The Independent Adviser for Vanguard Investors
•
May 2014
•
13
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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
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
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
Ranked by
After-Tax Return
5-Year
Return
Tax-Adj
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%
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
5-Year
Return
Tax-Adj
Return
Tax-
Effic.
International Explorer
20.6% 19.8% 96%
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%
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%
After-Tax Returns Since Q1 2009
A Healthy Comparison
3-YEAR RETURNS 5-YEAR RETURNS
Pre-Tax Post-Tax
Pre-Tax Post-Tax
Health Care Index
23.1% 22.7% 22.6% 22.3%
Health Care
23.3% 21.6% 22.8% 21.4%
Big Returns from Small Stocks
3-YEAR RETURNS 5-YEAR RETURNS
Pre-Tax Post-Tax Pre-Tax Post-Tax
Strategic SmallCap Equity
16.1% 15.8% 27.0% 26.7%
SmallCap Index
14.2% 13.8% 26.6% 26.2%
Tax-Man. SmallCap
15.8% 15.6% 26.1% 25.8%
Strategic Equity
17.2% 16.9% 26.9% 26.6%
MidCap Index
13.4% 13.2% 24.9% 24.6%
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