617 / 708
The Independent Adviser for Vanguard Investors
•
June 2016
•
7
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
past five years if, over the long haul,
the active fund has handily beaten the
index fund. Call it time dependency.
I conducted a simple test. I applied
each fund’s current five-year tax-effi-
ciency ratings to its five-year returns over
all the five-year periods since the index
fund was created. The results show that,
after taxes, the actively managed fund
still outperformed the index fund by
0.3% per annum on average. At its worst,
Health Care’s five-year after-tax return
trailed the index fund’s return by 2.1%
3-Year
Return
Tax-
Adj.
Return
Tax-
Effic.
5-Year
Return
Tax-
Adj.
Return
Tax-
Effic.
S&P 500 ETF
11.8% 11.3% 96% 11.5% 11.0% 95%
500 Index
11.7% 11.2% 96% 11.4% 11.0% 96%
Consumer Discretionary ETF
15.0% 14.7% 98% 16.0% 15.7% 98%
Consumer Discretionary Index 15.0% 14.7% 98% 16.0% 15.7% 98%
Consumer Staples ETF
13.0% 12.5% 96% 15.2% 14.5% 96%
Consumer Staples Index
13.1% 12.6% 96% 15.2% 14.7% 97%
Developed Markets ETF
2.5% 1.8% 70% 2.4% 1.6% 68%
Developed Markets Index
2.4% 1.9% 78% 2.5% 1.8% 74%
Dividend Appreciation ETF
9.7% 9.2% 95% 10.3% 9.9% 96%
Dividend Appreciation Index
9.5% 9.1% 96% 10.2% 9.8% 96%
Emerging Markets ETF
-4.3% -5.2% Neg. -4.2% -5.0% Neg.
Emerging Markets Index
-4.5% -5.4% Neg. -4.3% -5.0% Neg.
Energy ETF
-6.5% -7.0% Neg. -3.9% -4.3% Neg.
Energy Index
-6.5% -7.0% Neg. -3.8% -4.3% Neg.
Energy
-6.7% -7.6% Neg. -5.6% -6.5% Neg.
European ETF
3.1% 2.3% 74% 2.4% 1.5% 64%
European Index
2.9% 2.1% 73% 2.3% 1.5% 65%
Extended Market ETF
8.1% 7.7% 95% 8.5% 8.1% 96%
Extended Market Index
8.0% 7.6% 96% 8.3% 8.0% 96%
Financials ETF
8.9% 8.3% 93% 8.7% 8.0% 93%
Financials Index
8.9% 8.3% 93% 8.7% 8.1% 93%
Global ex-U.S. Real Estate
1.2% -0.0% Neg. 5.1% 3.7% 73%
Global ex-U.S. Real Estate ETF
1.3% 0.0% 1% 5.0% 3.6% 70%
Growth ETF
12.6% 12.3% 98% 12.1% 11.8% 98%
Growth Index
12.4% 12.2% 98% 11.9% 11.7% 98%
Health Care
18.2% 15.9% 87% 17.9% 16.0% 89%
Health Care ETF
15.6% 15.3% 98% 17.1% 16.7% 98%
Health Care Index
15.6% 15.3% 98% 17.1% 16.8% 98%
High Dividend Yield ETF
11.3% 10.7% 94% 12.7% 12.0% 95%
High Dividend Yield Index
11.2% 10.6% 94% 12.6% 12.0% 95%
Industrials ETF
11.5% 11.1% 97% 10.4% 9.9% 96%
Industrials Index
11.5% 11.2% 97% 10.4% 10.0% 96%
Information Technology ETF
16.0% 15.7% 98% 12.6% 12.3% 98%
Information Technology Index
16.1% 15.8% 98% 12.6% 12.4% 98%
LargeCap ETF
11.5% 11.1% 96% 11.3% 10.9% 96%
LargeCap Index
11.4% 11.0% 97% 11.1% 10.8% 97%
Materials ETF
5.7% 5.2% 93% 4.5% 4.0% 89%
Materials Index
5.7% 5.3% 93% 4.5% 4.1% 91%
MegaCap ETF
11.7% 11.2% 96% 11.5% 11.0% 95%
MegaCap Growth ETF
13.0% 12.7% 98% 12.7% 12.3% 97%
MegaCap Value ETF
10.6% 10.1% 95% 10.5% 9.9% 94%
MidCap ETF
10.8% 10.5% 97% 10.0% 9.7% 97%
MidCap Index
10.6% 10.3% 97% 9.9% 9.6% 97%
MidCap Growth ETF
10.0% 9.8% 98% 8.9% 8.8% 98%
MidCap Growth Index
9.9% 9.7% 98% 8.8% 8.7% 98%
Note: Data through March 2016.
3-Year
Return
Tax-
Adj.
Return
Tax-
Effic.
5-Year
Return
Tax-
Adj.
Return
Tax-
Effic.
