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her losses. Turnover is not the be- all, end-all indicator of tax efficiency. Anyway, taking a look at the tables, there are a few things that stood out and surprised me. First, as you and I know, Health Care ’s returns have been super strong, and over the last three and five years, the fund has beaten the lower- cost index option, Health Care Index . Yet, after you take taxes into account, the index fund comes out ahead. This surprised me, so I did a bit more sleuthing. As I expected, there’s some time-dependency to this outcome. By that I mean that the returns for the two funds were quite close over the periods I looked at. So I applied each fund’s current five-year tax-efficiency ratings to its five-year returns over all the five- year periods since the index fund was created. The results are that, after taxes, the actively managed fund still outper- formed the index fund in two out of every three five-year periods. And on average, the after-tax outperformance of 1.7% was significantly better than the average 0.6% outperformance by the index fund in periods when it came out on top. So I’m keeping my position in Health Care in the Model Portfolios — as well as in my own portfolio—with- out hesitation. Another thing you’ll see in the tables is that small-cap stocks were clear winners over the period (we knew that, of course), but that both Strategic SmallCap Equity and big brother Strategic Equity , which is more of a mid-cap fund, put up some very good pre- and post-tax numbers. Vanguard’s computer guys outperformed the index- es both before and after taxes. However, that brings up another big caveat: The five-year period ending in March was the very first time since its inception that Strategic SmallCap Equity outperformed SmallCap Index on an after-tax basis over a five-year period. And Strategic Equity’s after-tax performance against MidCap Index is a mixed bag. The fund has only been able to beat the index on an after-tax basis about 40% of the time over the more than 130 periods I’ve measured. So maybe the computer guys aren’t >

ETFs Have No Consistent Tax Advantage

Ranked by After-Tax Return

3-Year Return

Tax-Adj Return

Tax- Effic.

Ranked by After-Tax Return Materials Index MidCap ETF MidCap Index

3-Year Return

Tax-Adj Return

Tax- Effic.

Consumer Discret. ETF 20.3% 19.9% 98% Consumer Discret. Index 20.3% 20.0% 99% Consumer Staples ETF 16.4% 15.7% 96% Consumer Staples Index 16.4% 15.9% 97% Developed Markets ETF 7.0% 6.2% 88% Developed Mkts. Index 7.2% 6.6% 91% Dividend App. ETF 13.1% 12.6% 97% Dividend App. Index 13.0% 12.6% 97% Emerging Markets ETF -3.6% -4.3% Neg Emerging Markets Index -3.7% -4.3% Neg Energy ETF 5.1% 4.6% 91% Energy Index 5.0% 4.7% 93% European ETF 8.7% 7.7% 89% European Index 8.7% 7.8% 89% Extended Market ETF 14.4% 14.0% 98% Extended Market Index 14.2% 13.9% 98% Financials ETF 12.7% 12.0% 95% Financials Index 12.7% 12.1% 96% Global ex-U.S. R.E. ETF 6.5% 4.8% 75% Global ex-U.S. R.E. Index 6.6% 5.1% 77% Growth ETF 14.9% 14.6% 98% Growth Index 14.7% 14.4% 98% Health Care ETF 23.0% 22.6% 98% Health Care Index 23.1% 22.7% 99% High Dividend Yield ETF 16.0% 15.4% 96% High Dividend Yield Idx. 15.9% 15.3% 96% Industrials ETF 14.6% 14.1% 97% Industrials Index 14.6% 14.2% 98% Info. Technology ETF 13.7% 13.4% 98% Info. Technology Index 13.7% 13.5% 98% LargeCap ETF 14.5% 14.1% 97% LargeCap Index 14.4% 14.0% 97% Materials ETF 8.8% 8.3% 94% Tax- Effic. Consumer Discret. ETF 30.0% 29.7% 99% Consumer Discret. Idx. 30.0% 29.8% 99% Consumer Staples ETF 19.6% 18.9% 96% Consumer Staples Index 19.4% 18.9% 98% Developed Markets ETF 15.8% 15.1% 96% Developed Mkts. Index 16.0% 15.3% 96% Dividend App ETF 18.9% 18.5% 98% Dividend App Index 18.8% 18.3% 98% Emerging Markets ETF 13.9% 13.3% 96% Emerging Markets Index 13.7% 13.1% 95% Energy ETF 18.2% 17.8% 98% Energy Index 18.1% 17.8% 98% European ETF 17.9% 17.0% 95% European Index 17.7% 16.7% 94% Extended Market ETF 26.2% 25.9% 99% Extended Market Index 25.8% 25.5% 99% Financials ETF 21.6% 21.1% 97% Financials Index 21.6% 21.2% 98% Growth ETF 21.7% 21.5% 99% Growth Index 21.4% 21.1% 99% Health Care ETF 22.7% 22.3% 98% Health Care Index 22.6% 22.3% 99% High Div. Yield ETF 21.8% 21.3% 98% High Div. Yield Index 21.6% 21.0% 97% Industrials ETF 26.3% 25.8% 98% Industrials Index 26.2% 25.9% 99% Info Technology ETF 22.0% 21.8% 99% Info Technology Index 22.0% 21.8% 99% LargeCap ETF 21.4% 21.1% 98% LargeCap Index 21.2% 20.8% 98% Ranked by After-Tax Return 5-Year Return Tax-Adj Return

