N-CSRS 1 worldfunds_final.htm worldfunds_final.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number:  811-01027

 

Name of Registrant:

Vanguard World Fund

 

Address of Registrant:

P.O. Box 2600
  Valley Forge, PA 19482

 

Name and address of agent for service:

Anne E. Robinson, Esquire
  P.O. Box 876
  Valley Forge, PA 19482

 

Registrant’s telephone number, including area code:    (610) 669-1000

 

Date of fiscal year end:     August 31

 

Date of reporting period:  September 1, 2016 – February 28, 2017

 

Item 1: Reports to Shareholders

 



Semiannual Report | February 28, 2017

Vanguard U.S. Growth Fund

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisors’ Report. 5
Fund Profile. 11
Performance Summary. 13
Financial Statements. 14
About Your Fund’s Expenses. 28
Trustees Approve Advisory Arrangements. 30
Glossary. 32

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard U.S. Growth Fund returned almost 5% for the six months ended February 28, 2017. It trailed the 9.15% return of its benchmark, the Russell 1000 Growth Index, and the 7.44% average return of its large-capitalization growth peers.

• The fund’s five advisors manage their portions of the portfolio separately, but all seek to hold the stocks of large, high-quality companies with long-term growth potential.

• Value stocks outperformed growth during the half-year, and small-cap stocks topped large- and mid-caps.

• Information technology stocks, which made up about 40% of the portfolio, added the most to the fund’s absolute return but lagged those contained in the benchmark. The advisors’ consumer discretionary, industrial, and health care stocks also recorded subpar returns versus their benchmark counterparts.

• The fund held stocks in 9 of 11 industry sectors at the period’s end; only consumer staples declined.

Total Returns: Six Months Ended February 28, 2017  
  Total
  Returns
Vanguard U.S. Growth Fund  
Investor Shares 4.75%
Admiral™ Shares 4.81
Russell 1000 Growth Index 9.15
Large-Cap Growth Funds Average 7.44
Large-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.

 

Expense Ratios      
Your Fund Compared With Its Peer Group      
  Investor Admiral Peer Group
  Shares Shares Average
U.S. Growth Fund 0.46% 0.32% 1.14%

The fund expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year.
For the six months ended February 28, 2017, the annualized expense ratios were 0.41% for Investor Shares and 0.28% for Admiral Shares.
The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through
year-end 2016.

Peer group: Large-Cap Growth Funds.

1

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

More than a decade ago, a Vanguard client asked us to help improve its defined contribution retirement plan. New hires were participating in the plan at lower rates than in previous years, and the client wanted to reverse this trend. Another priority was to help more participants invest their retirement savings in balanced portfolios.

The overall goal of this longtime client: Give employees a better chance to achieve financial security in retirement.

Today, that plan automatically enrolls employees at a 5% contribution rate, puts them in a low-cost target-date fund that takes on less risk as they near retirement, and offers a comprehensive suite of advice services. On top of that, employees get an employer contribution of 5% and are eligible for a company match.

Because of this combination of attractive features and generous employer contributions, nearly all new hires now participate in the plan, 81% of plan participants invest their retirement savings in balanced portfolios, and 87% of participants meet or exceed Vanguard’s recommended total retirement savings target. (Vanguard generally recommends that retirement investors save 12%–15% of pay, including company matches.)

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Changing the retirement landscape

Am I singling out an isolated Vanguard success story? Absolutely not.

Stories like these are becoming increasingly common with employer-based retirement plans, particularly among large and midsize companies. Solutions such as automatic enrollment, automatic contribution increases, and default investment in target-date funds are having a positive effect.

Insights from the relatively new discipline of behavioral finance have contributed to the advances. Simply put, retirement plans are making natural human inertia work for future retirees, rather than against them, by putting savings on autopilot as much as possible.

More than 60% of Vanguard participants are in plans with automatic enrollment, which has led to a big jump in participation. Today, more than four-fifths of eligible employees are saving for retirement, compared with only two-thirds ten years ago.

In addition, many plans have adopted automatic-escalation features, which increase plan contributions at regular intervals until a maximum level is reached or an employee opts out. Automatic increases are a crucial tool for boosting retirement savings rates.

The growing use of target-date funds is another enormous benefit. More than 70% of all participants in Vanguard plans invest at least part of their retirement savings in

Market Barometer      
      Total Returns
    Periods Ended February 28, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.10% 25.53% 13.94%
Russell 2000 Index (Small-caps) 12.61 36.11 12.89
Russell 3000 Index (Broad U.S. market) 10.29 26.29 13.85
FTSE All-World ex US Index (International) 5.40 19.87 4.00
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.19% 1.42% 2.24%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.80 0.25 3.07
Citigroup Three-Month U.S. Treasury Bill Index 0.19 0.32 0.10
 
CPI      
Consumer Price Index 1.14% 2.74% 1.36%

 

3

 

these age-appropriate, diversified strategies. And nearly 50% of Vanguard participants are invested solely in a single target-date fund.

Consider a do-it-yourself autopilot

But what if you don’t have access to a world-class, employer-based retirement plan? Unfortunately, not everyone does, which is an important policy issue.

However, you can still put the features of these plans to work. For example, you can set up automatic contributions from your paycheck to an IRA. And you can adopt your own automatic escalation by investing any pay raises.

You can also take a page from top-quality retirement plans by considering a low-cost, globally diversified target-date fund. The beauty of this approach is that you don’t need to remember to rebalance your portfolio—the fund does it for you.