MidCap Value ETF
11.1% 10.7% 96% 11.0% 10.5% 96%
MidCap Value Index
10.9% 10.5% 96% 10.8% 10.4% 96%
Pacific ETF
0.9% 0.2% 26% 2.7% 2.0% 73%
Pacific Index
1.0% 0.4% 40% 2.6% 2.0% 74%
REIT ETF
10.3% 8.6% 83% 11.7% 10.1% 86%
REIT Index
10.2% 8.5% 84% 11.6% 10.0% 86%
Russell 1000 ETF
11.4% 11.0% 97% 11.2% 10.71% 96%
T-M Capital Appreciation
11.6% 11.3% 97% 11.3% 10.98% 97%
Russell 1000 Growth ETF
13.5% 13.2% 98% 12.2% 11.8% 97%
Russell 1000 Value ETF
9.3% 8.8% 95% 10.1% 9.5% 94%
Russell 2000 ETF
6.8% 6.5% 95% 7.2% 6.8% 95%
Russell 2000 Growth ETF
7.9% 7.8% 98% 7.6% 7.5% 98%
Russell 2000 Value ETF
5.6% 5.1% 91% 6.5% 6.0% 92%
Russell 3000 ETF
11.0% 10.6% 97% 10.8% 10.4% 96%
S&P 500 Growth ETF
13.9% 13.5% 98% 12.8% 12.4% 97%
S&P 500 Value ETF
9.4% 8.9% 95% 9.8% 9.3% 94%
S&P MidCap 400 ETF
9.3% 9.0% 96% 9.4% 9.1% 97%
S&P MidCap 400 Growth ETF 9.4% 9.2% 98% 9.1% 8.9% 98%
S&P MidCap 400 Value ETF
8.9% 8.6% 97% 9.4% 9.1% 97%
S&P SmallCap 600 ETF
10.3% 10.0% 97% 10.3% 10.00% 97%
T-M SmallCap
10.5% 10.2% 97% 10.4% 10.16% 98%
S&P SmallCap 600 Growth ETF 10.8% 10.6% 98% 10.6% 10.4% 98%
S&P SmallCap 600 Value ETF
9.5% 9.2% 96% 9.9% 9.6% 96%
SmallCap ETF
8.5% 8.1% 95% 8.8% 8.4% 95%
SmallCap Index
8.4% 8.0% 95% 8.6% 8.3% 96%
SmallCap Growth ETF
7.0% 6.7% 96% 7.6% 7.3% 97%
SmallCap Growth Index
6.8% 6.5% 96% 7.4% 7.2% 97%
SmallCap Value ETF
9.6% 9.0% 94% 9.7% 9.1% 94%
SmallCap Value Index
9.4% 8.9% 95% 9.5% 9.0% 94%
Telecom Services ETF
11.6% 10.9% 94% 10.0% 9.1% 91%
Telecom Services Index
11.6% 10.9% 94% 10.0% 9.3% 93%
Total International ETF
0.9% 0.1% 12% 0.5% -0.2% Neg.
Total International Index
0.7% -0.0% Neg.
0.6% -0.2% Neg.
Total Stock Market ETF
11.1% 10.7% 96% 11.0% 10.6% 96%
Total Stock Market Index
11.0% 10.6% 96% 10.9% 10.5% 96%
Total World Stock ETF
5.8% 5.2% 90% 5.5% 4.9% 89%
Total World Stock Index
5.7% 5.2% 90% 5.4% 4.9% 90%
Utilities ETF
12.1% 11.4% 94% 13.3% 12.3% 93%
Utilities Index
12.1% 11.4% 94% 13.3% 12.5% 94%
Value ETF
11.2% 10.6% 94% 10.9% 10.3% 95%
Value Index
10.4% 9.9% 95% 10.4% 9.9% 95%
World ex-U.S. ETF
0.6% -0.2% Neg.
0.4% -0.3% Neg.
World ex-U.S. Index
0.6% -0.2% Neg.
0.4% -0.3% Neg.
World ex-U.S. SmallCap ETF
2.3% 1.5% 65% 1.1% 0.2% 23%
World ex-U.S. SmallCap Index 2.5% 1.7% 69% 1.1% 0.4% 32%
ETFs Have No Consistent Tax Advantage
per annum. But at its best, the active fund
outperformed, after taxes, by 3.7%.
So would I recommend selling
Health Care for the index fund or
its ETF sibling? No. I’m keeping my
position in Health Care in the
Model
Portfolios
—as well as in my own port-
folio—without hesitation. And I sug-
gest you do, too. I have confidence
that Jean Hynes and her Wellington
Management team will continue to out-
perform on a pre-tax and post-tax basis.
And I’m also going to stick with my
open-end mutual funds over ETFs. First
off, when I can find good options, I pre-
fer active management over any of the
index schemes Vanguard offers. But if I
were an index investor, I’d be worried
that one little slip in the price I pay to
buy or sell an ETF would pretty much
kill any advantage I thought I would get
in using them over an open-end fund. I
am certainly not going to let annualized
differences in after-tax returns of 0.1%
cause me to choose an iffy proposition
over a sure thing.
n