Vanguard Mid Cap is Rockin', but DonÆt Come a-Knoc

The past couple of years have provided ample evidence that, in the short run, S&P indexes aren’t quite the same thing as the stock market. As Peter Di Teresa detailed, S&P looks for sound companies rather than just including companies of the appropriate market cap level. In addition, S&P tries to keep changes to a minimum to avoid causing those who track the index to rack up sizable trading costs and taxable gains. If you’ve seen a high-turnover index fund, you know it ain’t a pretty sight.

Last year those differences were clear as actively managed funds rode Net and other tech stocks to huge gains. Vanguard Growth Index (VIGRX) and Vanguard Mid Cap Index (VIMSX) looked decidedly sluggish because they were light on Net stocks. This year has been a different story for Mid Cap, though. It’s got lots of more-established tech stocks and that’s what the market likes this year. The fund has zipped out to a huge lead on 89% of mid-blend funds thanks to a 24% return this year. If it holds on to that ranking, it would be better than all but one of Vanguard 500 Index’s 25 calendar-year performances.

So, am I buying Vanguard Mid Cap with both fists? Nope. My reason lies in the record of yet another Vanguard index fund, Vanguard Extended Market (VEXMX). This one tracks the 4,500 largest stocks that aren’t in the S&P 500. It’s a fine fund, but it has consistently made larger capital gains distributions than Vanguard 500 Index (VFINX) because it regularly has to unload some of its largest holdings (JDS Uniphase (JDSU) most recently) when they graduate to the S&P 500. Sure, the S&P mid cap won’t change a lot, but it will make some changes and there’s no need to pay taxes on those changes. For taxable accounts, a better option is to either buy Vanguard 500 and keep the rest of your portfolio in active management or just buy Vanguard Total Stock Market, which never kicks stocks out because they’re too big.

No, I Don’t
That’s my answer to the home page for AIM Funds, which poses the question "Like the idea of 3-for-1?" AIM Blue Chip  is splitting its shares though there’s no value in doing so. "The stock dividend will bring the NAV down to around $18 a share, a more comfortable level for most investors," says the link. I ask AIM, how’d you like a half dozen of the other?