Of course, you can take a more active role in picking your own investments, and this can be a good choice for some. But keep in mind the lessons from successful employer-based plans: Busy workers, faced with a lot of competing priorities, are often best served by putting their retirement savings on autopilot.

Winning by default

In highlighting some recent successes in retirement savings, I don’t want to minimize the challenges we still face. We’re living in a slow-growth, uncertain world, and investment returns for both stocks and bonds could well be modest in the coming decade.

But I believe the innovations we’ve seen in the last ten years in many retirement plans—you might call it the “default revolution”—point the way toward a solution. And that even goes for people whose employers don’t have a world-class retirement plan.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
March 14, 2017

4

 

Advisors’ Report

For the six months ended February 28, 2017, Vanguard U.S. Growth Fund returned nearly 5%. It trailed its benchmark, the Russell 1000 Growth Index, and the average return of its peers. Your fund is managed by five advisors. The use of multiple independent advisors enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.

The table on page 10 presents the advisors, the percentage and amount of fund assets that each manages, and brief descriptions of their investment strategies. Each advisor has also prepared a discussion of the investment environment during the fiscal half-year and of how the portfolio’s positioning reflects this assessment. These reports were prepared on March 16, 2017.

Wellington Management Company llp

Portfolio Manager:

Andrew J. Shilling, CFA,
Senior Managing Director

We aim for our portion of the fund to outperform growth benchmarks and, in the longer term, the broader market. We employ proprietary fundamental research and a rigorous valuation discipline to invest in large-capitalization companies with attractive growth characteristics. Our investment approach is based on identifying companies with a clear competitive advantage that will enable them to sustain above-average growth.

Weak security selection in the industrial, information technology, and health care sectors weighed on our portion of the fund over the last six months. Choices in consumer discretionary also detracted from relative results. Our selection was stronger in real estate, helping to partially offset weakness elsewhere. An underweighted exposure to consumer staples and an overweighted allocation to information technology (a result of our bottom-up stock selection) further boosted results.

The largest detractors from relative performance included athletic apparel-maker Under Armour, medical equipment supplier Edwards Lifesciences, and energy and soft drink company Monster Beverage.

Netflix was the leading contributor. Other standouts included consumer electronics company Harman International Industries and technology products and services provider CDW.

At the period’s close, we were most overweighted in the information technology, financial, and industrial sectors. We reduced our exposure to consumer discretionary, where we now have an underweighted allocation. We also remained underweighted in health care, consumer staples, and materials.

5

 

In today’s environment of low global growth and elevated uncertainty, we have maintained the portfolio’s exposure to secular trends and long-cycle growth. We believe these durable growth drivers will yield attractive relative returns during a challenging period for investors. We remain true to our process, seeking to invest in companies with competitive advantages, strong balance sheets, experienced and proven management, and the ability to sustain above-average growth.

Jackson Square Partners, LLC

Portfolio Managers:

Jeffrey S. Van Harte, CFA,
Chairman and Chief Investment Officer

Christopher J. Bonavico, CFA,
Equity Analyst

Christopher M. Ericksen, CFA,
Equity Analyst

Daniel J. Prislin, CFA,
Equity Analyst

Stock selection hurt the portfolio during the period. TripAdvisor Holdings was the biggest detractor. The company is transitioning to a business model that allows users to book directly online through its site. Although usage trends for InstantBook are improving, user behavior has been more difficult to change than expected. The company plans to increase its marketing spending in order to accelerate revenue growth and attract customers to the new feature. Such a campaign could push revenues higher, but it could also temporarily affect EBITDA. Despite InstantBook’s slow takeoff, we believe the company has the assets in place to build a successful transaction business that will supplement its core travel search business.

Our largest relative contributor during the period was Celgene Corporation. Revlimid, its drug for multiple myeloma, has grown nearly 30% year-over-year, with notable international success. We believe the company is poised to benefit from additional indications for some of its drugs (particularly Revlimid), increased use of others, and international growth opportunities.

The equity market has delivered positive absolute results over the past several years. However, Jackson Square Partners believes that ever-changing market sentiment has demonstrated that more than just fundamental factors are affecting stock prices. A lack of confidence in the tepid fundamental outlook since the financial crisis suggests that many investors have struggled to accurately predict the pace of global economic recovery. They are also uncertain about assessing external factors that threaten economic fundamentals, such as central bank actions and fiscal policy debates across the globe.

President Trump’s surprising victory in November and the corresponding market reaction reflect growing investor optimism,

6

 

at least in the short term, that upcoming policy shifts could stimulate economic growth. We believe it is too early to determine the direction or magnitude of such moves, but we will closely monitor the launch of Trump’s tenure with a keen eye on potentially significant changes.

William Blair Investment
Management, LLC

Portfolio Managers:

James Golan, CFA, Partner

David Ricci, CFA, Partner

Equity market strength over the six months was fueled by positive U.S. economic data and the surprise election of Donald Trump. The president’s proposed policies of lower taxes, increased fiscal spending, and looser regulations were generally perceived as pro-growth. This gave a boost to cheaper and more economically sensitive areas of the market. At the same time, U.S. economic data, including retail sales, housing starts, unemployment claims, and wages, strengthened.

