(PUB) Vanguard Advisor

EFFICIENCY FROM PAGE 1 >

After-Tax Returns Since Q1 2011

the fund hasn’t paid out capital gains since 2000. But the losses used to offset gains in prior years are now gone, so 2014 might just be the year that “record” is broken. That’s not the only reason you shouldn’t let this tax- efficiency rating move you to invest in the fund, however. Hold on, and I’ll explain in a second. You see, the bulk of Vanguard’s funds, whether indexed or actively managed, show tax-efficiency rates of 90% or better over the past three- and five-year periods. The least tax-effi- cient funds over the last three years include Precious Metals & Mining and Emerging Markets Index . Both funds lost money over the period, and their investors lost even more after paying taxes. Over the past five years, Precious Metals & Mining sharehold- ers, who earned just 2.4% before taxes, only took home a 1.3% return due to the tax hit. So that fund definitely gets the “loser” award. And because income is and always has been a big component of its returns, Convertible Securities is a chronic underachiever in the tax-efficiency hunt, losing almost one-third of its 7.9% three-year return to the tax man and about one-sixth of its 16.6% five- year return to taxes. Efficient Investing Before we get into the nitty-gritty of the data, let’s back up and talk about tax efficiency for a moment. Or, as I said at the beginning, let’s talk about after-tax returns. While it’s tax efficiency that often gets the headlines, it’s really not the most important metric for assessing the overall performance of a fund, par- ticularly when taxes are a concern. For years I’ve said that just because many index funds are “tax efficient” and have low turnover, this doesn’t mean they’ll make you richer, faster. I have always focused on after- tax returns. And it’s funny, but sev- eral years ago, after years and years of preaching the tax efficiency of index funds, Vanguard seemed to get a new

Ranked by After-Tax Return Health Care Index

3-Year Return

Tax-Adj Return

Tax- Effic.

rather to “maximize after-tax wealth.” Sure, there may be some investors on the edge of a particular income tax bracket who may get thrown into a higher bracket because of a distribu- tion or, by the same token, might drop down a bracket if they don’t receive any or many distributions. So, avoid- ing a distribution might be critical for a few. But for most of us, this is a far less important factor than simply earn- ing as much as we can after Uncle Sam is done with us. Also, looked at in a vacuum, tax- efficiency tells you nothing about your Target Retirement 2055 10.8% 10.4% 96% Target Retirement 2040 10.7% 10.2% 95% Target Retirement 2050 10.7% 10.2% 95% Target Retirement 2045 10.8% 10.2% 95% Global Equity 10.6% 10.2% 96% Wellington 11.2% 9.9% 89% Target Retirement 2035 10.3% 9.7% 94% Balanced Index 10.3% 9.7% 94% T-M Balanced 9.9% 9.4% 95% STAR 10.1% 9.2% 92% Target Retirement 2030 9.8% 9.2% 94% STAR Growth 9.7% 9.0% 93% REIT Index 10.4% 8.9% 85% Target Retirement 2025 9.3% 8.6% 93% Materials Index 8.8% 8.5% 96% Total World Stock Index 8.8% 8.3% 94% Wellesley Income 9.6% 8.1% 85% Target Retirement 2020 8.7% 8.1% 92% European Index 8.7% 7.8% 89% STAR Mod. Growth 8.2% 7.4% 90% Target Retirement 2015 8.0% 7.2% 90% International Explorer 7.9% 7.0% 89% Developed Mkts. Index 7.2% 6.6% 91% International Growth 7.0% 6.6% 94% International Value 7.1% 6.5% 91% Managed Payout 8.2% 6.2% 76% Target Retirement 2010 7.1% 6.2% 88% Convertible Securities 7.9% 5.6% 71% STAR Cons. Gro. 6.4% 5.3% 84% Target Ret. Income 6.3% 5.3% 85% Global ex-U.S. R.E. Index 6.6% 5.1% 77% Energy Index 5.0% 4.7% 93% Market Neutral 4.4% 4.4% 99% Pacific Index 5.1% 4.3% 85% World ex-U.S. SmCap Idx. 4.9% 4.1% 83% Total Int’l Stock Index 4.3% 3.5% 81% STAR Income 4.7% 3.4% 73% World ex-U.S. Index 4.1% 3.3% 81% Energy 2.0% 1.0% 51% Emerging Markets Index -3.7% -4.3% neg. Prec. Metals & Mining -22.1% -22.9% neg. Ranked by After-Tax Return Tax- Effic. MidCap Growth Index 11.5% 11.4% 99% Telecom Svcs. Index 11.3% 10.6% 94% 3-Year Return Tax-Adj Return

23.1% 22.7% 99%

religion, focusing more on after-tax returns as well—rather than, say, turn- over. Today, Vanguard will tell you that focusing on a low turnover rate as the key to fending off distributions is a “flawed” approach. Vanguard tax maven Joel Dickson, who also hap- pens to help run the quantitative side of Vanguard’s stock shop, has said, “At the end of the day, the question is whether you have created wealth, not how much you have reduced taxes.” As he’s put it, the investor’s goal should not be to “minimize capital gains” but Information Tech. Index 13.7% 13.5% 98% SmallCap Growth Index 13.6% 13.4% 99% Explorer 14.5% 13.4% 93% MidCap Index 13.4% 13.2% 98% Explorer Value 14.7% 13.1% 89% Utilities Index 13.6% 12.9% 94% Dividend Appr. Index 13.0% 12.6% 97% Morgan Growth 12.9% 12.5% 97% Financials Index 12.7% 12.1% 96% Capital Value 13.5% 12.1% 89% MidCap Growth 13.5% 11.9% 88% Health Care 23.3% 21.6% 93% Consumer Discret. Index 20.3% 20.0% 99% Strategic Equity 17.2% 16.9% 98% U.S. Value 16.6% 16.2% 97% Social Index 16.3% 16.0% 98% Consumer Staples Index 16.4% 15.9% 97% Strategic SmCap Equity 16.1% 15.8% 98% Selected Value 16.4% 15.8% 96% Capital Opportunity 16.6% 15.7% 95% T-M SmallCap 15.8% 15.6% 98% PRIMECAP 16.4% 15.6% 95% Equity Income 16.2% 15.4% 95% High Div. Yield Index 15.9% 15.3% 96% Dividend Growth 15.6% 15.1% 97% Windsor 15.4% 15.1% 98% PRIMECAP Core 15.7% 15.0% 96% MidCap Value Index 15.2% 14.8% 97% U.S. Growth 14.8% 14.7% 99% Growth & Income 15.0% 14.6% 97% T-M Capital Appr. 14.8% 14.5% 98% Growth Index 14.7% 14.4% 98% Industrials Index 14.6% 14.2% 98% Windsor II 14.8% 14.2% 96% Diversified Equity 14.6% 14.2% 97% T-M Gro.&Inc. 14.5% 14.1% 97% Total Stock Mkt. Index 14.5% 14.1% 97% 500 Index 14.5% 14.1% 97% LargeCap Index 14.4% 14.0% 97% Extended Market Index 14.2% 13.9% 98% SmallCap Value Index 14.5% 13.9% 96% SmallCap Index 14.2% 13.8% 97% Value Index 14.0% 13.5% 96%

12 • Fund Family Shareholder Association

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