(PUB) Vanguard Advisor

PRIMECAP , though those two funds’ tax-efficiency ran about 96% and 95%, respectively, which is lower than U.S. Growth’s ratio. Information Technology Index is also highly efficient, but its returns were nothing to write home about once you factored even minuscule taxes into the equation. The same can be said for MidCap Growth Index . Tax effi- ciency tells you nothing about a fund’s returns—it only tells you the portion of that fund’s returns you’re likely to keep. Before you check out the tables on this page and the last, let’s define our parameters. Both the returns and tax- efficiency calculations I’ve done cover the three- and five-year periods ending March 31, 2014. I’ve hit the funds with a heavy tax burden, applying a 20% capital gains rate and a 43.4% income tax rate, which incorporates the 3.8% health-care surtax on high-income earn- ers. For qualified dividend income, as specified under the American Taxpayer Relief Act of 2012, I’ve used the maxi- mum rate of 20%. So whether a fund’s dividends qualify for the reduced rate or the normal income tax rate, it’s all factored in. The funds in the tables are ranked by after-tax returns. What I haven’t bothered to look at is turnover, because it’s just not that relevant. Unbelievably, sophisticated investors and novices alike still seem to focus way too much on turnover ratios (the pace at which a fund’s holdings are churned). I can’t tell you the number of times I’ve had conversations with inves- tors who were convinced that the only way to have high tax efficiency was to keep turnover low. That’s old-think. Not all turnover results in a taxable gain. Higher turnover could mean that a fund manager is harvesting his or >

After-Tax Returns Since Q1 2009

returns. Case in point: U.S. Growth, which I mentioned earlier. Yes, the fund is very tax efficient—over the past three and five years, investors lost only about half of one percent of the Extended Market Index 25.8% 25.5% 99% SmallCap Value Index 26.1% 25.5% 98% MidCap Index 24.9% 24.6% 99% Explorer 25.2% 24.5% 97% Selected Value 24.7% 24.1% 98% MidCap Growth Index 23.6% 23.4% 100% Social Index 23.1% 22.8% 99% Windsor 22.7% 22.4% 99% Health Care Index 22.6% 22.3% 99% MidCap Growth 23.0% 22.0% 95% Capital Opportunity 22.4% 21.8% 97% Information Tech. Index 22.0% 21.8% 99% Diversified Equity 22.1% 21.8% 98% U.S. Value 22.0% 21.6% 98% Total Stock Mkt. Index 21.9% 21.5% 98% Health Care 22.8% 21.4% 94% T-M Capital Appr. 21.7% 21.3% 98% Materials Index 21.6% 21.3% 98% Financials Index 21.6% 21.2% 98% Growth Index 21.4% 21.1% 99% PRIMECAP Core 21.5% 21.1% 98% PRIMECAP 21.7% 21.0% 97% High Div. Yield Index 21.6% 21.0% 97% Equity Income 21.7% 20.9% 97% LargeCap Index 21.2% 20.8% 98% 500 Index 21.0% 20.6% 98% T-M Gro.& Inc. 21.1% 20.5% 97% Morgan Growth 20.8% 20.5% 98% Windsor II 21.1% 20.5% 97% Value Index 21.0% 20.5% 97% Growth & Income 20.8% 20.4% 98% U.S. Growth 20.3% 20.2% 99% Ranked by After-Tax Return Tax- Effic. Consumer Discret. Index 30.0% 29.8% 99% Capital Value 29.5% 28.4% 96% SmallCap Growth Index 27.0% 26.8% 99% REIT Index 28.5% 26.7% 94% Strategic SmCap Equity 27.0% 26.7% 99% Strategic Equity 26.9% 26.6% 99% SmallCap Index 26.6% 26.2% 99% Industrials Index 26.2% 25.9% 99% T-M SmallCap 26.1% 25.8% 99% MidCap Value Index 26.0% 25.5% 98% 5-Year Return Tax-Adj Return

Ranked by After-Tax Return

5-Year Return

Tax-Adj Return

Tax- Effic.

International Explorer

20.6% 19.8% 96%

fund’s total returns to taxes. Still, its three-year after-tax return of 14.7% was less than the 15.0% after-tax return earned by PRIMECAP Core and the 15.6% annualized return from Target Retirement 2025 16.1% 15.4% 96% Developed Mkts. Index 16.0% 15.3% 96% International Value 15.6% 14.9% 96% Utilities Index 15.5% 14.8% 96% World ex-U.S. Index 15.5% 14.8% 95% Wellington 15.9% 14.7% 92% Total Int’l Stock Index 15.4% 14.6% 95% STAR 15.4% 14.5% 94% Balanced Index 15.0% 14.3% 95% Target Retirement 2020 14.9% 14.2% 95% Energy 15.1% 14.1% 93% Convertible Securities 16.6% 13.9% 84% STAR Mod. Growth 14.1% 13.2% 94% Emerging Markets Index 13.7% 13.1% 95% Managed Payout 14.9% 12.9% 87% Target Retirement 2015 13.7% 12.9% 94% T-M Balanced 13.0% 12.4% 96% Pacific Index 13.1% 12.3% 94% Wellesley Income 13.2% 11.7% 89% Target Retirement 2010 12.1% 11.2% 92% STAR Cons. Gro. 11.0% 10.0% 90% Target Ret. Income 9.3% 8.3% 89% STAR Income 7.9% 6.6% 84% Market Neutral 2.2% 2.1% 99% Prec. Metals & Mining 2.4% 1.3% 55% Global Equity 20.3% 19.8% 98% Consumer Staples Index 19.4% 18.9% 98% Dividend Growth 19.1% 18.6% 97% Dividend App. Index 18.8% 18.3% 98% Target Retirement 2040 18.4% 17.9% 97% Target Retirement 2045 18.5% 17.8% 97% Target Retirement 2050 18.5% 17.8% 97% Energy Index 18.1% 17.8% 98% International Growth 18.2% 17.7% 97% Target Retirement 2035 18.1% 17.5% 97% Total World Stock Index 18.0% 17.5% 97% Telecom Svcs. Index 18.0% 17.5% 97% European Index 17.7% 16.7% 94% Target Retirement 2030 17.2% 16.5% 96% STAR Growth 17.0% 16.4% 96%

A Healthy Comparison

Big Returns from Small Stocks

3-YEAR RETURNS 5-YEAR RETURNS Pre-Tax Post-Tax Pre-Tax Post-Tax 23.1% 22.7% 22.6% 22.3% 23.3% 21.6% 22.8% 21.4%

3-YEAR RETURNS 5-YEAR RETURNS Pre-Tax Post-Tax Pre-Tax Post-Tax 16.1% 15.8% 27.0% 26.7% 14.2% 13.8% 26.6% 26.2% 15.8% 15.6% 26.1% 25.8% 17.2% 16.9% 26.9% 26.6% 13.4% 13.2% 24.9% 24.6%

Health Care Index

Strategic SmallCap Equity

Health Care

SmallCap Index

Tax-Man. SmallCap

Strategic Equity MidCap Index

The Independent Adviser for Vanguard Investors • May 2014 • 13

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