8.8% 8.5% 96% 13.6% 13.3% 98% 13.4% 13.2% 98%

MidCap Growth ETF 11.7% 11.6% 99% MidCap Growth Index 11.5% 11.4% 99% MidCap Value ETF 15.4% 15.0% 97% MidCap Value Index 15.2% 14.8% 97% Pacific ETF 5.1% 4.3% 84% Pacific Index 5.1% 4.3% 85% REIT ETF 10.6% 9.0% 85% REIT Index 10.4% 8.9% 85% SmallCap ETF 14.4% 14.0% 97% SmallCap Index 14.2% 13.8% 97% SmallCap Growth ETF 13.8% 13.6% 99% SmallCap Growth Index 13.6% 13.4% 99% SmallCap Value ETF 14.6% 14.0% 96% SmallCap Value Index 14.5% 13.9% 96% Telecom Services ETF 11.3% 10.3% 91% Telecom Svcs. Index 11.3% 10.6% 94% Total Int’l Stock ETF 4.2% 3.3% 80% Total Int’l Stock Index 4.3% 3.5% 81% Total Stock Market ETF 14.6% 14.2% 97% Total Stock Market Index 14.5% 14.1% 97% Total World Stock ETF 8.8% 8.2% 93% Total World Stock Index 8.8% 8.3% 94% Utilities ETF 13.6% 12.5% 92% Utilities Index 13.6% 12.9% 94% Value ETF 14.8% 14.2% 96% Value Index 14.0% 13.5% 96% World ex-U.S. ETF 4.1% 3.2% 79% World ex-U.S. Index 4.1% 3.3% 81% World ex-U.S. SmCap ETF 4.7% 3.8% 81% World ex-U.S. SmCap Idx. 4.9% 4.1% 83% MidCap Growth ETF 23.9% 23.8% 100% MidCap Growth Index 23.6% 23.4% 100% MidCap Value ETF 26.3% 25.9% 99% MidCap Value Index 26.0% 25.5% 98% Pacific ETF 13.0% 12.3% 94% Pacific Index 13.1% 12.3% 94% REIT ETF 28.7% 27.2% 95% REIT Index 28.5% 26.7% 94% SmallCap ETF 27.0% 26.6% 99% SmallCap Index 26.6% 26.2% 99% SmallCap Growth ETF 27.1% 27.0% 99% SmallCap Growth Index 27.0% 26.8% 99% SmallCap Value ETF 26.3% 25.8% 98% SmallCap Value Index 26.1% 25.5% 98% Telecom Services ETF 18.0% 17.1% 95% Telecom Svcs. Index 18.0% 17.5% 97% Utilities ETF 15.3% 14.3% 93% Utilities Index 15.5% 14.8% 96% Total Stock Market ETF 22.1% 21.8% 98% Total Stock Market Index 21.9% 21.5% 98% Total World Stock ETF 18.1% 17.6% 97% Total World Stock Index 18.0% 17.5% 97% Value ETF 21.7% 21.2% 98% Value Index 21.0% 20.5% 97% World ex-U.S. ETF 15.5% 14.8% 96% World ex-U.S. Index 15.5% 14.8% 95% Ranked by After-Tax Return Materials ETF Materials Index MidCap ETF MidCap Index 5-Year Return Tax-Adj Return Tax- Effic. 21.6% 21.0% 97% 21.6% 21.3% 98% 25.1% 24.9% 99% 24.9% 24.6% 99%

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