Home Adviser Fund Update Tax Efficiency of Vanguard and Fidelity Funds Published May 20, 2016 Tax Efficiency: Fidelity and Vanguard Funds Here at Adviser Investments, we feel the main goal of investing isn’t to avoid taxes, but to maximize wealth. That said, careful consideration of tax burdens should be part of any investment strategy, so this week, we thought it’d be useful to look at the tax efficiency of funds from Fidelity and Vanguard over the three years through April. Before we dig into the data, it’s important to note that tax efficiency for funds is generally calculated in one of two ways. The first assumes you still own your shares at the end of the period, paying taxes on distributions along the way; this is the method we used to calculate the percentages you’ll see below. The second assumes that you’ve sold all shares, meaning that it also accounts for any additional short- or long-term capital gains you’ve realized since you bought the fund (tax efficiency will generally be considerably lower using this method if your investment has gained value). Because of Adviser Investments’ long-term investment philosophy, we think it’s more useful to look at the tax efficiency of funds you plan to hold on to. (When our clients are drawing down their accounts with us, however, we do consider how taxes will come into play when deciding what to sell, and together work out a plan that best meets each client’s needs.) Fidelity’s Most and Least Tax-Efficient Funds Fund Symbol 3-Year Return Tax-Adjusted 3-Year Return Tax Efficiency Fifty FFTYX 17.0% 17.0% 100% Growth Discovery FDSVX 12.4% 12.3% 100% Growth Strategies FDEGX 12.3% 12.2% 100% StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Selector Mid Cap FSSMX 8.0% 7.8% 97% Nasdaq Composite Index FNCMX 14.0% 13.6% 97% Blue Chip Value FBCVX 10.5% 10.2% 97% Stock Selector Large Cap Value FSLVX 9.8% 9.5% 96% Value Strategies FSLSX 7.4% 7.1% 96% International Growth FIGFX 3.6% 3.4% 96% International Small Cap Opportunities FSCOX 6.8% 6.5% 95% Pacific Basin FPBFX 5.2% 2.9% 57% Select Automotive FSAVX 7.7% 4.3% 55% Select Wireless FWRLX 5.0% 2.4% 48% Convertible Securities FCVSX 3.9% 1.9% 48% Real Estate Income FRIFX 4.6% 2.2% 46% Select Consumer Finance FSVLX 6.6% 2.8% 43% Spartan International Index FSIIX 1.2% 0.5% 42% International Real Estate FIREX 2.5% 0.9% 35% Global Strategies FDYSX 2.7% 0.7% 27% Total International EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. FTIEX 1.0% 0.1% 7% Source: Morningstar. Note: Three-year returns are annualized through April 2016. After-tax returns assume the highest applicable tax rate for each distribution and reinvestment of whatever’s left after taxes. Funds with losses over the period were excluded from the table. One thing that you might notice in the tables is that a handful of funds from each family have achieved excellent tax efficiency, but that their after-tax returns over the period were weaker than some of the funds that were less efficient. A clear example of this is Vanguard Market Neutral, which allowed investors keep 99.97% of their gains after taxes on distributions, making it the firm’s most tax-efficient fund over the period. But, unfortunately for investors, it only generated a 5.1% gain per year while doing so. Compare that to the MidCap Growth fund, which was one of the 10 worst funds for tax-efficiency due a couple of big capital gains distributions, but still gained 6.2% a year after taxes. Vanguard’s Most and Least Tax-Efficient Funds Fund Symbol 3-Year Return Tax-Adjusted 3-Year Return Tax Efficiency Market Neutral VMNFX 5.1% 5.1% 100% MidCap Growth Index VMGIX 9.6% 9.4% 97% Growth Index VIGRX 11.6% 11.1% 96% Admiral Tax-Managed Growth & Income VTGLX 13.7% 13.2% 96% Admiral Tax-Managed SmallCap VTMSX 11.0% 10.5% 96% SmallCap Growth Index VISGX 7.4% 7.1% 96% MidCap Index VIMSX 10.2% 9.7% 95% FTSE Social Index VFTSX 11.7% 11.1% 95% Extended Market Index VEXMX 8.4% 7.9% 94% Admiral Tax-Managed Capital Appreciation VTCLX 11.3% 10.6% 94% LifeStrategyConservative Growth VASIX 3.5% 2.5% 71% MidCap Growth VMGRX 9.1% 6.2% 68% Wellesley Income VWINX 5.7% 3.8% 67% Explorer VEXPX 8.3% 5.2% 63% FTSE All-World ex-US SmallCap Index VFSVX 2.5% 1.5% 61% European Stock Index VEURX 2.5% 1.3% 52% Managed Payout VPGDX 3.6% 1.4% 38% Admiral Developed Markets Index VTMGX 1.6% 0.6% 35% Convertible Securities VCVSX 3.6% 1.1% 30% Capital Value VCVLX 5.4% 1.6% 29% Source: Morningstar. Note: Three-year returns are annualized through April 2016. After-tax returns assume the highest applicable tax rate for each distribution and reinvestment of whatever’s left after taxes. Funds with losses over the period are excluded from the table, as are multiple share classes of the same fund. You might also notice that there are no funds with negative returns listed. This is not because there weren’t any funds from the two firms that lost money over the period. We excluded these funds because investors had nothing to show at the end of the period, even though in every case they were stuck paying taxes on distributions, which resulted in negative tax efficiency. (A fund can also have negative tax efficiency if it has a positive pre-tax return that becomes a loss after taxes, which was the case for a number of international funds at both firms over this period.) Nearly 39% of the Fidelity funds with a positive return (47 of 113) had a tax efficiency of 85% or better over the three years through April, while more than 52% of Vanguard’s funds (31 of 59) surpassed that mark. Not bad, although the percentages are significantly lower than when we ran three-year numbers last year. (The reason for this is the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market’s gains over the last few years—funds have had to pay out larger capital gains, and managers have used up the unrealized losses in their portfolios that could have offset some of these distributions.) If you own a fund not included in either of these tables and would like to see its after-tax returns, both Fidelity and Vanguard publish this information on their websites for a handful of different periods. You can find the information by going to an individual fund’s “performance” page—both firms show after-tax returns before and after the sale of shares. To calculate tax efficiency, simply divide the after-tax return by the pre-tax return for a given period. Tax efficiency is important, but it is just one consideration of many we use when selecting funds and managers to invest with. After a long period of gains, you may owe (or have paid) a sizeable amount in taxes, but in our experience, most investors are happier with more money in their pockets after taxes than holding onto tax-efficient investments that leave them with less. To learn more, we encourage you to read our exclusive Special Report, Investing and Taxes: Maximizing Gains While Minimizing Taxes. The report discusses critical tax considerations for investors of every stripe, including three account types you need to know, tax efficiency in fixed-income investing and why index funds aren’t a tax cure-all. Download this free report now by clicking here! About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance. Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility. © 2018 Adviser Investments, LLC. All Rights Reserved.