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Best-Performing Vanguard Mutual Funds In Q3 Of 2015

Calling the third quarter a bloodbath will not be far from the truth. In this quarter, the Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. In the third quarter, just 17% of mutual funds managed to finish in the green. China-led global growth fears, uncertainty about the Fed rate hike followed by the no lift-off decision, the sell-off in biotech stocks and tumbling commodity prices, among other factors, resulted in the worst quarter in four years. In a quarter ravaged by such headwinds, mutual funds from the Vanguard Group gave a decent performance. Its best gain hit 8.4%, achieved by Vanguard Extended Duration Treasury Index Fund Institutional (MUTF: VEDTX ). This fund, which requires a minimum initial investment of $5,000,000, was in fact the top performer among the Long Government Bond Funds. The commendable gain came not only when the markets suffered a rout, but at a time when the U.S. Fed was preparing for a possible rate hike at the end of this year. As for the worst performer, Vanguard Precious Metals & Mining Fund Investment (MUTF: VGPMX ) slumped to a loss of 21.9%. This was in line with the performance of the fund category. Morningstar data showed that the Equity Precious Metals category had lost 19.4% in the third quarter. Vanguard’s Q3 Performance vs. Q2 Popular for offering the no-load mutual funds, the top-performing Vanguard funds gave a better performance than those in the second quarter. As mentioned earlier, VEDTX gained 8.4%. In the second quarter, Vanguard’s top performer was the Vanguard Health Care Fund (MUTF: VGHAX ), which had gained just 3.8%. However, the magnitude of losses increased significantly in the quarter. Of the 258 funds under our study, 79 funds ended in the positive territory in the third quarter. The average gain for these 79 funds was 1.9%. This was an improvement from the average 0.8% gain scored by 101 Vanguard funds that had finished in the green in the second quarter. However, in the third quarter, the remaining 179 funds finished with losses averaging -8%. In the second quarter, of the 257 funds under our study, 156 funds had ended in the negative territory, with an average loss of 1.8%. Among the 79 gainers in the third quarter, only 8 funds posted above 5% return. On the other hand, 58 funds posted returns lower than 2%. Out of the 179 funds that finished in the red this time, only 30 funds had a sub-5% loss. Meanwhile, 45 funds lost by at least 10%. (Note: These numbers include same funds with varied asset classes.) Vanguard’s performance in the third quarter was also relatively better than that of many of its key peers. For instance, its top gaining fund had higher returns than the best gainers from Fidelity, BlackRock (NYSE: BLK ), Wells Fargo (NYSE: WFC ) and American Funds. In the second quarter, Vanguard had failed to beat any of these fund families. However, this time, it failed to beat the third-quarter performance of T. Rowe Price (NASDAQ: TROW ). Top-Performing Vanguard Mutual Funds Fund Name Objective Description Q3 Total Return Q3 % Rank vs. Obj. YTD Total Return % Yield Expense Ratio Beta vs. S&P 500 Vanguard Long-Term Treasury Inv Government 5.44 2 0.08 2.63 0.2 -0.04 Vanguard Long-Term Inv-Gr Inc Inv Corp.-Inv. 2.63 1 -2.29 4.18 0.22 0.03 Vanguard Long-Term Bond Index Inv Dvsfd Bond 2.32 1 -2.49 3.97 0.18 -0.01 Vanguard CA Long-Term T-E Inv Muni CA 2.08 8 1.88 3.12 0.19 -0.05 Vanguard MA Tax-Exempt Fd Muni State 2.01 2 1.79 2.68 0.15 -0.04 Vanguard Interm-Term Treasury Inv Government 2 5 2.77 1.58 0.2 -0.02 Vanguard OH Long-Term Tax-Exmpt Fd Muni State 2 2 1.95 2.96 0.15 -0.03 Vanguard REIT Index Inv Real Est 1.95 35 -4.49 3.77 0.26 0.55 Vanguard NY Long-Term T/E Inv Muni NY 1.88 7 1.8 2.91 0.19 -0.01 Vanguard PA Long-Term Tax-Exmpt Inv Muni State 1.88 4 1.81 3.17 0.19 -0.02 Vanguard Long-Term Tax-Exempt Inv Muni Natl 1.81 9 1.51 3.23 0.19 -0.02 Vanguard High-Yield Tax-Exempt Inv Muni Natl 1.77 10 1.58 3.24 0.19 0.01 Vanguard CA Interm-Term T-E Inv Muni CA 1.74 31 1.53 2.46 0.19 -0.03 Vanguard Interm-Term Bd Index Inv Corp.