(PUB) Investing 2016

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17 Morningstar FundInvestor July 2016
Notably Strong Performers: The portfolios’ two
domestic-equity holdings, Vanguard Dividend Growth
VDIGX and Vanguard Total Stock Market Index
VTSAX, have been exceptional performers in absolute
and relative terms. The mega-caps that dominate
both funds have performed well at the expense of small-
and mid-cap stocks. Vanguard Wellesley Income’s
VWINX absolute returns have been more muted,
but its relative gains have been exceptional over the
past three and a half years.
Notably Poor Performers: Harbor Commodity Real
Return HACMX, a small slice of the portfolio, has
been the worst-performing holding in these portfolios
over the past three and a half years. A near-clone
of PIMCO Commodity Real Return Strategy PCRDX,
the fund consists of two components: first, a basket
of derivatives tracking commodities, and second, a port-
folio of inflation-protected bonds. As commodities
prices have slumped amid global economic weakness,
so have commodity-trackers like this one; TIPS
have also performed pretty poorly over the portfolios’
lifetime owing to slack inflation. That said, the
portfolios still maintain a small 5% stake in commodi-
ties, to provide some diversification as well as some
additional inflation protection.
ETF Bucket Portfolios
(Aggressive, Moderate, Conservative)
Original Launch Date: September 2012
Changes: The original portfolio included iShares TIPS
Bond TIP, a low-cost broad-market TIPS fund. But
as with the bucket portfolios composed of traditional
mutual funds, I swapped in Vanguard Short-Term
Inflation-Protected Securities ETF VTIP in its place,
to deliver purer inflation protection without a lot of
interest-rate-related noise.
Notably Strong Performers: As with the traditional
mutual fund portfolios, the ETF portfolio’s domestic-
equity funds have been standouts. Vanguard Total
Stock Market ETF VTI has been the portfolio’s best
performer in absolute terms, as its ample exposure
to mega-caps and technology stocks has helped it over
the past three years. (The tech exposure has hindered
its results recently, however.)
Notably Poor Performers: As with the bucket portfolios
composed of traditional mutual funds, the ETF port-
folios’ commodities exposure has done them no favors,
but we’re retaining our small 5% stake in Power-
Shares DB Commodity Tracking DBC for its diver-
sification potential as well as the possibility that it will
earn its keep in an inflationary environment. The
portfolios’ noncore fixed-income positions—SPDR
Barclays High Yield Bond ETF JNK and especially
WisdomTree Emerging Markets Local Currency ELD—
have also dragged on results, as higher-quality
bonds have generally outperformed dicier credits over
the past three-plus years.
Tax-Efficient Bucket Portfolios
Original Launch Date: February 2015
Changes: These portfolios have not undergone any
changes since their launch just over a year ago.
Notably Strong Performers: The core equity fund in
these portfolios, Vanguard Tax-Managed Capital
Appreciation VTCLX, has been a standout over the
portfolios’ short life span.
Notably Poor Performers: Because the portfolios’
asset-class exposures are quite “vanilla,” no single
position has performed as badly as the commod-
ities, emerging-markets, and junk-bond holdings in
the traditional mutual fund and ETF portfolios.
(Those categories all tend to be quite tax-inefficient,
so I didn’t include them in the tax-efficient port-
folios.) Vanguard FTSE All-World ex-US Index VFWAX
has been the portfolios’ worst performer in absolute
terms, however, owing to its ample exposure to strug-
gling emerging markets. K
Contact Christine Benz at