(PUB) Investing 2016

The Independent Adviser for Vanguard Investors

•

September 2016

•

FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

stocks to meet the objective. The bot-

tom-right chart on page 14 plots the rel-

ative performance of Strategic Equity

against

Extended Market Index

and

MidCap Index

. When the line is ris-

ing, Strategic Equity outperforms.

Strategic Equity has been on a winning

streak for the past five or so years, as

its 15.5% annual return over that period

is ahead of Extended Market Index’s

13.3% pace and MidCap Index’s 13.9%

annual gain.

But what is apparent to me in review-

ing the chart is that Strategic Equity has

seen long stretches when it outper-

formed and then underperformed these

benchmarks. And over the full time

period, simply holding MidCap Index

would’ve been a better option, without

worrying about Vanguard’s computers

developing a bug.

Strategic SmallCap Equity

Hold.

Like its big brother,

Strategic

SmallCap Equity

is a “quantitative”

fund, where the stock picking is com-

puter-driven. Just to be clear, those

computers are programmed by real-life

human beings, so this is not an index

fund.

As its name implies, the fund

focuses exclusively on small stocks.

Performance runs hot and cold.

Strategic SmallCapEquity, which had

put together a nice run of performance

since the middle of 2009, ran into

a wall the past year, with its 6.5%

gain over the past 12 months lagging

behind

SmallCap Index

’s 9.2% return

and

SmallCapValue Index

’s 11.9%

advance. Rather than fret over whether

performance will turn around here, why

not just stick with SmallCap Index

or SmallCap Value Index? Both index

funds have outperformed Strategic

SmallCap Equity since its inception.

INDEX FUNDS

Russell 2000 Growth ETF

Hold

S&P SmallCap 600 Gro. ETF

Buy

SmallCap Growth Index

Buy

With Capital Opportunity closed and

now tilted more towards large- and mid-

cap stocks, there isn’t really a go-to

actively managed fund in the small-

cap growth space at Vanguard. And

on top of that,

PRIMECAP Odyssey

Aggressive Growth

is also closed. So,

as I said at the start, indexing may be

the way to go.

Vanguard offers three index options

for investors looking to add small-

cap growth stocks. Of the three,

S&P

SmallCap 600 Growth ETF

is my

top choice, as S&P’s commitment

to higher-quality fare tends to work

to its advantage over a full market

cycle. I’d also pick the CRSP index

that backs

SmallCap Growth Index

over the

Russell 2000 Growth ETF

Though Russell has made a name for

itself within the industry as a leader

in small-cap indexing, the historical

performance of its indexes makes them

notable laggards compared to other

providers’ indexes.

All three of these options are avail-

able as ETFs, and Vanguard will let you

trade them for free. That’s a good deal,

in my book.

Russell 2000 ETF

Hold

S&P SmallCap 600 ETF

Hold

SmallCap Index

Hold

Vanguard is hoping that Strategic

SmallCap Equity will give these

DISTRIBUTIONS TO COME

Fall’s Dividend Payouts

WITH SUMMER COMING TO A CLOSE, funds and ETFs that pay out quarterly will distribute

interest and dividends earned in the past three months, after expenses, to shareholders. Keep

an eye on the calendar and check the

Hotline

as Vanguard begins releasing actual distribution

dates.

Remember that for tax reasons, you don’t want to “buy a distribution,” so if you’re planning

an investment in a taxable account, please hold off until after the “record date,” which is the

date ownership is determined for distribution purposes. (If you’re investing in a tax-deferred

account, you don’t need to worry about this.)

The funds or ETFs scheduled to distribute are listed below. Note that even though

Short-

Term Inflation-Protected Securities Index

is supposed to be a quarterly payer, it hasn’t

paid out a quarterly dividend since its inception, storing up what little it’s earned for a year-end

dividend—though the fund couldn’t even manage that last year. With inflation subdued, short-

term Treasury yields still extremely low, and the fund’s yield a reported -0.43%, there’s prob-

ably still not much income for the fund to actually pass on to shareholders. So don’t hold your

breath. The same goes for big brother

Inflation-Protected Securities

, which paid a fractional

distribution last June but has skipped plenty of quarterly payouts the past few years.

The funds and ETFs that will pay out in September include the following and, unless other-

wise noted, both fund and ETF shares will pay distributions during the month:

500 Index, Balanced Index, Consumer Discretionary Index, Consumer Staples Index,

Convertible Securities, Developed Markets Index, Dividend Appreciation Index, Emerging

Markets Stock Index, Energy Index, Equity Income, European Stock Index, Extended Duration

Treasury ETF, Extended Market Index, Financials Index, Global ex-U.S. Real Estate Index,

Growth Index, Health Care Index, High Dividend Yield Index, Industrials Index, Inflation-

Protected Securities, Information Technology Index, International Dividend Appreciation Index,

International High Dividend Yield Index, LargeCap Index, Materials Index, MegaCap ETF,

MegaCap Growth ETF, MegaCap Value ETF, MidCap Growth Index, MidCap Index, MidCap

Value Index, Pacific Stock Index, REIT Index, all seven Russell ETFs, S&P 500 Growth ETF, S&P

500 Value ETF, S&P MidCap 400 ETF, S&P SmallCap 600 Growth ETF, S&P SmallCap 600 Value

ETF, Short-Term Inflation-Protected Index, SmallCap Growth Index, SmallCap Index, SmallCap

Value Index, Social Index, STAR

LifeStrategy

Conservative Growth, STAR

LifeStrategy

Income,

Target Retirement Income, Tax-Managed Balanced, Tax-Managed Capital Appreciation, Tax-

Managed SmallCap, Telecommunication Services Index, Total International Stock Index, Total

Stock Market Index, Total World Stock Index, Utilities Index, Value Index, Wellesley Income,

Wellington, World ex-U.S. Index, World ex-U.S. SmallCap Index.