-Inv. 1.73 1 1.93 2.27 0.18 -0.01 Vanguard Interm-Term Tax-Exempt Inv Muni Natl 1.58 19 1.23 2.56 0.19 -0.01 Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. The list of top 15 Vanguard fund performers is dominated by funds belonging to the Municipal bond funds category. Nine of the 15 funds belong to this category. This was expected as many sub-Municipal fund categories, such as Muni California Long, Muni Pennsylvania and Muni New York Long, featured in the top performers list for the third quarter, according to Morningstar data. However, the gains were modest, with Muni California Long performing the best, notching up a 1.7% gain in the quarter. Among the best-performing Vanguard Municipal Bond funds, Vanguard California Long-Term Tax Exempt Fund Investment (MUTF: VCITX ) gained 2.1% and was the best performer. The other funds from this category were Vanguard Massachusetts Tax-Exempt Fund Investment (MUTF: VMATX ), Vanguard Ohio Long Term Tax Exmpt Fund Investment (MUTF: VOHIX ), Vanguard New York Long Term Tax Exempt Fund Invesment (MUTF: VNYTX ), Vanguard Pennsylvania Long Term Tax Exmpt Fund Investment (MUTF: VPAIX ), Vanguard Long Term Tax Exempt Fund Investment (MUTF: VWLTX ), Vanguard High Yield Tax Exempt Fund Investment (MUTF: VWAHX ) and Vanguard California Intermediate Term Tax Exempt Fund Investment (MUTF: VCAIX ). Moreover, all these funds carry a favorable Zacks Mutual Rank. VCITX, VMATX, VOHIX, VNYTX, VPAIX, VWLTX, VWAHX carry Zacks Mutual Fund Rank #1 (Strong Buy) , while VWITX holds a Zacks Mutual Fund Rank #2 (Buy) . However, the best gainer from this list was a Government Bond Fund – Long, Vanguard Long Term Treasury Fund Investment (MUTF: VUSTX ), which added 5.4% in the quarter. Another fund from the category, Vanguard Intermediate Term Treasury Fund Investment (MUTF: VFITX ), was up 2% and was the sixth best gainer. Both VUSTX and VFITX carry a Zacks Mutual Fund Rank #1. Vanguard Long Term Investment Grade Fund Investment (MUTF: VWESX ), also carrying a Strong Buy rank, from the Investment Grade Bond Category, gained 2.6% and was the second best performer. While none of the funds carried an unfavorable Zacks Mutual Fund Rank, Vanguard Long-Term Bond Index Inv (MUTF: VBLTX ), Vanguard REIT Index Inv (MUTF: VGSIX ) and Vanguard Interm-Term Bd Index Inv (MUTF: VBIIX ) currently carry a Zacks Mutual Fund Rank #3 (Hold) . Original Post

Mean-Variance-Optimization Applied To Portfolios Using QQQ During Bear Markets

Summary Portfolios using QQQ and bond mutual funds achieved high returns with low risk from 1999 to 2015. The parameters of the mean-variance optimization (MVO) algorithm can be easily adapted to the risk tolerance of the investors. MVO strategy is very robust, and it may continue to perform well in the future. The idea of writing this article came from a comment by Varan, a frequent contributor on Seeking Alpha. Varan suggested that I investigate the performance of a portfolio using the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) during the 2000 to 2003 period. Since two funds in the portfolio, the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ), were created in July 2002, Varan suggested that I use two mutual funds with similar holdings, the Vanguard Long Term Treasury Fund (MUTF: VUSTX ) and the Fidelity Limited Term Government Fund (MUTF: FFXSX ). In the articles on the simple ETF portfolio the simulations did not cover the 2000-03 bear market when QQQ had a maximum drawdown of -82.96%. We frequently hear investors saying that tactical asset allocation using bond funds will not work anymore because everybody expects a secular bond bear market. So, it is relevant to ask how tactical asset allocation worked using an asset that suffered a severe bear market. In that respect, QQQ is a prime example, having suffered such deep and prolonged losses during the 2000-03 bear market. It has taken twelve years for QQQ to recover and reach the level it had at its top in March 2000. The new portfolio is made up of the following four assets: SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ) PowerShares QQQ Trust ETF Vanguard Long Term Treasury Fund Fidelity Limited Term Government Fund Basic information about the funds was extracted from Yahoo Finance and marketwatch.com and it is shown in table 1. Table 1. Symbol Inception Date Net Assets Yield% Category MDY 5/04/1995 14.23B 1.41% Mid-Cap Blend QQQ 3/03/1999 36.93B 0.96% Large Growth VUSTX 5/19/1986 3.27B 2.75% Long Term Treasury Bond FFXSX 11/10/1986 385M 0.68% Short Term Treasury Bond The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for MDY, QQQ, VUSTX, and FFXSX. We use the daily price data adjusted for dividend payments. For the adaptive allocation strategy, the portfolio is managed as dictated by the Mean-Variance Optimization (MVO) algorithm developed on the Modern Portfolio Theory (Markowitz). The allocation is rebalanced monthly at market closing of the first trading day of the month. The optimization algorithm seeks to maximize the return under a constraint on the portfolio risk determined as the standard deviation of daily returns. The portfolios are optimized for three levels of risk: LOW, MID and HIGH. The corresponding annual volatility targets are 5%, 10% and 15% respectively. In Table 2 we show the performance of the strategy applied monthly from June 1999 to September 2015. Table 2. Performance of MVO algorithm applied monthly versus 100% in QQQ.   