The portfolio was hindered during the period by disappointing stock selection and a challenging environment for our investment style. The market’s preference for cheaper stocks hurt because the portfolio’s quality growth companies typically trade at a valuation premium. At the sector level, our largest detractors were information technology—mainly our decision to not own Apple—and consumer discretionary, in part because of a position in O’Reilly Automotive. Other top individual detractors included health care holding Cerner Corporation and consumer staples companies Monster Beverage Corporation, Kroger, and Estee Lauder. Top contributors included UnitedHealth Group (health care), Union Pacific (industrials), Adobe Systems (information technology), Affiliated Managers Group (financials), and Mastercard (information technology).

As always, we believe other investors’ focus on near-term events creates opportunities for investors such as ourselves, who analyze companies over the long term to achieve excess returns. We remain focused on identifying companies with durable growth drivers whose stocks present compelling risk/reward opportunities.

Jennison Associates LLC

Portfolio Managers:

Kathleen A. McCarragher,
Managing Director

Blair A. Boyer, Managing Director

Hurt by the U.S. election’s focus on drug pricing earlier in the period, health care stocks dragged on portfolio returns despite a later rebound as concerns abated somewhat. Bristol-Myers Squibb declined following disappointing clinical data from its immuno-oncology program. Allergan and Shire, which have grown through acquisitions, were affected by

7

 

regulatory changes that threatened to remove the tax benefits of mergers between U.S. and offshore companies.

Technology positions were strong contributors but underperformed the benchmark sector. Apple’s strength reflected the proliferation of the iOS platform across mobile phones, tablets, and personal computers and the financial power and attractive margins of the company’s hardware products. Semiconductor-maker NVIDIA benefited from its focus on high-growth markets, where it is offering high-value-added graphics products. Qualcomm fell because of new and ongoing antitrust litigation.

In the wake of the U.S. election, the financial and industrial sectors performed well in anticipation of a less onerous regulatory environment and stimulus to infrastructure investment. We believe Goldman Sachs’s strong capital base and leading positions in investment banking, capital markets, trading, and asset management provide attractive exposure to long-term global economic expansion. Morgan Stanley is a formidable competitor and has a balanced and diversified business model.

Boeing’s gain reflected strong financial results and the 787 Dreamliner commercial jet’s cash generation. In consumer discretionary, Netflix rose on robust subscriber growth. As the company develops into a global network, its earnings potential grows significantly.

We conduct rigorous research to determine company, industry, and sector fundamentals and prospects over intermediate and longer terms, projecting how markets, industries, and businesses will evolve over time. With this perspective, we build the portfolio through individual stock selection based on company fundamentals.

Baillie Gifford Overseas Ltd.

Portfolio Managers:

Tom Slater, Investment Manager, Partner

Gary Robinson, Investment Manager

The election victory of Donald Trump dominated the news during the period. As in 2016, markets were primarily driven by politics and sentiment. Given our long-term view and focus on company fundamentals, it was pleasing to see the companies held by the portfolio continue to deliver outstanding operational results. We are heartened by their extensive investment for future growth.

Our philosophy and process focus on finding and holding exceptional growth companies, as defined by their culture, growth opportunity, and competitive edge. As a result of our research, we acquired a diverse range of stocks with attractive and durable growth prospects. CoStar Group (commercial real estate data), Ellie Mae (mortgage origination software), NVIDIA (graphic-chip designer), and Vertex Pharmaceuticals (cystic fibrosis drug developer) were all purchased over the

8

 

period. Funds for these stocks came from the complete sales of Apache, Colgate-Palmolive, Genomic Health, Idexx Laboratories, and O’Reilly Automotive.

Despite political uncertainties, we remain very optimistic about the portfolio’s prospects; some of its holdings are literally changing the world through their innovation, expertise, and vision. We look forward to updating you on their progress and finding more exceptional growth companies over the coming year.

9

 

Vanguard U.S. Growth Fund Investment Advisors  
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Wellington Management 37 2,536 Employs proprietary fundamental research and a
Company LLP     rigorous valuation discipline in an effort to invest in
      high-quality, large-cap, sustainable-growth companies.
      The investment approach is based on the belief that
      stock prices often overreact to short-term trends and
      that bottom-up, intensive research focused on
      longer-term fundamentals can be used to identify
      stocks that will outperform the market over time.
Jackson Square Partners, LLC 36 2,511 Uses a bottom-up approach, seeking companies that
      have large end-market potential, dominant business
      models, and strong free cash flow generation that is
      attractively priced compared with the intrinsic value of
      the securities.
William Blair Investment 13 882 Uses a fundamental investment approach in pursuit of
Management, LLC     superior long-term investment results from
      growth-oriented companies with leadership positions
      and strong market presence.
Jennison Associates LLC 6 441 Uses a research-driven, fundamental investment
      approach that relies on in-depth company knowledge
      gleaned through meetings with management,
      customers, and suppliers.
Baillie Gifford Overseas Ltd. 6 428 Uses a long-term, active, bottom-up investment
      approach to identify companies that can generate
      above-average growth in earnings and cash flow.
Cash Investments 2 127 These short-term reserves are invested by Vanguard in
      equity index products to simulate investment in stocks.
      Each advisor may also maintain a modest cash
      position.

