(PUB) Investing 2016

17

July 2016

Morningstar FundInvestor

Notably Strong Performers: The portfolios’ two domestic-equity holdings, Vanguard Dividend Growth VDIGX and Vanguard Total Stock Market Index VTSAX , have been exceptional performers in absolute and relative terms. The mega-caps that dominate both funds have performed well at the expense of small- and mid-cap stocks. Vanguard Wellesley Income ’s VWINX absolute returns have been more muted, but its relative gains have been exceptional over the past three and a half years. Notably Poor Performers: Harbor Commodity Real Return HACMX , a small slice of the portfolio, has been the worst-performing holding in these portfolios over the past three and a half years. A near-clone of PIMCO Commodity Real Return Strategy PCRDX , the fund consists of two components: first, a basket of derivatives tracking commodities, and second, a port- folio of inflation-protected bonds. As commodities prices have slumped amid global economic weakness, so have commodity-trackers like this one; TIPS have also performed pretty poorly over the portfolios’ lifetime owing to slack inflation. That said, the portfolios still maintain a small 5% stake in commodi- ties, to provide some diversification as well as some additional inflation protection. Changes: The original portfolio included iShares TIPS Bond TIP , a low-cost broad-market TIPS fund. But as with the bucket portfolios composed of traditional mutual funds, I swapped in Vanguard Short-Term Inflation-Protected Securities ETF VTIP in its place, to deliver purer inflation protection without a lot of interest-rate-related noise. Notably Strong Performers: As with the traditional mutual fund portfolios, the ETF portfolio’s domestic- equity funds have been standouts. Vanguard Total Stock Market ETF VTI has been the portfolio’s best performer in absolute terms, as its ample exposure to mega-caps and technology stocks has helped it over ETF Bucket Portfolios (Aggressive, Moderate, Conservative) Original Launch Date: September 2012

the past three years. (The tech exposure has hindered its results recently, however.)

Notably Poor Performers: As with the bucket portfolios composed of traditional mutual funds, the ETF port- folios’ commodities exposure has done them no favors, but we’re retaining our small 5% stake in Power- Shares DB Commodity Tracking DBC for its diver- sification potential as well as the possibility that it will earn its keep in an inflationary environment. The portfolios’ noncore fixed-income positions— SPDR Barclays High Yield Bond ETF JNK and especially WisdomTree Emerging Markets Local Currency ELD — have also dragged on results, as higher-quality bonds have generally outperformed dicier credits over the past three-plus years.

Tax-Efficient Bucket Portfolios

Original Launch Date : February 2015

Changes: These portfolios have not undergone any changes since their launch just over a year ago.

Notably Strong Performers : The core equity fund in these portfolios, Vanguard Tax-Managed Capital Appreciation VTCLX , has been a standout over the portfolios’ short life span. Notably Poor Performers: Because the portfolios’ asset-class exposures are quite “vanilla,” no single position has performed as badly as the commod- ities, emerging-markets, and junk-bond holdings in the traditional mutual fund and ETF portfolios. (Those categories all tend to be quite tax-inefficient, so I didn’t include them in the tax-efficient port- folios.) Vanguard FTSE All-World ex-US Index VFWAX has been the portfolios’ worst performer in absolute terms, however, owing to its ample exposure to strug- gling emerging markets. K Contact Christine Benz at christine.benz@morningstar.com