargaining Power of Customers = Low
   
   1. Bargaining power of customers is low as electric and gas rates are set by regulators, although customer advocacy groups try to have an impact on the ratemaking process. Consumption by industrial users tends to be more sensitive to changes in economic activity and price than commercial or residential demand because industrial customers have greater ability and incentive to alter their consumption according to market forces. Industrial users have the highest customer bargaining power while residential customers have the lowest. Higher profit margins for residential users but, Covid-19 decrease led to less revenue because the drop in commercial utilities was greater than the increase in residential utilities.
3. Bargaining Power of Suppliers
   
   1. Bargaining Power of Suppliers is higher as commodity fuels, such as natural gas, are the main inputs for power generators. Fuel costs routinely change based on fuel supply and demand patterns, and utilities often enter into purchase-contracts and hedge contracts. Both electric and gas utilities may be forced to purchase electricity, fuel, and natural gas from the wholesale markets if they need to supplement contracted resources
4. Threat of Substitutes (Very for Low for Electric, Low for Gas)
   
   1. For gas utilities, we see the impact of increasing generation from renewable resources initially occurring slowly enough so that gas demand is maintained. However, over time renewable resources could reduce gas demand from natural gas-fired generation units. As battery storage is introduced, gas-fired peaking plants could also start to be phased out, but we see this evolution taking many years.
5. Threat of New Entrants or New Entry
   
   1. Barriers to entry are high as the U.S. electric, gas, and multi-utilities industries are dominated by state or local government-sanctioned monopoly businesses that have exclusive rights and obligations to deliver power and natural gas to homes and businesses. Huge capital investments are required to build large electric and gas distribution networks, as well as to maintain and operate the systems

Question 10

Energy

Answer 10

The Energy Sector

1. Subsector
   
   1. Energy Equipment & Services

Oil, Gas & Consumable Fuels

2. Performance can be closely related to the price of commodities, such as crude oil and natural gas.
3. Tends to be sensitive to changes in consumer demand and the economy
4. Offers potential exposure to growth associated with innovations in drilling technology or alternative energy sources

VDE - Vanguard Energy ETF

10 largest holdings = 69.70% of total net assets​

1. Exxon Mobil Corp.
2. Chevron Corp.
3. ConocoPhillips
4. Phillips 66
5. EOG Resources Inc.
6. Kinder Morgan Inc.
7. Marathon Petroleum Corp.
8. Schlumberger Ltd.
9. Valero Energy Corp.
10. Williams Cos. Inc.

Investment Note = Inexpensive but weak fundamentals

1. The energy sector remains the least expensive on asset-based measures, but is still mixed on earnings and free cash flow relative to the sector’s historical range.
2. The maturation of shale drilling and pressure from Wall Street are 2 reasons why exploration & production (E&P) energy companies are becoming more disciplined stewards of their businesses.
3. First, the shale technological drilling revolution, which made the US arguably the most productive supplier of crude oil and natural gas across the globe, has reached a new phase in its development. Signs indicate that the race to drill for the sake of simply boosting (commodity) production—without regard for profitability—has peaked. In recent years, many E&P companies have focused on increasing volumes (production) without creating value in the form of return on capital employed and other profitability metrics. This has kept commodity prices low, and at levels that have threatened corporate profitability.
4. Second, energy stocks have been out of favor for the five-year period ending October 31, 2019. Energy has been the worst-performing of the 11 sectors in the S&P 500 during that time, with an annualized return of -4.95%, and the only sector with a negative return. Meanwhile, the S&P 500 index is up 10.78% per year over the same period. As a result, more energy companies have shifted attention from production to profitability and shareholder-friendly efforts, even amid historically low crude oil prices.

Question 11

Materials

Answer 11

Considered a Cyclical Sector

The Materials Sector encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel.

VAW - Vanguard Materials ETF

10 largest holdings = 56.00% of total net assets​

1. Linde plc
2. Air Products and Chemicals Inc.
3. Newmont Corp.
4. Sherwin-Williams Co.
5. Ecolab Inc.
6. DuPont de Nemours Inc.
7. Dow Inc.
8. PPG Industries Inc.
9. Ball Corp.
10. Corteva Inc.

