Vanguard Tax-Managed Growth and Income Fund
From Bogleheads
| Company: | Vanguard |
|---|---|
| Fund category: | US Stock Market Index |
| Benchmark: | S&P 500 |
| Start date: | 09/06/1994 |
| Expense ratio: | 0.15% |
Vanguard Tax-Managed Growth and Income Fund is designed for taxable account investors desiring to hold a tax-managed fund benchmarked to the S&P 500 Index. According to its prospectus:
The Fund purchases stocks included in the Standard & Poor's 500 Index--an index that contains stocks of the largest U.S. companies. The Fund will hold substantially all of the S&P 500 Index stocks. To minimize capital gains distributions caused by portfolio trades, the Fund sells portfolio securities with a higher tax basis.
The Holdings page on the Vanguard website reports that as of 10/31/2008, the fund invests in 507 stocks, while the benchmark index includes 500.
Contents |
Share Classes
Two share classes are available to individual investors:
- Investor (VTGIX), with an expense ratio (ER) of 0.15% and an initial minimum investment of $10,000, along with a 1% redemption fee on shares sold within five years of purchase.
- Admiral (VTGLX), with an ER of 0.09% and a minimum investment of $100,000, except $50,000 suffices for conversion of an Investor Shares account in existence 10 years, along with a 1% redemption fee on shares sold within five years of purchase.
An additional share class is offered to institutional investors:
- Institutional (VTMIX) with an ER of 0.07%, an initial minimum investment of $5,000,000, and a 1% redemption fee on shares sold within five years of purchase.
Advantages
Low expenses
The fund's low expense ratios of 0.15% for investor shares; 0.09% for admiral shares; and 0.07% for institutional shares are minuscule when compared to the 1.35% expense ratio of the average Large Cap Core Fund. The fund paid brokerage commissions totaling $37,000 in fiscal year 2007, for a Commission Ratio (CR) of 0.001%.
Tax Efficiency
In keeping with its tax-management mandate, the fund has produced tax efficient results over its fifteen year history. The fund has distributed an average 1.69% dividend to shareholders over its history; all dividends have been 100% qualified during the four years that the qualifying dividend tax provision has been in the tax code; and the fund has never distributed a capital gain. See Vanguard Tax-Managed Growth & Income Fund Tax Distributions for a complete tally of the fund's distribution history. As a point of comparison, the non-tax managed Vanguard 500 Index Fund has distributed an average 1.69% dividend as well as a 0.20% capital gains distribution over the measurement period.
Criticisms
Somewhat Actively Managed Target
While the Vanguard Tax-Managed Growth & Income Fund closely tracks its benchmark, that target index is maintained by a committee, using criteria which aren't particularly objective. One could view the S&P 500 Index itself as being actively managed. However, the S&P U.S. Index Committee makes no attempt to select stocks based on predicted outperformance, and turnover has historically been very low.
Front-Running
Arbitrageurs may attempt to profit by buying stocks about to enter the S&P 500 (or any other index) and selling ones about to exit. Further explanation is provided in the Understanding index front running article from thetradenews.com.
If everyone knows which stocks they need to buy (and sell) and when, speculators will obviously attempt to trade the stocks before the passive index funds – the rather crude term for this is ‘index front running’.
Index revision schedules are normally released to the market well before the effective revision date, leaving the route open for speculators. As a result, passive index funds with the tightest tracking error allowances typically choose to wait until the last moment on the effective day of change before trading, leading to inflated prices on the purchase of those stocks being added to the index (and substantially lower prices on those to be removed).
Bubble Risk
If a group of stocks becomes irrationally popular, their market capitalizations increase, so they are more heavily weighted in the S&P 500 Index Fund. This effect, which depends upon the belief that stock sectors can become significantly mispriced, may lead to sharp fund declines when the bubble bursts, i.e., the overvaluation unwinds itself. An obvious example, with benefit of hindsight, is the technology boom of the late 1990s followed by the 2000-2002 bust.
Redemption Fee
The 1.00% redemption fee on the fund, which lasts five years for each purchased tax lot, makes it potentially expensive to tax harvest investment losses.
Performance
This historical returns webpage provides VTGIX performance for each of the 13 most recent calendar years. During this 1995-2007 period, the fund had an average annualized return of 11.26%. Its best calendar year result was +37.53% (1995), and its worst was -21.95% (2002). Its tracking error relative to its benchmark varied from -0.15% (2003) to +0.15% (2002).
Alternatives
ETF options include:
- iShares S&P 500 Index Fund (IVV), with an ER of 0.09%.
- SPDR® S&P® 500 ETF (SPY), with an ER of 0.10%.
- Vanguard Large-Cap ETF (VV), with an ER of 0.07%. This product does not track the S&P 500 Index, but it follows the rather similar MSCI U.S. Prime Market Index.
History
Inception dates of the various share classes are as follows:
- Investor: 09/06/1994
- Institutional: 03/04/1999
- Admiral: 11/12/2001
The fund's fiscal year ends on 12/31 of each year.
See Also
Links
- Vanguard Tax-Managed Funds Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard Tax-Managed Growth & Income Fund tax attributes
