(PUB) Investing 2016

The Independent Adviser for Vanguard Investors

•

November 2016

•

FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

Stock Market. There is an ETF share

class of this fund, if that’s your prefer-

ence, but then, Vanguard’s other index

funds also have ETF shares. So I ask

again, where does this fund fit in?

MidCap Growth Index,

Buy

S&P MidCap 400 Growth ETF,

Buy

Vanguard doesn’t offer mid-cap index

funds based on the Russell indexes. As

a result, investors looking for a mid-

cap growth index fund have just two

options:

MidCap Growth Index

and

S&P MidCap 400 Growth ETF

. Dan

and I rate both a Buy—though when it

comes down to it, my preference is for

the S&P MidCap 400 Growth ETF.

Despite similar names, these two

funds cover the mid-cap space in dif-

ferent ways. MidCap Growth Index has

about 70 fewer holdings than the S&P-

based fund, and the two portfolios have

no top-10 holdings in common. As you

can see in the bottom table to the left,

the sector allocations are fairly different,

and the average stock in S&P MidCap

400 Growth ETF is less than half the

size of the average in its sibling fund.

While the stock selection in the CRSP

indexes is rules-based and computer-

driven, S&P’s indexes are constructed

by a committee looking for companies

with seasoned operating track records.

It’s fair to describe the S&P indexes

built by this committee as actively man-

aged indexes—as demonstrated by turn-

over of over 35% for S&P MidCap 400

Growth ETF.

Somehow, it seems to work. S&P’s

growth indexes simply outperform. If

you are willing to own an ETF, even

though its 20-basis-point (or 0.20%)

expense ratio is higher than MidCap

Growth ETF’s 8-basis-point cost, go

with S&P MidCap 400 Growth ETF.

If don’t want an ETF, and you still

want an index fund in this space, well,

there is only an Institutional mutual

fund share class of S&P MidCap 400

Growth, which requires a $5 million

minimum investment and is out of

reach to us mere mortals, but MidCap

Growth Index remains a good option.

MidCap Index,

Hold

S&P MidCap 400 ETF,

Buy

You’ll find both MidCap Index and

S&P MidCap 400 ETF

in the

Model

Portfolios

The two funds have their differenc-

es: In a pattern similar to what you’ll

see in the growth funds, the S&P-based

fund has more stocks, and the aver-

age company therein is smaller. Also,

the two funds have completely distinct

top-10 holdings, and sector weights are

meaningfully different.

Looking over the past 15 years, the

CRSP mid-cap index has lagged those

from other providers—not just S&P,

but also MSCI and Russell. The differ-

ences haven’t been enormous, and over

the past five years, the CRSP index has

slightly edged out the S&P index.

If I had to choose just one, I’d go

with S&P MidCap 400 ETF. That said,

if switching will increase your tax bill,

I wouldn’t rush to make that change.

Mid-Cap’s Sweet Spot

Large Stocks

Russell Top 200

Mid-Sized Stocks

Russell MidCap

Small Stocks

Russell 2000

Return Since 1978

5346.2%

11052.2%

5954.3%

Annualized

11.2%

13.3%

11.5%

Max Cumulative Loss

-50.1%

-54.2%

-52.9%

MCL ex-Financial Crisis

-49.1%

-30.3%

-35.5%

Rolling 36-Month Returns

Min

-18.4%

-17.3%

-17.9%

Average

11.6%

13.3%

11.1%

Max

34.6%

32.3%

33.9%

Rolling 60-Month Returns

Min

-6.8%

-5.2%

-6.7%

Average

11.2%

12.9%

10.5%

Max

30.6%

28.6%

26.7%

Return Since Feb. 2009

233.9%

300.6%

257.4%

Annualized

17.2%

20.1%

18.3%

MidCap Index

S&P MidCap 400 ETF

MidCap Value Index S&P MidCap 400 Value ETF

343

400

210

305

27.4

25.3

23.4

23.8

2.7

2.4

1.9

1.8

$11.6

$4.6

$11.2

$4.1

0.3%

0.0%

0.5%

0.0%

12.1%

11.6%

11.0%

10.7%

13.7%

4.2%

16.6%

3.1%

5.2%

3.9%

5.3%

7.4%

20.4%

15.0%

25.2%

16.3%

8.3%

8.2%

4.7%

3.1%

16.7%

14.2%

10.7%

17.7%

13.0%

18.0%

8.8%

13.9%

4.3%

7.2%

7.7%

8.7%

not reported

11.9%

not reported

9.8%

1.1%

0.2%

0.3%

5.2%

5.6%

9.7%

9.0%

11%

Ross Stores

IDEXX Laboratories

Newell Brands

Alleghany

Edwards Lifesciences

WhiteWave Foods

Newmont Mining

Westar Energy

Equinix

Ingredion

ConAgra Foods

Everest Re Group

Newell Brands

Duke Realty

Molson Coors Brewing

UGI

Electronic Arts

ResMed

WEC Energy Group

Computer Sciences

Fiserv

Synopsys

Nielsen Holdings New York Comm. Bancorp

Newmont Mining

CDK Global

Willis Towers Watson

Reinsurance Group

ConAgra Foods Alexandria Real Est. Equ.

Eversource Energy

Carlisle Cos.

Amphenol

Alleghany Dr Pepper Snapple Group

OGE Energy

Concho Resources

Regency Centers

DTE Energy

Steel Dynamics