Investment Note -

1. While the near-term outlook for lithium and some other commodities is clouded by oversupply, there could be a supply crunch by the mid-2020s. In fact, lithium’s use in every lithium-ion EV battery type means it is likely to have double-digit annual growth, making up over 80% of total lithium demand by 2030
2. Copper is also a major component of EVs, as it’s used in electric motors, batteries, inverters, wiring, and charging stations. According to data from the International Copper Association (ICA), hybrid EVs contain about twice as much copper as a conventional internal combustion engine, and pure EVs contain roughly 4 times as much.3 What’s more, ICA predicts that copper’s use in EV transport may become even greater with the emergence of energy-independent vehicles that use solar photovoltaic panels to harness renewable energy.
3. The use of wind and solar power for electricity generation offers similarly intriguing possibilities. Falling costs for renewable energy have brought us much closer to “grid parity,” the point at which the cost of producing electricity from renewable sources is on par with production from fossil fuels. Copper, steel, and many other commodities have key roles to play in this rapidly growing market, and we will be watching these developments carefully in the coming year.

Question 12

Real Estate

Answer 12

Considered a Cyclical Sector

1. Subsector
   
   1. Equity Real Estate Investment Trusts
   2. Real Estate Management & Development
2. Provides growth potential, as real estate investments have produced competitive long-term returns relative to stocks and bonds
3. Offers diversification potential due to lower correlations with other major asset classes
4. Acts as a potential hedge against inflation, due to the tendency of real estate values and rents to increase when inflation is increasing

VNQ - Vanguard Real Estate

10 largest holdings = 49.20% of total net assets​

1. Vanguard Real Estate II Index Fund
2. American Tower Corp.
3. Prologis Inc.
4. Crown Castle International Corp.
5. Equinix Inc.
6. Digital Realty Trust Inc.
7. SBA Communications Corp.
8. Public Storage
9. Welltower Inc.
10. Alexandria Real Estate Equities Inc.

Investment Note

1. Traditional REIT segments such as retail, apartments, and offices are giving way to new and emerging categories, including single-family home rentals and data centers
2. We’re paying close attention to these shifts, evaluating new opportunities and assessing which traditional REITs are best-positioned in an evolving world
3. In 2010, 80% of the market was focused on core property types—retail, apartment, office, and industrial buildings. Today, however, that figure stands at only about 40%, by our calculation, with new and emerging real estate categories making up the rest.
4. These shifts in the REIT market have tracked the generational changes driving the US economy—in particular, the technological disruption that is modifying not only how we live our lives but even the spaces we occupy. For example, the expansion of e-commerce has hurt traditional retail real estate owners, whose commercial tenants are struggling to respond to heightened competition from online vendors. Another example: Hotel and lodging REITs now face a more challenging business environment because of the impact of short-term rental agencies such as Airbnb.
5. Health care REITs are benefiting from the world’s aging populations that require specialized housing; additionally, a favorable cost of capital has spurred acquisition and development within the industry

Question 13

Chinese Economy

Answer 13

China Nominal GDP: $14.14 trillion - China GDP (PPP): $27.31 trillion

China has experienced exponential growth over the past few decades, breaking the barriers of a centrally-planned closed economy to evolve into a manufacturing and exporting hub of the world. China is often referred to as the “world’s factory,” given its huge manufacturing and export base. However, over the years, the role of services has gradually increased and that of manufacturing as a contributor to GDP has declined relatively. Back in 1980, China was the seventh-largest economy, with a GDP of $305.35 billion, while the size of the U.S. then was $2.86 trillion. Since it initiated market reforms in 1978, the Asian giant has seen an economic growth averaging 10% annually. In recent years, the pace of growth has slowed, although it remains high in comparison to its peer nations.

The IMF projects a growth of 5.8% in 2020, which would sober down to around 5.6% by 2023. Over the years, the difference in the size of the Chinese and the U.S. economy has been shrinking rapidly. In 2018, the Chinese GDP in nominal terms stood at $13.37 trillion, lower than the U.S. by $7.21 trillion. In 2020, the gap is expected to reduce to $7.05 trillion, and by 2023, the difference would be $5.47 trillion. In terms of GDP in PPP, China is the largest economy, with a GDP (PPP) of $25.27 trillion. By 2023, China’s GDP (PPP) would be $36.99 trillion. China’s huge population brings down its GDP per capita to $10,100 (seventieth position).

