Vanguard Has Figured out How to Avoid Taxes on Mutual Funds

An article in Bloomberg reports that Vanguard Group Inc. has figured out how to avoid taxes on its mutual funds. According to the article, a review of Vanguard financial statements and trading data reflects that the firm “relies substantially on so-called heartbeat trades, which wash away taxes by rapidly pumping stocks in and out of a fund.” The mechanics are explained as follows: Vanguard attaches a more tax-efficient ETF to an existing mutual fund. Then… Read More

Higher Returns on Fewer Stocks: Vanguard Debunks “Best Ideas” Portfolio Philosophy

A recent study by a team at Vanguard contradicts the idea adopted by many investors and financial professionals that “broadly diversified portfolios are inferior to concentrated portfolios made up of a manager’s ‘best ideas.’ “ While the underlying premise might make sense—that performance of a manager’s most promising holdings would outperform those with a weaker outlook—the Vanguard paper makes an extensive and detailed case as to why the argument doesn’t hold up. Here are some… Read More

How the Fed’s Rate Hikes Affect Investors

A recent Vanguard blog addresses the issue of the Fed’s ongoing rate hike program and how it will affect investors. Here are highlights: “Higher yields on cash are good news for savers”—the article notes that since the Fed started raising rates in December 2015, investors have moved more than $60 billion into money market funds, and those inflows could rise with further rate hikes. Mixed outlook for bonds—”Bond investors might cringe at our outlook for… Read More

It’s Hard to Predict Bear Markets

A recent Vanguard blog discusses the challenges faced when trying to predict a market downturn. “While all bear markets involve a loss of investor confidence,” it says, “an assortment of factors can cause them,” including change in monetary policy, political events, and overvalued stocks. Even if you could predict such factors, the article argues, it’s hard to tell how they would affect equities. The article illustrates the differences between the last two bear markets—namely, the… Read More

Morningstar Survey Results for Long-Term Stock and Bond Returns

A recent Morningstar article outlined the intermediate-term (10-year) market return assumptions of a group of industry leaders that responded to a recent survey: John Bogle, founder of Vanguard: 4% stock return, 3% bond return over the next 10 years. Bogle asserts that “future returns from the major asset classes will be muted. GMO: -4.4% returns for U.S. large caps over next seven years; 2% real returns for emerging market equities. The firm, the article points… Read More

Combining Active and Passive Investing Can “Smooth the Ride”

A “partnership” of both active and passive investing can help smooth out some rough patches in portfolio performance, according to a recent Vanguard article. “The addition of a reliable investment partner—a broadly diversified, passively managed investment—can theoretically narrow the range of outcomes, helping you stick with a plan that offers the potential for outperformance while limiting the chances of significant underperformance.” Even the most skilled active fund managers, the article points out, will suffer periods… Read More

Vanguard’s Principles for Investing Success

Earlier this year, Vanguard published a whitepaper outlining the firm’s Principles for Investing Success. The forty-page report breaks down investing principles into four basic categories: Goals: Investors should create clear investment goals that are both “measurable and attainable. Success should not depend upon outsized investment returns, nor upon impractical saving or spending requirements.” Balance: Diversification is key in establishing asset allocations to avoid exposure to unnecessary risk. Cost: The paper argues that lower-cost investments have… Read More

Vanguard Expects Low Market Returns

Economists at the Vanguard Group think stocks will continue to grow, but at a lower rate of return in the medium term (of between 4% and 6%), with U.S. stocks trailing international equities. This according to a recent CNBC article. In a recent report to investors, Vanguard chief economist Joe Davis wrote, “Overall, the risk of correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed-income portfolios.” While… Read More

Vanguard’s McNabb Says Data Doesn’t Support ETF Bubble Fears

Although the shift to ETFs over the past ten years has been dramatic—since the start of 2008, the industry has attracted nearly $2.8 trillion in investment dollars (according to the Investment Company Institute)—Vanguard chief executive Bill McNabb told The Financial Times that he doesn’t see this as a “systemic” trajectory indicative of a market bubble. In the interview, McNabb argues that index tracking funds represent less than 15 percent of the equity market capitalization around… Read More

Vanguard Has Seen More Inflows than All Competitors Combined

In the last three calendar years, investors have poured $823 billion into low-cost index and ETF funds managed by Vanguard, about 8.5 times as much as all of its competitors combined, according to a recent New York Times article. The article quotes Morningstar’s Alina Lamy, who says this type of flow is unprecedented. “Since the crisis,” she says, “investors have been saying, ‘I may not be able to control the market, but I can control… Read More