Vanguard Tax-Managed Small Cap ( VTMSX) is a good choice for taxable accounts, according to Morningstar. It's down 0.9% this year, but has a 10-year average annual return rate of 7.6%. Morningstar analyst David Falkof writes that "small-cap funds tend to have poor tax efficiency, as most managers eventually sell for a gain when successful stocks grow into larger companies. This fund, however, avoids paying out gains to shareholders as taxable events. Using a strategy called tax-harvesting, the fund gradually accumulates losses from underperforming holdings to offset future capital gains from better-performing names." Its strategy also includes trying to deter short-term investors whose redemptions could trigger taxable gains by maintaining a $10,000 minimum initial investment, said Morningstar, and "thus far, the fund has never paid a taxable gain." The fund's five- and 10-year tax-adjusted returns are better than 75% of its small-blend peers through October. The fund's top pick is Vanguard REIT Index ETF ( VNQ), at 3% of the fund, followed by Regeneron Pharmaceuticals ( REGN), which discovers, develops, and commercializes products that fight inflammation, cancer, and eye disease (it has gained 83% this year), and Healthspring ( HS), a Medicare-focused managed-care organization, which is up 103% this year.