The Chinese economy has slowed noticeably over the past few years. At the same time, an increasing percentage of China’s economy is tied to the consumer-oriented areas of travel and leisure, health care, and financial services, reflecting the dynamic growth of its middle class.

Both trends have dampened demand for traditional industrial products and services. Even within the nation’s industrial sector, the emphasis has shifted in favor of technology-driven markets.

For example, China already has the world’s largest robot market, and its government is actively promoting the robotics industry with special funding for research and development

Question 14

Japan

Answer 14

Japan Nominal GDP: $5.15 trillion- Japan GDP (PPP): $5.75 trillion

Japan is the third-largest economy in the world, with its GDP crossing the $5 trillion mark in 2019. The financial crisis of 2008 rocked the Japanese economy and it’s been a challenging time for its economy since then. The global crisis triggered a recession, followed by weak domestic demand and huge public debt. When the economy was beginning to recover, it suffered a massive earthquake that hit the country socially and economically. While the economy has broken the deflationary spiral, economic growth remains muted.

Its economy will get some stimulus with the 2020 Olympics keeping the investment flow strong, which is backed by a lax monetary policy by the Bank of Japan. Japan slips to the fourth spot when GDP is measured in terms of PPP; GDP (PPP) is $5.75 trillion in 2019, while its GDP per capita is $40,850 (24th spot)

Question 15

Germany

Answer 15

Germany Nominal GDP: $3.86 trillion - Germany GDP (PPP): $4.44 trillion

Germany is not just Europe’s largest economy but also the strongest. On the global scale, it is the fourth-largest economy in terms of nominal GDP, with a $4 trillion GDP. The size of its GDP in terms of purchasing power parity is $4.44 trillion, while its GDP per capita is $46,560 (18th place). Germany was the third-largest economy in nominal terms in 1980, with a GDP of $850.47 billion.

The nation has been dependent upon capital good exports, which suffered a setback post-2008 financial crisis. The economy grew by 2.2% and 2.5% in 2016 and 2017, respectively. However, the IMF says this slipped to 1.5% and 0.5% in 2018 and 2019, respectively. To bolster its manufacturing strength in the current global scenario, Germany has launched Industrie 4.0—its strategic initiative to establish the country as a lead market and provider of advanced manufacturing solutions.

Question 16

India

Answer 16

India Nominal GDP: $2.94 trillion-India GDP (PPP): $10.51 trillion

India is the fastest-growing trillion-dollar economy in the world and the fifth-largest overall, with a nominal GDP of $2.94 trillion. India has become the fifth-largest economy in 2019, overtaking the United Kingdom and France. The country ranks third when GDP is compared in terms of purchasing power parity at $11.33 trillion. When it comes to calculating GDP per capita, India’s high population drags its nominal GDP per capita down to $2,170. The Indian economy was just $189.438 billion in 1980, ranking 13th on the list globally. India’s growth rate is expected to rise from 7.3% in 2018 to 7.5% in 2019 as drags from the currency exchange initiative and the introduction of the goods and services tax fade, according to the IMF.

India’s post-independence journey began as an agrarian nation; however, over the years the manufacturing and services sector has emerged strongly. Today, its service sector is the fastest-growing sector in the world, contributing to more than 60% to its economy and accounting for 28% of employment. Manufacturing remains as one of its crucial sectors and is being given due push via the governments’ initiatives, such as “Make in India.” Although the contribution of its agricultural sector has declined to around 17%, it still is way higher in comparison to the western nations. The economy’s strength lies in a limited dependence on exports, high saving rates, favorable demographics, and a rising middle class.

Question 17

United Kingdom

Answer 17

U.K. Nominal GDP: $2.83 trillion - U.K. GDP (PPP): $3.04 trillion

The United Kingdom, with a $2.83 trillion GDP is the sixth largest economy in the world. When compared in terms of GDP purchasing-power-parity, U.K. slips to the ninth spot with a GDP-PPP of $3.04 trillion. It ranks 23rd in terms of GDP per capita, which is $42,558. Its nominal GDP is estimated to remain at $2.83 trillion during 2019, but its ranking is expected to slide to the seventh spot by 2023 with its GDP of $3.27 trillion.