 

10

 

U.S. Growth Fund

Fund Profile
As of February 28, 2017

Share-Class Characteristics  
  Investor Admiral
  Shares Shares
Ticker Symbol VWUSX VWUAX
Expense Ratio1 0.46% 0.32%
30-Day SEC Yield 0.45% 0.60%

 

Portfolio Characteristics    
      DJ
      U.S.
    Russell Total
    1000 Market
    Growth FA
  Fund Index Index
Number of Stocks 156 610 3,807
Median Market Cap $53.4B $82.4B $57.6B
Price/Earnings Ratio 31.6x 24.7x 24.8x
Price/Book Ratio 5.0x 5.9x 3.0x
Return on Equity 21.0% 22.5% 16.4%
Earnings Growth      
Rate 12.7% 11.6% 7.6%
Dividend Yield 0.9% 1.5% 1.9%
Foreign Holdings 1.1% 0.0% 0.0%
Turnover Rate      
(Annualized) 33%
Short-Term      
Reserves 1.1%

 

Volatility Measures    
    DJ
    U.S. Total
  Russell 1000 Market
  Growth Index FA Index
R-Squared 0.92 0.79
Beta 1.01 0.97
These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.

 

Ten Largest Holdings (% of total net assets)
Alphabet Inc. Internet Software &  
  Services 6.0%
Facebook Inc. Internet Software &  
  Services 3.9
Microsoft Corp. Systems Software 3.9
Mastercard Inc. Data Processing &  
  Outsourced Services 3.3
Visa Inc. Data Processing &  
  Outsourced Services 3.1
Amazon.com Inc. Internet & Direct  
  Marketing Retail 2.7
Apple Inc. Technology  
  Hardware, Storage &  
  Peripherals 2.6
PayPal Holdings Inc. Data Processing &  
  Outsourced Services 2.5
Celgene Corp. Biotechnology 2.5
Allergan plc Pharmaceuticals 2.1
Top Ten   32.6%
The holdings listed exclude any temporary cash investments and
equity index products.

 

Investment Focus

1 The expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year. For the six
months ended February 28, 2017, the annualized expense ratios were 0.41% for Investor Shares and 0.28% for Admiral Shares.

11

 

U.S. Growth Fund

Sector Diversification (% of equity exposure)
      DJ
      U.S.
    Russell Total
    1000 Market
    Growth FA
  Fund Index Index
Consumer      
Discretionary 16.6% 20.6% 12.4%
Consumer Staples 3.6 9.3 8.4
Energy 0.5 0.5 6.2
Financials 7.0 2.9 15.3
Health Care 15.4 16.2 13.4
Industrials 8.8 10.9 10.8
Information      
Technology 41.7 32.3 20.7
Materials 0.8 3.5 3.4
Other 1.8 0.0 0.0
Real Estate 3.8 2.8 4.1
Telecommunication      
Services 0.0 1.0 2.1
Utilities 0.0 0.0 3.2

 

12

 

U.S. Growth Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Fiscal-Year Total Returns (%): August 31, 2006, Through February 28, 2017

 

Note: For 2017, performance data reflect the six months ended February 28, 2017.

Average Annual Total Returns: Periods Ended December 31, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
Investor Shares 1/6/1959 -0.75% 14.32% 7.18%
Admiral Shares 8/13/2001 -0.59 14.48 7.35

 

See Financial Highlights for dividend and capital gains information.

13

 

U.S. Growth Fund

Financial Statements (unaudited)

Statement of Net Assets
As of February 28, 2017

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value
    Shares ($000)
Common Stocks (96.0%)1    
Consumer Discretionary (16.3%)  
* Amazon.com Inc. 223,927 189,227
  Home Depot Inc. 829,918 120,263
* Liberty Interactive Corp.    
  QVC Group Class A 4,656,094 87,907
* Netflix Inc. 597,274 84,891
* Liberty Global plc 1,881,595 66,025
* TripAdvisor Inc. 1,513,701 62,773
* O’Reilly Automotive Inc. 226,143 61,445
  NIKE Inc. Class B 869,228 49,685
  Dollar General Corp. 672,388 49,098
  Starbucks Corp. 825,973 46,973
* Priceline Group Inc. 25,840 44,552
^ Tesla Inc. 130,819 32,703
  Ross Stores Inc. 393,741 27,003
* Chipotle Mexican Grill Inc.    
  Class A 57,790 24,199
* Hilton Worldwide    
  Holdings Inc. 418,642 23,946
* Under Armour Inc. 1,185,878 22,010
* AutoZone Inc. 28,136 20,724
  Las Vegas Sands Corp. 390,933 20,700
* Liberty Global plc Class A 501,593 17,907
  Lennar Corp. Class A 298,631 14,570
  adidas AG 59,368 9,959
  Marriott International Inc.    
  Class A 109,409 9,518
^ Wayfair Inc. 239,189 9,044
  Industria de Diseno Textil    
  SA ADR 549,830 8,797
  Charter Communications    
  Inc. Class A 20,104 6,495
  CarMax Inc. 89,514 5,777
  Harley-Davidson Inc. 87,428 4,929
  Ulta Beauty Inc. 14,945 4,086
  Expedia Inc. 28,280 3,367
      1,128,573

 