TotRet% CAGR% VOL% maxDD% Sharpe Sortino 2015 return LOW risk 268.91 8.32 5.51 -5.51 1.51 2.19 3.60% MID risk 553.49 12.18 10.3 -10.55 1.18 1.68 3.10% HIGH risk 824.31 14.59 15.11 -16.12 0.97 1.36 -0.24% QQQ 124.69 5.08 29.43 -82.96 0.17 0.23 -1.22% In table 2 we see that all MVO portfolios had stellar performance over the 16 years of this study, even though QQQ had a very rocky ride. Also, notice that the realized volatilities of the MVO strategies are well correlated with the maximum drawdown and the realized annual returns. The 2015 returns column reports the results during 2015 to the end of September. It shows that all MVO strategies performed better than QQQ. The LOW and MID risk portfolios achieved a positive return of over 3% while QQQ lost 1.33%. The HIGH risk portfolio lost a minute 0.24%. The equity curves for all portfolios are shown in Figure 1. (click to enlarge) Figure 1. Equity curves of the portfolios with MVO monthly optimization versus QQQ over the whole time interval from June 1999 to September 2015. Source: All charts in this article are based on calculations using the adjusted daily closing share prices of securities. In figure 2 we show the equity curves during a shorter period that includes the 2000-03 bear market, specifically, we show the June 1999 to December 2003 interval. During the first nine months there was a steep increase in QQQ price followed by a three year bear market. We also included a nine month period of recovery. (click to enlarge) Figure 2. Equity curves of the portfolios with MVO monthly optimization versus QQQ over the time interval from June 1999 to December 2003. We see that all MVO portfolios increased at a slow pace during the bear market. The HIGH risk portfolio was basically flat from March 2000 to March 2003, while the LOW and MID risk portfolios achieved small but steady gains. The details of their performance are given in table 3. Table 3. Returns of QQQ and MVO portfolios during the 2000-03 bear market. Time Interval QQQ LOW_Risk MID_Risk HIGH_Risk 6/10/1999-3/28/2000 123.95% 13.32% 23.93% 53.15% 3/29/2000-3/11/2003 -79.79% 26.21% 22.72% 6.65% 3/12/2003-12/31/2003 53.25% 10.59% 17.86% 34.09% In figure 3 we show the equity curves of the MVO portfolio during the 2008-09 bear market. We included nine months of recovery from April to December 2009. (click to enlarge) Figure 3. Equity curves of the portfolios with MVO monthly optimization versus QQQ over the time interval from October 2007 to December 2009. In figure 3 we see that QQQ suffered a large loss from October 2007 to March 2009. During the same interval, the HIGH risk portfolio lost 8.40%, the MID portfolio was flat, and the LOW risk portfolio gained 7.29%. The exact numbers are given in table 4. Table 4. Returns of QQQ and MVO portfolios during the 2008-09 bear market. Time Interval QQQ LOW_Risk MID_Risk HIGH_Risk 10/1/2007-3/09/2009 -50.27 7.29 0.37 -8.40 3/10/2009-12/31/2009 78.72 8.71 19.35 42.54 Finally, in figure 4 we show the equity curves from September 2014 to September 2015. (click to enlarge) Figure 4. Equity curves of the portfolios with MVO monthly optimization versus QQQ over the time interval from September 2014 to September 2015. In figure 4 we see that QQQ as well as all the MVO portfolios were very volatile, but their equity was bound in a narrow range. Still, the LOW and MID risk portfolios outperformed by realizing modest gains. The exact gains and losses are given in table 5. Table 5. Returns of QQQ and MVO portfolios during the latest one year and the first nine months of 2015. Time Interval QQQ LOW_Risk MID_Risk HIGH_Risk 9/30/2014-9/30/2015 3.63 8.18 9.17 3.58 12/31/2014-9/30/2015 -1.22 3.60 3.10 -0.24 To give the reader more insight into how the MVO strategy succeeds in making gains even when an asset of the portfolio suffers extremely large losses, we present in the following three figures the monthly allocations during the period from June 1999 to December 2003. We decided to display the allocations over a short time interval in order to get graphs that are easy to read. (click to enlarge) Figure 