(PUB) Investing 2015

end fund to give the ETFs as much of an advantage as possible. Running down the table, you’ll see that there are times when, on an after- tax basis, the ETF comes out slightly ahead of its Investor share sibling. At other times, it’s the mutual fund. Most importantly, the differences are mea- sured in basis points, or hundredths of a percent. Now, imagine the extra 10 or so basis point advantage in operating expenses of the Admiral share class versus the Investor share class, and you’ll quickly see that the tables turn further towards the old, tried-and-true open-end fund. ETFs are more tax efficient? Bah! Notice also that while the ETF share class of a particular index offering might outperform on a tax-adjusted basis over three years, it might under- perform over five—or vice versa . To me, the choice between an ETF and an index fund is a toss-up. So, if you hear someone extolling the tax-efficiency advantage of a Vanguard ETF over a Vanguard index fund, pull this table out. The argument doesn’t hold water. One final note: I’ve marked three ETFs that showed anomalous price readings at the end of March that impacted their three- and five-year returns. To see if a “corrected” price and resulting total return calculation turned the tables on the ETFs’ after-tax returns compared to their open-end Investor shares, I gave them the Investor shares’ returns for March. While the disparities are greatly reduced, not one of the three ETFs comes out signifi- cantly ahead of or behind the Investor shares. But if you buy the Admiral shares instead, my original comment holds: The odds are that you’ll actually do better after taxes by staying away from ETFs and buying an old-fashioned open-end mutual fund. Tax Day is behind us, but there are seven more months to this year and many more years to come after. While you may have closed the books on your 2014 taxes, don’t ignore chances for better after-tax returns from open-end funds, whether actively managed or indexed, in the future. n

ETFs Have No Consistent Tax Advantage

3-Year Return

Tax-Adj Return

ETF diff. (basis pts.)

5-Year Return

Tax-Adj Return

ETF diff. (basis pts.)

S&P 500 ETF 500 Index

16.1% 15.5% 15.9% 15.5% 20.7% 20.4% 20.7% 20.4% 16.4% 15.9% 16.4% 15.9% 8.9% 8.2% 13.6% 13.2% 13.6% 13.2% 0.6% -0.2% 0.4% -0.4% 3.2% 2.8% 3.2% 2.8% 9.5% 8.6% 9.4% 8.6% 17.5% 17.1% 17.4% 17.0% 16.7% 16.1% 16.7% 16.1% 16.3% 16.0% 27.7% 27.4% 27.7% 27.4% 15.6% 14.9% 15.4% 14.7% 17.4% 17.0% 17.4% 17.1% 14.1% 13.8% 14.0% 13.8% 16.2% 15.7% 16.0% 15.6% 11.7% 11.3% 11.8% 11.4% 17.8% 17.5% 17.0% 16.8% 16.7% 16.5% 19.0% 18.5% 18.7% 18.3% 7.9% 7.1% 7.7% 6.9% 14.1% 12.4% 13.9% 12.3% 17.7% 17.2% 17.4% 17.0% 16.3% 16.1% 18.2% 17.6% 18.1% 17.6% 13.7% 12.9% 13.7% 13.0% 6.6% 5.8% 6.5% 5.7% 16.4% 15.9% 16.2% 15.8% 11.2% 10.6% 11.0% 10.4% 13.0% 12.2% 13.0% 12.2% 16.7% 16.1% 15.8% 15.3% 6.6% 5.7% 6.4% 5.6% 6.7% 5.8% 6.5% 5.6% 10.6% 8.9%

3

N.A.

N.A.

N.A.

14.3% 13.9%

Consumer Discretionary ETF Consumer Discretionary Index Consumer Staples ETF Consumer Staples Index Developed Markets ETF Developed Markets Index Dividend Appreciation ETF Dividend Appreciation Index Emerging Markets ETF Emerging Markets Index

3

19.9% 19.6% (12)

19.9% 19.7%

0

15.4% 14.7% (26)

15.4% 14.9%

8.9% 8.0% (21)

6.1% 5.3% (17)

6.2% 5.5% 12.9% 12.5% 12.9% 12.5% 1.8% 1.1% 1.7% 1.0% 7.2% 6.9% 6.6% 5.7% 6.6% 5.7% 16.0% 15.6% 15.8% 15.5%

0

2

16

7

Energy ETF Energy Index European ETF European Index

0

7.2% 6.7% (14)

4

(0)

Extended Market ETF Extended Market Index

13

13

Financials ETF Financials Index

3

10.8% 10.2% (12)

10.8% 10.3%

Global ex-U.S. Real Estate ETF 10.8% 9.1%

14

N.A. N.A.

N.A. N.A.

N.A.

Global ex-U.S. Real Estate

Growth ETF* Growth Index Health Care ETF Health Care Index

15.4% 15.1% (93)

15.0% 14.7% (52)

15.5% 15.3%

4

20.8% 20.3% (17)

20.8% 20.4% 14.9% 14.3% 14.8% 14.2% 15.1% 14.8% 14.7% 14.5% 14.7% 14.5% 14.5% 14.1% 14.4% 14.0% 11.1% 10.7% 16.8% 16.5% 15.9% 15.6% 16.4% 16.3% 16.2% 16.1% 15.7% 15.3% 15.5% 15.1% 5.6% 4.8% 5.5% 4.7% 15.8% 14.1% 15.7% 14.1% 15.9% 15.5% 15.6% 15.3% 16.1% 15.9% 15.1% 14.5% 14.9% 14.4% 4.8% 4.1% 14.7% 14.3% 14.6% 14.2% 9.2% 8.7% 9.1% 8.6% 13.1% 12.4% 13.9% 13.3% 13.3% 12.8% 4.9% 4.2% 4.9% 4.1% 6.1% 5.2% 12.6% 11.9% N.A. N.A.

High Dividend Yield ETF High Dividend Yield Index

19

12

Industrials ETF Industrials Index

(2)

15.1% 14.6% (19)

Information Technology ETF Information Technology Index

8

(2)

LargeCap ETF LargeCap Index Materials ETF Materials Index MidCap ETF* MidCap Index

14

12

(6)

11.1% 10.5% (24)

19.1% 18.8% 134

83

MidCap Growth ETF MidCap Growth Index MidCap Value ETF MidCap Value Index

26

20

24

18

Pacific ETF Pacific Index REIT ETF REIT Index SmallCap ETF SmallCap Index

17

6

6

4

24

19

SmallCap Growth ETF* SmallCap Growth Index SmallCap Value ETF SmallCap Value Index Telecom Services ETF Telecom Services Index Total International ETF Total International Index Total Stock Market ETF Total Stock Market Index Total World Stock ETF Total World Stock Index

15.9% 15.6% (46)

15.9% 15.7% (23)

7

13

(1)

12.5% 11.5% (36)

5

N.A.

8

6

13

7

Utilities ETF Utilities Index Value ETF Value Index

0

13.1% 12.0% (41)

78

48

World ex-U.S. ETF World ex-U.S. Index

10

4

World ex-U.S. SmallCap ETF World ex-U.S. SmallCap Index

16

11

5.9% 5.1% *Vanguard reports that the 3/31/15 prices for these funds were distorted, throwing off performance calculations (as explained in the article text to the right). N.A.: ETF shares not available for the full five-year period.

The Independent Adviser for Vanguard Investors • June 2015 • 7

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