14
•
Fund Family Shareholder Association
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
Ranked by
After-Tax Return
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%
Ranked by
After-Tax Return
3-Year
Return
Tax-Adj
Return
Tax-
Effic.
Materials Index
8.8% 8.5% 96%
MidCap ETF
13.6% 13.3% 98%
MidCap Index
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%
Ranked by
After-Tax Return
5-Year
Return
Tax-Adj
Return
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
Tax-
Effic.
Materials ETF
21.6% 21.0% 97%
Materials Index
21.6% 21.3% 98%
MidCap ETF
25.1% 24.9% 99%
MidCap Index
24.9% 24.6% 99%
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%
ETFs Have No Consistent Tax Advantage
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