(PUB) Investing 2016

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ETFs Have No Consistent Tax Advantage

Tax- Adj. Return

3-Year Return

Tax- Effic.

5-Year Return

Tax- Effic.

5-Year Return

Tax- Effic.

S&P 500 ETF 500 Index

11.8% 11.3% 96% 11.5% 11.0% 95% 11.7% 11.2% 96% 11.4% 11.0% 96%

MidCap Value ETF MidCap Value Index

11.1% 10.7% 96% 11.0% 10.5% 96% 10.9% 10.5% 96% 10.8% 10.4% 96% 0.9% 0.2% 26% 2.7% 2.0% 73% 1.0% 0.4% 40% 2.6% 2.0% 74% 10.3% 8.6% 83% 11.7% 10.1% 86% 10.2% 8.5% 84% 11.6% 10.0% 86% 11.4% 11.0% 97% 11.2% 10.71% 96% 11.6% 11.3% 97% 11.3% 10.98% 97% 13.5% 13.2% 98% 12.2% 11.8% 97% 9.3% 8.8% 95% 10.1% 9.5% 94% 6.8% 6.5% 95% 7.2% 6.8% 95% 7.9% 7.8% 98% 7.6% 7.5% 98% 5.6% 5.1% 91% 6.5% 6.0% 92% 11.0% 10.6% 97% 10.8% 10.4% 96% 13.9% 13.5% 98% 12.8% 12.4% 97% 9.4% 8.9% 95% 9.8% 9.3% 94%

Consumer Discretionary ETF 15.0% 14.7% 98% 16.0% 15.7% 98% Consumer Discretionary Index 15.0% 14.7% 98% 16.0% 15.7% 98% Consumer Staples ETF 13.0% 12.5% 96% 15.2% 14.5% 96% Consumer Staples Index 13.1% 12.6% 96% 15.2% 14.7% 97% Developed Markets ETF 2.5% 1.8% 70% 2.4% 1.6% 68% Developed Markets Index 2.4% 1.9% 78% 2.5% 1.8% 74% Dividend Appreciation ETF 9.7% 9.2% 95% 10.3% 9.9% 96% Dividend Appreciation Index 9.5% 9.1% 96% 10.2% 9.8% 96% Emerging Markets ETF -4.3% -5.2% Neg. -4.2% -5.0% Neg. Emerging Markets Index -4.5% -5.4% Neg. -4.3% -5.0% Neg. Energy ETF -6.5% -7.0% Neg. -3.9% -4.3% Neg. Energy Index -6.5% -7.0% Neg. -3.8% -4.3% Neg. Energy -6.7% -7.6% Neg. -5.6% -6.5% Neg. European ETF 3.1% 2.3% 74% 2.4% 1.5% 64% European Index 2.9% 2.1% 73% 2.3% 1.5% 65% Extended Market ETF 8.1% 7.7% 95% 8.5% 8.1% 96% Extended Market Index 8.0% 7.6% 96% 8.3% 8.0% 96% Financials ETF 8.9% 8.3% 93% 8.7% 8.0% 93% Financials Index 8.9% 8.3% 93% 8.7% 8.1% 93% Global ex-U.S. Real Estate 1.2% -0.0% Neg. 5.1% 3.7% 73% Global ex-U.S. Real Estate ETF 1.3% 0.0% 1% 5.0% 3.6% 70% Growth ETF 12.6% 12.3% 98% 12.1% 11.8% 98% Growth Index 12.4% 12.2% 98% 11.9% 11.7% 98% Health Care 18.2% 15.9% 87% 17.9% 16.0% 89% Health Care ETF 15.6% 15.3% 98% 17.1% 16.7% 98% Health Care Index 15.6% 15.3% 98% 17.1% 16.8% 98% High Dividend Yield ETF 11.3% 10.7% 94% 12.7% 12.0% 95% High Dividend Yield Index 11.2% 10.6% 94% 12.6% 12.0% 95% Industrials ETF 11.5% 11.1% 97% 10.4% 9.9% 96% Industrials Index 11.5% 11.2% 97% 10.4% 10.0% 96% Information Technology ETF 16.0% 15.7% 98% 12.6% 12.3% 98% Information Technology Index 16.1% 15.8% 98% 12.6% 12.4% 98% LargeCap ETF 11.5% 11.1% 96% 11.3% 10.9% 96% LargeCap Index 11.4% 11.0% 97% 11.1% 10.8% 97% Materials ETF 5.7% 5.2% 93% 4.5% 4.0% 89% Materials Index 5.7% 5.3% 93% 4.5% 4.1% 91% MegaCap ETF 11.7% 11.2% 96% 11.5% 11.0% 95% MegaCap Growth ETF 13.0% 12.7% 98% 12.7% 12.3% 97% MegaCap Value ETF 10.6% 10.1% 95% 10.5% 9.9% 94% MidCap ETF 10.8% 10.5% 97% 10.0% 9.7% 97% MidCap Index 10.6% 10.3% 97% 9.9% 9.6% 97% MidCap Growth ETF 10.0% 9.8% 98% 8.9% 8.8% 98% MidCap Growth Index 9.9% 9.7% 98% 8.8% 8.7% 98% Note: Data through March 2016.