5. Monthly allocations of the portfolios LOW risk strategy over the 2000-03 bear market. In figure 5 we see that the LOW risk strategy allocated, on average, over 60% of the money to the short term bond fund. QQQ was not allocated any funds between March 2000 and November 2002. The long term bond fund was allocated substantial funds during the bear market. (click to enlarge) Figure 6. Monthly allocations of the portfolios MID risk strategy over the 2000-03 bear market. The MID risk strategy allocated more funds to the long term bond fund than to the short term during the bear market. Again, QQQ was allocated the smallest amount of funds during the bear market. (click to enlarge) Figure 7. Monthly allocations of the portfolios HIGH risk strategy over the 2000-03 bear market. The HIGH risk portfolio allocated very little money to the short term bonds. During the bear market most money went alternately to the long term bonds and the mid cap MDY. QQQ was still not allocated any significant funds from April 2000 to November 2002. In table 6 we show the October 2015 allocations for all the strategies. Table 6. Current allocations for October 2015.   MDY QQQ FFXSX VUSTX LOW risk 0% 0% 70% 30% MID risk 0% 0% 31% 69% HIGH risk 0% 0% 0% 100% Conclusion The Mean-Variance Optimization strategy applied to a well-constructed portfolio of stocks and bonds performs quite satisfactorily during deep bear markets. It also offers a very simple mechanism of adaptation to the risk tolerance of the investors by trading off risk and returns. The illustrations of this article give us confidence that MVO strategy is very robust, and it may continue to perform well in the future. Additional disclosure: The article was written for educational purposes and should not be considered as specific investment advice.

Don’t Fall Victim To Home Country Bias

Summary The US only makes up 22% of the world economy. Emerging markets in Africa and the Pacific are showing the strongest growth. International stocks are trading at lower multiples than US stocks. We’ve written a several articles in the past about what investments and assets classes shouldn’t be in your portfolio such as commodities , currency funds , and bank loan funds . We also wrote a few articles about asset classes that should be in your portfolio such as international bonds . But, we’ve never discussed how to assemble a comprehensive, well diversified portfolio. It’s important to note we are talking about an investment portfolio so we will not be considering cash which would be part of someone’s savings portfolio. In this ongoing series of articles we’ll be discussing each of the asset classes we use to assemble client portfolios. Over the next few weeks we’ll be discussing each asset class in depth and talking about what risk and reward attributes they bring to a portfolio. For this series of articles we’ve divided the asset classes into three conceptual categories: low risk, medium risk, and high risk. The links to previous articles are below. Low Risk Treasury Inflation Protected Securities ( OTC:TIPS ): Why TIPS Deserve a Spot in Your Portfolio Domestic Government Bonds: Government Bonds Greatest Strength is Downside Protection Medium Risk Currency Hedged Foreign Bonds: International Bonds Belong in Every Investors Portfolio Corporate Bonds Municipal Bonds: Comprehensive Guide to the Municipal Bond Market High Risk Real Estate: REITs Belong In Your Diversified Portfolio Domestic and International Stocks: Don’t Fall Victim to Home Country Bias Summary How to Assemble a Comprehensive Investment Portfolio For investors looking for growth, stocks usually make up the bulk of their accounts. The reasons for investing in stocks are well known; they provide the highest potential returns of all the major asset classes and thus are the growth engine of your portfolio. So rather than rehash the well known case for owning stocks over the long run ( hat tip to Jeremy Siegel ) What I want to focus on is how to properly allocate the stock section of your portfolio to domestic, international, and emerging market stocks. When reviewing client portfolios one of the biggest issues I come across is home country bias. Investors typically overweight their home country and severely underweight global equities. Before we get into why you want to own international and emerging market stocks let’s first examine the one case where home country bias might be the best course of action. Also, since I’m from the US and most readers are from the US I’ll be writing this article from the perspective