Consumer Staples (3.5%)    
* Monster Beverage Corp. 1,269,295 52,599
  Walgreens Boots Alliance    
  Inc. 523,500 45,220
  Estee Lauder Cos. Inc.    
  Class A 449,633 37,252
  Constellation Brands Inc.    
  Class A 229,601 36,463
  Kroger Co. 975,100 31,008
  PepsiCo Inc. 148,225 16,361
  Costco Wholesale Corp. 64,294 11,392
  Mondelez International Inc.    
  Class A 132,213 5,807
  Brown-Forman Corp.    
  Class B 80,411 3,921
      240,023
Energy (0.4%)    
  Schlumberger Ltd. 201,447 16,188
  Concho Resources Inc. 39,274 5,202
  EOG Resources Inc. 37,884 3,674
      25,064
Financials (6.7%)    
  Intercontinental Exchange    
  Inc. 2,464,830 140,816
  Charles Schwab Corp. 1,688,205 68,220
  MarketAxess Holdings    
  Inc. 304,193 59,388
* Markel Corp. 43,200 42,324
  Marsh & McLennan Cos.    
  Inc. 447,559 32,887
  MSCI Inc. Class A 269,311 25,474
  First Republic Bank 239,467 22,469
  Affiliated Managers    
  Group Inc. 121,600 20,420
  TD Ameritrade Holding    
  Corp. 349,576 13,669
  Goldman Sachs Group Inc. 44,455 11,028
  Morgan Stanley 200,680 9,165

 

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U.S. Growth Fund

      Market
      Value
    Shares ($000)
  American Express Co. 104,261 8,347
  M&T Bank Corp. 43,105 7,197
  Interactive Brokers Group    
  Inc. 162,552 5,967
      467,371
Health Care (15.0%)    
* Celgene Corp. 1,404,163 173,428
  Allergan plc 599,713 146,822
* Biogen Inc. 428,458 123,653
  Bristol-Myers Squibb Co. 1,573,259 89,220
* Quintiles IMS Holdings    
  Inc. 1,019,919 78,932
  UnitedHealth Group Inc. 446,990 73,923
  Dentsply Sirona Inc. 1,084,720 68,901
* Edwards Lifesciences    
  Corp. 425,253 39,991
* Illumina Inc. 216,436 36,231
  Medtronic plc 413,911 33,490
  Zoetis Inc. 567,600 30,259
* ABIOMED Inc. 220,850 26,054
  Danaher Corp. 253,600 21,695
* Cerner Corp. 334,900 18,433
* Regeneron    
  Pharmaceuticals Inc. 49,095 18,337
  Alexion Pharmaceuticals    
  Inc. 86,611 11,368
  BioMarin Pharmaceutical    
  Inc. 120,546 11,323
  Waters Corp. 55,868 8,659
  Bioverativ Inc. 166,229 8,657
  Shire plc ADR 43,912 7,935
  Vertex Pharmaceuticals Inc.  61,810 5,601
  Juno Therapeutics Inc. 135,822 3,265
  Alnylam Pharmaceuticals    
  Inc. 58,026 2,996
  Seattle Genetics Inc. 45,430 2,982
      1,042,155
Industrials (8.6%)    
  Nielsen Holdings plc 1,682,770 74,648
* Verisk Analytics Inc.    
  Class A 578,690 47,985
  Union Pacific Corp. 383,000 41,341
  FedEx Corp. 198,285 38,265
  AMETEK Inc. 643,769 34,744
* TransUnion 934,737 34,669
  Equifax Inc. 262,396 34,403
  Lockheed Martin Corp. 124,507 33,191
  Fastenal Co. 648,268 32,433
* IHS Markit Ltd. 775,944 30,883
  TransDigm Group Inc. 119,959 30,494
  Fortive Corp. 454,266 26,188
  Northrop Grumman Corp. 97,801 24,166
  Fortune Brands Home &    
  Security Inc. 391,681 22,651
  JB Hunt Transport    
  Services Inc. 214,707 21,078
  Snap-on Inc. 96,304 16,340
  Watsco Inc. 92,794 13,758
  Boeing Co. 56,451 10,174
  Wabtec Corp. 101,519 8,134
  Parker-Hannifin Corp. 38,499 5,961
  NOW Inc. 307,754 5,890
  CSX Corp. 97,275 4,724
      592,120
Information Technology (41.0%)  
* Facebook Inc. Class A 2,010,099 272,449
  Microsoft Corp. 4,203,891 268,965
* Alphabet Inc. Class C 314,253 258,696
  Mastercard Inc. Class A 2,069,448 228,591
  Visa Inc. Class A 2,421,729 212,967
  Apple Inc. 1,319,952 180,820
* PayPal Holdings Inc. 4,155,713 174,540
* Alphabet Inc. Class A 183,496 155,041
* eBay Inc. 4,218,220 142,998
* Electronic Arts Inc. 1,098,366 95,009
  Symantec Corp. 2,729,680 77,987
* Adobe Systems Inc. 633,817 75,006
  Intuit Inc. 433,143 54,333
  QUALCOMM Inc. 918,900 51,900
* salesforce.com Inc. 555,138 45,161
* Alibaba Group Holding    
  Ltd. ADR 408,429 42,027
* ServiceNow Inc. 456,471 39,676
  CDW Corp. 655,997 38,638
* Autodesk Inc. 430,631 37,163
  ASML Holding NV 297,845 36,245
  Alliance Data Systems    
  Corp. 147,795 35,911
  Texas Instruments Inc. 462,700 35,452
* Workday Inc. Class A 426,634 35,381
* FleetCor Technologies Inc. 201,112 34,189
  Global Payments Inc. 415,835 33,138
* Red Hat Inc. 399,095 33,049
  NVIDIA Corp. 290,034 29,433
  Accenture plc Class A 166,600 20,409
*,^ Zillow Group Inc. 485,598 16,481
  Microchip Technology Inc. 192,370 13,951
  GrubHub Inc. 364,128 12,766
  Tencent Holdings Ltd. 430,849 11,433
  Ellie Mae Inc. 73,867 7,059
  Tableau Software Inc.    
  Class A 124,316 6,556
  CoStar Group Inc. 29,335 5,960
  Palo Alto Networks Inc. 37,956 5,766
  Splunk Inc. 78,349 4,837
  Mobileye NV 101,912 4,639
  Analog Devices Inc. 38,206 3,130
  Advanced Micro Devices    
  Inc. 186,577 2,698
      2,840,450