Pacific ETF Pacific Index REIT ETF REIT Index

Russell 1000 ETF

T-M Capital Appreciation Russell 1000 Growth ETF Russell 1000 Value ETF Russell 2000 Growth ETF Russell 2000 Value ETF Russell 3000 ETF S&P 500 Growth ETF S&P 500 Value ETF S&P MidCap 400 ETF Russell 2000 ETF

9.3% 9.0% 96% 9.4% 9.1% 97% S&P MidCap 400 Growth ETF 9.4% 9.2% 98% 9.1% 8.9% 98% S&P MidCap 400 Value ETF 8.9% 8.6% 97% 9.4% 9.1% 97% S&P SmallCap 600 ETF 10.3% 10.0% 97% 10.3% 10.00% 97% T-M SmallCap 10.5% 10.2% 97% 10.4% 10.16% 98% S&P SmallCap 600 Growth ETF 10.8% 10.6% 98% 10.6% 10.4% 98% S&P SmallCap 600 Value ETF 9.5% 9.2% 96% 9.9% 9.6% 96% SmallCap ETF 8.5% 8.1% 95% 8.8% 8.4% 95% SmallCap Index 8.4% 8.0% 95% 8.6% 8.3% 96% SmallCap Growth ETF 7.0% 6.7% 96% 7.6% 7.3% 97% SmallCap Growth Index 6.8% 6.5% 96% 7.4% 7.2% 97% SmallCap Value ETF 9.6% 9.0% 94% 9.7% 9.1% 94% SmallCap Value Index 9.4% 8.9% 95% 9.5% 9.0% 94% Telecom Services ETF 11.6% 10.9% 94% 10.0% 9.1% 91% Telecom Services Index 11.6% 10.9% 94% 10.0% 9.3% 93% Total International ETF 0.9% 0.1% 12% 0.5% -0.2% Neg. Total International Index 0.7% -0.0% Neg. 0.6% -0.2% Neg. Total Stock Market ETF 11.1% 10.7% 96% 11.0% 10.6% 96% Total Stock Market Index 11.0% 10.6% 96% 10.9% 10.5% 96% Total World Stock ETF 5.8% 5.2% 90% 5.5% 4.9% 89% Total World Stock Index 5.7% 5.2% 90% 5.4% 4.9% 90% Utilities ETF 12.1% 11.4% 94% 13.3% 12.3% 93% Utilities Index 12.1% 11.4% 94% 13.3% 12.5% 94% Value ETF 11.2% 10.6% 94% 10.9% 10.3% 95% Value Index 10.4% 9.9% 95% 10.4% 9.9% 95% World ex-U.S. ETF 0.6% -0.2% Neg. 0.4% -0.3% Neg. World ex-U.S. Index 0.6% -0.2% Neg. 0.4% -0.3% Neg. World ex-U.S. SmallCap ETF 2.3% 1.5% 65% 1.1% 0.2% 23% World ex-U.S. SmallCap Index 2.5% 1.7% 69% 1.1% 0.4% 32%

open-end mutual funds over ETFs. First off, when I can find good options, I pre- fer active management over any of the index schemes Vanguard offers. But if I were an index investor, I’d be worried that one little slip in the price I pay to buy or sell an ETF would pretty much kill any advantage I thought I would get in using them over an open-end fund. I am certainly not going to let annualized differences in after-tax returns of 0.1% cause me to choose an iffy proposition over a sure thing. n

past five years if, over the long haul, the active fund has handily beaten the index fund. Call it time dependency. I conducted a simple test. I applied each fund’s current five-year tax-effi- ciency ratings to its five-year returns over all the five-year periods since the index fund was created. The results show that, after taxes, the actively managed fund still outperformed the index fund by 0.3% per annum on average. At its worst, Health Care’s five-year after-tax return trailed the index fund’s return by 2.1%

per annum. But at its best, the active fund outperformed, after taxes, by 3.7%. So would I recommend selling Health Care for the index fund or its ETF sibling? No. I’m keeping my position in Health Care in the Model Portfolios —as well as in my own port- folio—without hesitation. And I sug- gest you do, too. I have confidence that Jean Hynes and her Wellington Management team will continue to out- perform on a pre-tax and post-tax basis. And I’m also going to stick with my

The Independent Adviser for Vanguard Investors • June 2016 • 7

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