that the US is our home country. However, everything here still applies no matter what country you are from. When Domestic Bias Can Be a Good Thing Probably the number one argument for overweighting your home countries stocks is if you are a retiree or anyone else on a fixed income that is depending on the dividend income generated from your stocks for living expenses. The reason why you may want to have a portfolio of all or predominately all domestic stocks has to do with currency fluctuations. If all of your living expenses are denominated in dollars then you may want all of your dividend income denominated in dollars as well. While currencies as a whole are a zero sum game and over the long-term currency fluctuations tend to cancel each other out they can be quite volatile in the short term. If your income is close to your expenses, you may not be able to weather a 10% drop in the value of a currency you are receiving dividends in. After all, you can’t very well call the electric company and tell them you’ll pay this month’s bill later once the Norwegian Krone regains its value! This doesn’t mean a retiree should own no foreign stocks. If your expenses are below your income or if you have a decent cushion of cash and can weather some fluctuations, then owning foreign stocks is a great idea. You can also concentrate on companies whose dividend payments are denominated in “safe haven” currencies such as the British Pound or Swiss Franc (this is what we do for our dividend portfolio) instead of more volatile currencies like say the Argentinean Peso. Reasons to Avoid Domestic Bias The primary reason to own international stocks is diversification. United States stocks make up roughly half (depending on what index you look at) of the global stock market. However, because the US has some of the best-developed capital markets and a large amount of publicly traded companies that doesn’t tell the whole story. The United States only makes up around 22% of world GDP according to data from 2014 from the International Monetary Fund. Investing in either foreign companies or US companies that have significant foreign operations gives investors much needed exposure to the 78% or so of the world that is not the United States. While global conditions are always changing, right now international markets have two attractive factors. First, many international markets particularly emerging markets have economies that are growing faster than developed countries. The graphic below based on data from the World Factbook puts worldwide growth rates in perspective. (click to enlarge) We can see that Africa and Asia have many fast growing economies while Western Europe is quite stagnant. Exposure to these high growth markets should be an important component in investors’ stock allocations. Second, and probably most important is that international markets right now can give investors stock exposure at lower multiples then the US market. The table below shows the TTM P/E for the total US stock market ETF offered by Vanguard compared with various Vanguard international market stock ETFs. Fund Index Current Valuation (TTM P/E) Vanguard Total Stock Market ETF (NYSEARCA: VTI ) CRSP US Total Market Index 20.2 Vanguard Total International Stock ETF (NASDAQ: VXUS ) FTSE Global All Cap ex US Index 16.4 Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) FTSE Developed ex North America Index 14.3 Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) FTSE Emerging Markets 15.2 Vanguard FTSE Europe ETF (NYSEARCA: VGK ) FTSE Developed Europe All Cap Index 18.7 Vanguard FTSE Pacific ETF (NYSEARCA: VPL ) FTSE Developed APAC All Cap Index 13.9 Many international markets are trading at levels significantly cheaper than the US market. With international stocks, particularly emerging market stocks, having underperformed US stocks in the current bull market it might be hard for investors to rotate out of the winning hand of US stocks. If you’re a macroeconomic expert then by all means concentrate your portfolio in the best geographic areas. However, for most investors they would be best served with a diversified portfolio spread among the entire world. You will have exposure to better performing economies like the US but at above average multiples, underperforming economies such as Western Europe at slightly below average multiples, and faster growing economies albeit with currency concerns at very low multiples. A global stock portfolio insures that no matter which area of the globe is poised to outperform you’ll have some exposure to it.