Starting from 1992 until 2008, the economy of the U.K. witnessed an uptrend in each quarter. However, it witnessed a decline in its output for five consecutive quarters starting April 2008. The economy shrunk by 6% during this time (between the first quarter of 2008 and the second quarter of 2009) and eventually took five years to grow back to the pre-recession levels, according to data from the Office of National Statistics.

The economy of the U.K. is primarily driven by the services sector, which contributes more than 75% of its GDP, with manufacturing the second prominent segment, followed by agriculture. Although agriculture is not a major contributor to its GDP, 60% of the U.K.’s food needs are produced domestically, even though less than 2% of its labor force is employed in the sector.

Question 18

France

Answer 18

France Nominal GDP: $2.71 trillion - France GDP (PPP): $2.96 trillion

France, the most-visited country in the world, is the third-largest economy of Europe and the sixth-largest in the world, with a nominal GDP of $2.78 trillion. Its GDP in terms of purchasing power parity is around $2.96 trillion. The country offers a high standard of living to its people as reflected in its GDP per capita of $42,877.56. In recent years, the economic growth has slowed, resulting in unemployment that has placed immense pressure on the government to reboot the economy. The World Bank has recorded unemployment rates at 10% during 2014, 2015, and 2016. During 2017, it declined to 9.681%.

In addition to tourism, which remains very important for its economy, France is a leading agricultural producer, accounting for about one-third of all agricultural land within the European Union. France is the world’s sixth-largest agricultural producer and the second-largest agricultural exporter, after the United States. The manufacturing sector is primarily dominated by the chemical industry, automotive, and armament industries. The economy has grown by 2.3% during 2017 and is expected to grow 1.8% and 1.7% during 2018 and 2019 as per the IMF.

Question 19

Italy

Answer 19

Italy Nominal GDP: $1.99 trillion - Italy GDP (PPP): $2.40 trillion

With a nominal GDP of $2.07 trillion, Italy is the world’s eighth-largest economy. Its economy is expected to expand to $2.26 trillion by 2023. In terms of GDP (PPP), its economy is worth $2.40 trillion and it has a per capita GDP of $34,260.34. Italy—a prominent member of the eurozone—has been facing deep political and economic chaos. Its unemployment rate continues to be in double-digits, while its public debt remains sticky at around 132% of GDP.

On the positive side, exports and business investment are driving economic recovery. The economy clocked 0.9% and 1.5% in 2016 and 2017, respectively. It is projected to edge down to 1.2% in 2018 and 1.0% in 2019.

Question 20

Brazil

Answer 20

Brazil Nominal GDP: $1.85 trillion - Brazil GDP (PPP): $3.37 trillion

Brazil is the largest and most populous nation in Latin America. With a nominal GDP of $1.87 trillion, Brazil is the ninth-largest economy in the world. The nation that had been riding on the commodity wave suffered multiple setbacks with the end of the commodity supercycle, in addition to internal problems of corruption and political uncertainty, which dampened the investment and business environment.

During 2006–2010, the nation grew at an average 4.5%, moderating to around 2.8% in 2011–2013. By 2014, it was barely growing at 0.1%. In 2016, Brazil contracted by 3.5% before rebounding by 1% in 2017. IMF projects the economic growth to revive to 2.5% by 2019. Brazil is part of the BRICS, along with Russia, India, China, and South Africa. The country has a GDP (PPP) of $3.37 trillion and a GDP per capita of $8,967.66.

Question 21

Canada

Answer 21

Canada Nominal GDP: $1.73 trillion - Canada GDP (PPP): $1.84 trillion

Canada displaced Russia to take the 10th spot in 2015 and has retained its position since then. Canada’s nominal GDP is currently at $1.71 trillion and is expected to touch $1.74 trillion in 2019 and $2.13 trillion by 2023. Its per capita GDP of $46,260.71 is ranked 20th globally, while its GDP of $1.84 trillion in terms of PPP pulls it down to the 17th spot.

The country has contained its level of unemployment and it’s likely to further shrink. While services are the major sector, manufacturing is the cornerstone of the economy, with 68% of its exports constituting of merchandise exports. Canada is laying a lot of emphasis on manufacturing, which is crucial to its future economic growth. Canada registered a growth of 3% in 2017 vis-à-vis 1.4% in 2016 and is expected to grow 2% during 2018 and 2019.