 

15

 

U.S. Growth Fund

      Market
      Value
    Shares ($000)
Materials (0.7%)    
  Sherwin-Williams Co. 79,172 24,428
  PPG Industries Inc. 159,100 16,297
  Martin Marietta Materials    
  Inc. 51,536 11,129
      51,854
Other (0.0%)    
*,2 WeWork Class A PP 52,398 2,630
3 Vanguard Growth ETF 3,100 373
      3,003
Real Estate (3.8%)    
  Crown Castle International    
  Corp. 1,231,864 115,216
  Equinix Inc. 157,271 59,145
  American Tower    
  Corporation 362,296 41,588
  Public Storage 118,040 26,849
* SBA Communications    
  Corp. Class A 146,800 16,995
      259,793
Total Common Stocks    
(Cost $4,713,308)   6,650,406
Preferred Stocks (1.6%)    
*,2 Uber Technologies PP 1,408,784 68,709
*,2 WeWork Pfd. D1 PP 260,418 13,071
*,2 WeWork Pfd. D2 PP 204,614 10,270
*,2 Pinterest Prf G PP 1,596,475 10,154
*,2 Cloudera, Inc. Pfd. 300,088 5,681
Total Preferred Stocks    
(Cost $45,428)   107,885
Convertible Preferred Stocks (0.2%)  
*,2 Airbnb Inc. (Cost $11,928) 128,123 13,453
Temporary Cash Investments (3.2%)1  
Money Market Fund (2.9%)    
4,5 Vanguard Market    
  Liquidity Fund,    
  0.864% 2,014,480 201,468
    Face Market
    Amount Value
    ($000) ($000)
Repurchase Agreement (0.2%)    
  Bank of America Securities,    
  LLC 0.530%, 3/1/17    
  (Dated 2/28/17, Repurchase    
  Value $12,700,000,    
  collateralized by Federal    
  Home Loan Bank 0.000%,    
  8/25/17, with a value of    
  $12,955,000) 12,700 12,700
 
U.S. Government and Agency Obligations (0.1%)
6 United States Treasury Bill,    
  0.534%, 6/8/17 6,000 5,992
6 United States Treasury Bill,    
  0.593%, 7/13/17 2,500 2,494
      8,486
Total Temporary Cash Investments  
(Cost $222,643)   222,654
Total Investments (101.0%)    
(Cost $4,993,307)   6,994,398
  Amount
  ($000)
Other Assets and Liabilities (-1.0%)  
Other Assets  
Investment in Vanguard 485
Receivables for Investment Securities Sold 15,137
Receivables for Accrued Income 7,373
Receivables for Capital Shares Issued 2,867
Other Assets 195
Total Other Assets 26,057
Liabilities  
Payables for Investment Securities  
Purchased (35,423)
Collateral for Securities on Loan (19,089)
Payables to Investment Advisor (2,320)
Payables for Capital Shares Redeemed (24,516)
Payables to Vanguard (12,798)
Other Liabilities (806)
Total Liabilities (94,952)
Net Assets (100%) 6,925,503

 

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U.S. Growth Fund

At February 28, 2017, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 4,771,514
Overdistributed Net Investment Income (4,324)
Accumulated Net Realized Gains 153,464
Unrealized Appreciation (Depreciation)  
Investment Securities 2,001,091
Futures Contracts 3,758
Net Assets 6,925,503
 
 
Investor Shares—Net Assets  
Applicable to 120,903,751 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 3,782,875
Net Asset Value Per Share—  
Investor Shares $31.29
 
 
Admiral Shares—Net Assets  
Applicable to 38,816,046 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 3,142,628
Net Asset Value Per Share—  
Admiral Shares $80.96

 

See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $18,642,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 97.8% and 1.4%, respectively, of
net assets.
2 Restricted securities totaling $123,968,000, representing 1.8% of net assets.
3 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
5 Includes $19,089,000 of collateral received for securities on loan.
6 Securities with a value of $6,569,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
PP—Private Placement.
See accompanying Notes, which are an integral part of the Financial Statements.

