(PUB) Investing 2015

and the yield of their long-maturity counterparts while exposing investors to about half the risk. Not a bad trade- off. Intermediate-Term Investment- Grade focuses on high-quality cor- porate bonds, and its yield of 2.35% may not be anything to get excited about, but it is a decent pickup over the 1.32% yield on Intermediate-Term Treasury . For years, I’ve been warning about the risks of rising interest rates, and I have so far been wrong. Fortunately, I’ve also advised that rising rates are not a reason to abandon bonds. Yes, it paid to hold long-maturity bonds last year, as Long-Term Treasury ’s 25.3% gain shows, but remember that the risk side of that coin prevailed in 2013, when rates increased and Long-Term Treasury declined 13.0%. With Vanguard’s long-term bond funds yielding between 2.28% and 4.14% at month-end, the long-run risk/ reward on longer-maturity bonds does not look attractive to me. Staying in the intermediate-maturity range provides us with some income and protection against falling stock prices without leav- ing us too vulnerable in the face of a rising rate environment. International Growth Everyone seems to agree that the economic and investing picture is better in the U.S. than it is overseas, and past performance has reflected that, with Total Stock Market’s five-year annual- ized gain of 15.6% through the end of 2014 well ahead of Total International Stock ’s 4.3% return. But it has paid to be diversified over the long run, and International Growth provides expo- sure to both developed and emerging market stocks. The teams managing International Growth have feet on the ground in many countries and have consistently been able to separate the winners from the los- ers. International Growth outpaced Total International Stock in five of the last six calendar years (2014 was the outlier). I’m not throwing in the towel on for- eign stocks, and you shouldn’t either. Holding only U.S. stocks would have looked really smart last year (and in >

mid-cap exposure with a tilt toward value or growth stocks, but in the Conservative Growth and Income Models I am looking for broad mid-cap exposure in just one position. So I use MidCap Index in place of both Capital Opportunity and Selected Value in the Income Model while S&P MidCap 400 ETF serves as a complement to those actively managed funds in the Conservative Growth Model . PRIMECAP Core As with Capital Opportunity, I hope you took my advice to add to this fund in October 2012. From that time through the end of 2014, PRIMECAP Core has outgained 500 Index 67.5% to 49.4%. As the name implies, this fund is more “core” compared to the other PRIMECAP-run Vanguard funds. It is larger-cap than Capital Opportunity and isn’t as growth-leaning as its big brother, PRIMECAP. This is one place where the Vanguard fund has outpaced its sibling, PRIMECAP Odyssey Stock . Why? Both funds launched nearly simultaneously, and their portfolios are virtually identi- cal, so Vanguard’s lower expense ratio won the day over the Odyssey option. I have a ton of respect for the PRIMECAP Management team—I’m glad we got this fund into the Income Model before it closed. It serves as a core stock holding that can play a bit more offense than Dividend Growth. S&P 500 Growth ETF Vanguard investors can slice and dice the domestic universe almost any way they please now with mul- tiple index providers to choose from. Vanguard hasn’t taken a stand on which index provider is better, citing only lower costs as the reason for replacing MSCI with CRSP and FTSE on nearly two dozen index funds in 2013. I can’t guarantee that S&P 500 Growth ETF will continue to out- pace Russell 1000 Growth ETF or LargeCap Growth ETF , its two in- house ETF competitors, but there is no harm in investing with the lead horse. The committee that selects stocks for the S&P index favors high-quality com-

2013, too). But markets are cyclical, and as sure as the sun will rise tomor- row, there will come another cycle when foreign stocks lead the way. (See the December 2014 newsletter and the story on page 5 for a deeper dive into the history of U.S. and foreign stock performance.) If, like me, you are beginning to see articles in your local papers arguing that investors simply don’t need to own any foreign stocks, this could be the signal that the turn in the cycle is fast approaching. S&P MidCap 400 Growth ETF S&P MidCap 400 Value ETF Mid-caps are in what I consider the market’s sweet spot. Quality mid-sized companies typically have seasoned management and a decent and defen- sible share of the market in which they operate, yet at the same time they tend to fly under Wall Street’s radar. This creates opportunity, as fewer analysts and investors chase after them. I think there are managers who can beat the mid-cap indexes, but Capital Opportunity, due to its size, can no longer access the mid-cap stock space to the extent that it did, and Vanguard keeps adding managers to my other actively managed mid-cap favorite, Selected Value . So I’ll happily use a mid-cap index or ETF to get additional targeted exposure to this attractive sub- set of stocks. S&P MidCap 400 Growth ETF serves as a complement to Capital Opportunity in the Growth Model and a replacement for it in the Growth Index Model . When it comes to growth index- es, S&P’s consistently distinguish them- selves from their Russell and CRSP peers by focusing on higher-quality companies. Similarly, S&P MidCap 400 Value ETF is a decent replacement for Selected Value in the Growth Index Model . Since the ETF was launched in September of 2010 through the end of 2014, the index fund and Selected Value have delivered nearly identical returns of 92.9% and 95.0%, respec- tively. In the two situations above I want MidCap Index S&P MidCap 400 ETF

14 • Fund Family Shareholder Association

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