Funds Easy On Your Wallet

8/17/2015


While minimizing expenses has become accepted wisdom among fund investors, the bite of taxes is often overlooked.

Taxable capital gains and income are distributed to fund owners when a portfolio manager sells a security at a profit or passes along a dividend payment. Those distributions often saddle investors with a tax bill that is not factored in total return.

According to Vanguard, investors in U.S. stock funds saw their net total returns reduced by nearly one percentage point annually because of taxes for the 15 years ended September. Vanguard's calculations, which do not reflect state or local taxes, assume an investor was in the highest tax bracket at the time of each distribution.

11 THRIFTY FUNDS
The 11 standout stock funds below should appeal to frugal investors because of their low expense ratios and modest taxable distributions. All 11 earn fund scores of at least 90, ranking them near the top 10% of their category.
-------- Expense Ratio --------
---- Total Return ----
Fund (Price; Ticker)
Fund
Score
%
Rank
Category
Average
(%)
YTD
(%)
3 Year
(Annual.)
(%)
Fidelity Growth Strategies
($35; FDEGX)
98
0.72
90
1.20
8.0
21.0
Fidelity Value ($115; FDVLX)
99
0.73
82
1.12
2.0
18.9
iShares Core S&P Small-Cap
($114; IJR)
98
0.12
98
1.14
2.0
17.4
iShares Core U.S. Value
($132; IUSV)
90
0.09
99
0.98
(1.0)
15.6
iShares Russell 2000 Growth
($148; IWO)
94
0.25
98
1.29
6.0
19.2
iShares S&P Sm.-Cap 600
Value ($112; IJS)
95
0.25
96
1.23
(3.2)
16.2
T. Rowe Price Blue Chip Gro.
($75; TRBCX)
94
0.72
85
1.09
11.1
21.1
T. Rowe Price Global Stock
($28; PRGSX)
99
0.89
86
1.27
8.1
17.6
Vanguard Balanced Index
($30; VBINX)
93
0.23
99
1.07
1.8
10.5
Vanguard FTSE Social Index
($14; VFTSX)
100
0.27
87
0.94
3.5
20.1
Vanguard International Value
($35; VTRIX)
91
0.44
89
1.05
4.5
9.7

If you're investing in a taxable account, focus on cheap, tax-efficient funds — like the 11 listed above. The funds share these attributes:

• Based on annual expense ratios, all of the funds rank among the cheapest one-fifth of their peer groups.

• Using Morningstar's tax-cost ratio, all 11 place among the top 20% of their category. The ratio is the percentage of a fund's return reduced by taxes shareholders pay on distributions.

• All of the funds rank near the top 10% of their category based on our fund-rating system. Scores are calculated monthly using 10 metrics, including measures for expenses and tax efficiency, for nearly 5,400 funds.

• Ten of the 11 funds rank among the top half of their categories for three-year performance.

OUR RECOMMENDED MUTUAL FUNDS
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($31; ARTIX)
1.8
E
9
9
77
Baird Core Plus Bond ($12; BCOSX)
0.9
B
9
4
92
Dreyfus Midcap Index ($39; PESPX)
3.6
B
0
0
52
Dreyfus Small Cap Stock Index
($29; DISSX)
1.9
B
0
0
81
Homestead Small Company
($38; HSCSX)
(2.1)
E
5
6
76
iShares MSCI EAFE Small-Cap ETF
($51; SCZ)
11.4
A
4
6
83
PRIMECAP Odyssey Stock ($24; POSKX)
2.8
B
10
10
96
T. Rowe Price Divers. Small-Cap Growth
($27; PRDSX)
7.5
B
7
7
99
T. Rowe Price Value
($35; TRVLX)
1.1
B
10
11
95
Thompson Bond ($11; THOPX)
0.2
E
9
4
71
Vanguard 500 Index ($193; VFINX)
2.4
B
7
8
82
Vanguard GNMA ($11; VFIIX)
0.9
C
0
0
98
Vanguard Growth Index
($56; VIGRX)
5.1
C
10
11
78
Vanguard High-Yield Corp. ($6; VWEHX)
1.4
B
5
6
91
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.6
B
0
0
89
Vanguard Selected Value
($29; VASVX)
1.1
C
5
8
90
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.0
A
0
0
95
Vanguard Total Bond Mkt. Index
($11; VBMFX)
0.8
B
0
0
44
Vanguard Wellesley Income
($25; VWINX)
0.9
C
0
0
90
Vanguard Wellington ($39; VWELX)
1.6
C
10
10
93

* Year-to-date ranks through Aug. 11 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. † Fund ratings are percentile ranks based on our fund-rating system.


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