12
•
Fund Family Shareholder Association
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
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
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
EFFICIENCY
FROM PAGE 1
>
Ranked by
After-Tax Return
3-Year
Return
Tax-Adj
Return
Tax-
Effic.
Health Care Index
23.1% 22.7% 99%
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%
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%
Ranked by
After-Tax Return
3-Year
Return
Tax-Adj
Return
Tax-
Effic.
MidCap Growth Index 11.5% 11.4% 99%
Telecom Svcs. Index
11.3% 10.6% 94%
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.
After-Tax Returns Since Q1 2011
