(PUB) Investing 2015

typically holding 50 or so stocks, while the index fund holds more than three times that number. This more con- centrated portfolio allows Kilbride’s stock picks to have more impact on the fund—for better or worse. Fortunately, it has tended to be for the better. This fund is one that checks the boxes that typically make for a win- ner—a single manager, a concentrated portfolio, a strong and proven track record, a sensible strategy and plenty of resources in support. So long as this skipper remains at the helm, I’ll stay aboard for the long voyage. Health Care I don’t think I’ll ever get sick of investing in Health Care , which has been a component of my Model Portfolios for over 15 years. The fund has been on a tear—through the end of 2014, Health Care returned 28.4% a year over the prior three years and 20.2% over the past five. By compari- son, 500 Index has generated annual returns of 20.2% and 15.3% over the same periods. Of course, even Health Care investors have to take their medicine from time to time, and I recommend tempering return expectations going forward—gains of nearly 30% a year can’t be maintained indefinitely. That being said, I still believe it makes sense to overweight health care in our portfolios. Demographics, innova- tion and global demand all support the argument for more—not less—exposure to health care. And let’s not forget that while the “growth” side of the sector (think bio- techs and medical device makers) has driven performance, health care can at times be a defensive sector, with a stel- lar long-term record of outperforming the market with less risk, particularly in downdrafts—not a bad combination. In our Models , we have an addi- tional dose of health care, since the PRIMECAP team is also overweight the sector; however, given the role it will undoubtedly play in the future, the historic risk and reward dynamics of health care, and the skills of both the Wellington and PRIMECAP teams, I am comfortable with an outsized position.

smaller, nimbler version of Capital Opportunity—is now closed to new investors as well. If you own either Capital Opportunity or PRIMECAP Odyssey Aggressive Growth , stick with them. If you’re looking to make your first investment with the PRIMECAP team, consider PRIMECAP Odyssey Growth (POGRX). Dividend Appreciation ETF I recommend this ETF, which tracks the NASDAQ U.S. Dividend Achievers Select Index, in the Growth Index Model Portfolio as a decent substi- tute for Dividend Growth . (Dividend Growth’s comparative benchmark is the same index this fund mimics.) If you are an indexer, this ETF gives exposure to a set of large-cap companies with strong balance sheets and a proven record of growing dividends. But for my money, I prefer the active hand of Don Kilbride on Dividend Growth. That said, after outpacing the broad market in 2011, large-cap, dividend- rich U.S. stocks have lagged over the past three calendar years. During that stretch, Dividend Appreciation ETF returned 16.6% a year—not bad in absolute terms, but still 3.7% behind Total Stock Market ’s 20.3% annual return. Trailing by 3.7% a year starts to add up, but remember that the large, stable, dividend-growing companies held in this portfolio earn their keep when the stock market stumbles. Dividend Growth As I just mentioned, the waters where Wellington’s Don Kilbride fishes (large-cap dividend growers) have been out of favor with investors for the past three years. Through the end of 2014, Dividend Growth’s 17.5% annualized return trailed Total Stock Market’s 20.3% pace—but it is nearly a full per- cent higher than Dividend Appreciation ETF’s 16.6% gain. In contrast to Dividend Appreciation ETF, Kilbride has the flexibility to invest overseas, an option he has uti- lized in the past, putting as much as 15% of the fund’s assets in foreign stocks. Additionally, he runs a tighter ship here compared to the index fund,

Health Care ETF If you’re trying to match the success of Wellington’s health care team, you’ll have a tough time doing it with Health Care ETF. But, as it’s all we’ve got, this ETF is at least a low-cost option for those looking to index a piece of the health care sector. For my money, I prefer partnering with the Wellington team. But if you insist on indexing even if it underper- forms, this is the only option atVanguard. High-Yield Corporate It’s been more than three years since we traded into the market for high-yield (or “junk”) bonds in the Conservative Growth and Income Models in September 2011. And it’s been a profitable trade for us, with High-Yield Corporate up 32.6% through the end of 2014 compared to Total Bond Market ’s 8.5% return. Yes, the high-yield bond market has come under pressure the past few months, as dramatically lower oil prices have driven investors to question the ability of some leveraged energy-relat- ed companies to pay off their debts. Wellington’s Michael Hong takes a more conservative approach to the junk bond space, which has paid off over the past few months as the fund held up better than some of its more aggressive peers. The turmoil created by low oil pric- es has also created better values. High- Yield Corporate’s 4.66% SEC yield isn’t sumptuous, but it’s a big improve- ment from the all-time month-end low of 3.85% hit in June 2014, and it is still a nice pickup over the 2.92% yield on Intermediate-Term Corporate or the 1.92% yield on Total Bond Market . For those who own the fund, if yields continue to rise (and prices continue to fall) this could be a position to add to. In the meantime, I’m happy to earn a higher yield while allowing Hong to sort through the winners and losers of lower oil prices. Intermediate-Term Investment- Grade Historically, Vanguard’s interme- diate-maturity funds have generated 80% to 90% or so of the return >

The Independent Adviser for Vanguard Investors • March 2015 • 13

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