17

 

U.S. Growth Fund

Statement of Operations

  Six Months Ended
  February 28, 2017
  ($000)
Investment Income  
Income  
Dividends1,2 29,933
Interest1 694
Securities Lending—Net 251
Total Income 30,878
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 5,924
Performance Adjustment (908)
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 4,395
Management and Administrative—Admiral Shares 1,797
Marketing and Distribution—Investor Shares 339
Marketing and Distribution—Admiral Shares 128
Custodian Fees 29
Shareholders’ Reports—Investor Shares 71
Shareholders’ Reports—Admiral Shares 14
Trustees’ Fees and Expenses 9
Total Expenses 11,798
Expenses Paid Indirectly (123)
Net Expenses 11,675
Net Investment Income 19,203
Realized Net Gain (Loss)  
Investment Securities Sold1 214,001
Futures Contracts 10,448
Realized Net Gain (Loss) 224,449
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 70,223
Futures Contracts 2,856
Change in Unrealized Appreciation (Depreciation) 73,079
Net Increase (Decrease) in Net Assets Resulting from Operations 316,731
1 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $3,000, $642,000, and
$4,000, respectively.
2 Dividends are net of foreign withholding taxes of $15,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

18

 

U.S. Growth Fund

Statement of Changes in Net Assets

  Six Months Ended Year Ended
  February 28, August 31,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 19,203 38,023
Realized Net Gain (Loss) 224,449 71,168
Change in Unrealized Appreciation (Depreciation) 73,079 333,653
Net Increase (Decrease) in Net Assets Resulting from Operations 316,731 442,844
Distributions    
Net Investment Income    
Investor Shares (14,717) (19,111)
Admiral Shares (16,728) (16,735)
Realized Capital Gain1    
Investor Shares (38,970) (327,359)
Admiral Shares (32,022) (218,490)
Total Distributions (102,437) (581,695)
Capital Share Transactions    
Investor Shares (128,312) (96,179)
Admiral Shares (20,865) 699,217
Net Increase (Decrease) from Capital Share Transactions (149,177) 603,038
Total Increase (Decrease) 65,117 464,187
Net Assets    
Beginning of Period 6,860,386 6,396,199
End of Period2 6,925,503 6,860,386
1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $0, respectively. Short-term gain distributions are treated as
ordinary income dividends for tax purposes.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($4,324,000) and $7,918,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

19

 

U.S. Growth Fund

Financial Highlights

Investor Shares              
  Six Months          
    Ended          
For a Share Outstanding February 28, Year Ended August 31,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $30.32 $30.89 $31.03 $24.67 $20.79 $18.12
Investment Operations              
Net Investment Income   .078 .151 .169 .168 .134 .068
Net Realized and Unrealized Gain (Loss)            
on Investments   1.333 1.944 2.168 6.303 3.861 2.679
Total from Investment Operations 1.411 2.095 2.337 6.471 3.995 2.747
Distributions              
Dividends from Net Investment Income (.121) (.147) (.194) (.111) (.115) (. 077)
Distributions from Realized Capital Gains (.320) (2.518) (2.283)
Total Distributions   (.441) (2.665) (2.477) (.111) (.115) (.077)
Net Asset Value, End of Period $31.29 $30.32 $30.89 $31.03 $24.67 $20.79
 
Total Return1   4.75% 6.89% 7.96% 26.29% 19.31% 15.22%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $3,783 $3,794 $3,975 $4,038 $3,137 $2,975
Ratio of Total Expenses to              
Average Net Assets2   0.41% 0.46% 0.47% 0.44% 0.45% 0.45%
Ratio of Net Investment Income to            
Average Net Assets   0.53% 0.50% 0.53% 0.59% 0.59% 0.35%
Portfolio Turnover Rate   33% 32% 38% 36% 38% 43%

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of (0.03%), 0.02%, 0.03%, (0.01%), (0.01%), and (0.01%).

See accompanying Notes, which are an integral part of the Financial Statements.

20

 

U.S. Growth Fund

Financial Highlights

Admiral Shares              
  Six Months          
    Ended          
For a Share Outstanding February 28, Year Ended August 31,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $78.52 $80.01 $80.37 $63.91 $53.85 $46.94
Investment Operations              
Net Investment Income   . 257 .506 .563 .557 .440 . 258
Net Realized and Unrealized Gain (Loss)            
on Investments   3.445 5.018 5.607 16.293 10.002 6.924
Total from Investment Operations 3.702 5.524 6.170 16.850 10.442 7.182
Distributions              
Dividends from Net Investment Income (. 433) (. 499) (. 623) (. 390) (. 382) (. 272)
Distributions from Realized Capital Gains (.829) (6.515) (5.907)
Total Distributions   (1.262) (7.014) (6.530) (.390) (.382) (.272)
Net Asset Value, End of Period $80.96 $78.52 $80.01 $80.37 $63.91 $53.85
 
Total Return1   4.81% 7.03% 8.12% 26.44% 19.51% 15.38%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $3,143 $3,066 $2,421 $1,868 $1,141 $869
Ratio of Total Expenses to              
Average Net Assets2   0.28% 0.32% 0.33% 0.30% 0.31% 0.31%
Ratio of Net Investment Income to            
Average Net Assets   0.66% 0.64% 0.67% 0.73% 0.73% 0.49%
Portfolio Turnover Rate   33% 32% 38% 36% 38% 43%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of (0.03%), 0.02%, 0.03%, (0.01%), (0.01%), and (0.01%).

See accompanying Notes, which are an integral part of the Financial Statements.

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U.S. Growth Fund

Notes to Financial Statements

Vanguard U.S. Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

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U.S. Growth Fund

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

During the six months ended February 28, 2017, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.

5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (August 31, 2013–2016), and for the period ended February 28, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

7. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

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U.S. Growth Fund

8. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at February 28, 2017, or at any time during the period then ended.

9. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. The investment advisory firms Wellington Management Company LLP, Jackson Square Partners, LLC, William Blair Investment Management, LLC, Jennison Associates LLC, and Baillie Gifford Overseas Ltd. each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fees of Wellington Management Company LLP, Jackson Square Partners, LLC, and Jennison Associates LLC are subject to quarterly adjustments based on performance relative to the Russell 1000 Growth Index for the preceding three years. The basic fee of William Blair Investment Management, LLC, is subject to quarterly adjustments based on performance relative to the Russell 1000 Growth Index for the preceding five years. The basic fee of Baillie Gifford Overseas Ltd. is subject to quarterly adjustments based on performance relative to the S&P 500 Index for the preceding three years.

Vanguard manages the cash reserves of the fund as described below.

For the six months ended February 28, 2017, the aggregate investment advisory fee represented an effective annual basic rate of 0.18% of the fund’s average net assets, before a decrease of $908,000 (0.03%) based on performance.

C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, distribution, and cash management services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the

24

 

U.S. Growth Fund

board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At February 28, 2017, the fund had contributed to Vanguard capital in the amount of $485,000, representing 0.01% of the fund’s net assets and 0.19% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended February 28, 2017, these arrangements reduced the fund’s expenses by $123,000 (an annual rate of 0.00% of average net assets).

E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of February 28, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 6,626,384 21,392 2,630
Preferred Stocks 107,885
Convertible Preferred Stocks 13,453
Temporary Cash Investments 201,468 21,186
Futures Contracts—Liabilities1 (806)
Total 6,827,046 42,578 123,968
1 Represents variation margin on the last day of the reporting period.

 

The determination of Level 3 fair value measurements is governed by documented policies and procedures adopted by the board of trustees. The board has designated a pricing review committee, as an agent of the board, to ensure the timely analysis and valuation of Level 3 securities held by the fund in accordance with established policies and procedures. The pricing review committee employs various methods for calibrating valuation approaches, including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity. All valuation decisions made by the pricing review committee are reported to the board on a quarterly basis for review and ratification. The board reviews the adequacy of the fair value measurement policies and procedures in place on an annual basis.

25

 

U.S. Growth Fund

The following table summarizes changes in investments valued based on Level 3 inputs during the six months ended February 28, 2017. Transfers into or out of Level 3 are recognized based on values as of the date of transfer.

      Investments in
  Investments in Investments in Convertible
  Common Stocks Preferred Stocks Preferred Stocks
Amount Valued Based on Level 3 Inputs ($000) ($000) ($000)
Balance as of August 31, 2016 2,630 107,612 13,453
Change in Unrealized Appreciation (Depreciation) 273
Balance as of February 28, 2017 2,630 107,885 13,453

 

The following table provides quantitative information about the significant unobservable inputs used in fair value measurement as of February 28, 2017:

 

  Fair Value      
Security Type ($000) Valuation Technique Unobservable Input Amount
Common Stocks 2,630 Market Approach Recent Market Transaction $50.192
Preferred Stocks 107,885 Market Approach Recent Market Transaction 50.192
      Recent Market Transaction 48.772
      Comparable Company Approach 18.930
      Comparable Company Approach 6.360
Convertible        
Preferred Stocks 13,453 Market Approach Recent Market Transaction 105.000

 

Significant increases or decreases in the significant unobservable inputs used in the fair value measurement of the portfolio’s Level 3 securities, in isolation, could result in a significantly higher or lower fair value measurement.

F. At February 28, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index March 2017 691 81,635 2,796
E-mini S&P Mid-Cap 400 Index March 2017 262 45,266 962
        3,758

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will

26

 

U.S. Growth Fund

reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.

At February 28, 2017, the cost of investment securities for tax purposes was $4,993,307,000. Net unrealized appreciation of investment securities for tax purposes was $2,001,091,000, consisting of unrealized gains of $2,140,369,000 on securities that had risen in value since their purchase and $139,278,000 in unrealized losses on securities that had fallen in value since their purchase.

H. During the six months ended February 28, 2017, the fund purchased $1,089,501,000 of investment securities and sold $1,250,278,000 of investment securities, other than temporary cash investments.

I. Capital share transactions for each class of shares were:

  Six Months Ended Year Ended
  February 28, 2017 August 31, 2016
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 117,563 3,900 566,832 18,852
Issued in Lieu of Cash Distributions 52,776 1,792 340,874 11,389
Redeemed (298,651) (9,922) (1,003,885) (33,788)
Net Increase (Decrease)—Investor Shares (128,312) (4,230) (96,179) (3,547)
Admiral Shares        
Issued 270,896 3,489 1,021,665 13,128
Issued in Lieu of Cash Distributions 46,252 607 223,265 2,883
Redeemed (338,013) (4,332) (545,713) (7,215)
Net Increase (Decrease)—Admiral Shares (20,865) (236) 699,217 8,796

 

J. Management has determined that no material events or transactions occurred subsequent to February 28, 2017, that would require recognition or disclosure in these financial statements.

27

 

About Your Fund’s Expenses

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

The accompanying table illustrates your fund’s costs in two ways:

Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“

Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

28

 

Six Months Ended February 28, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
U.S. Growth Fund 8/31/2016 2/28/2017 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,047.46 $2.08
Admiral Shares 1,000.00 1,048.15 1.42
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,022.76 $2.06
Admiral Shares 1,000.00 1,023.41 1.40

The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that
period are 0.41% for Investor Shares and 0.28% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the
annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent
six-month period, then divided by the number of days in the most recent 12-month period (181/365).

29

 

Trustees Approve Advisory Arrangements

The board of trustees of Vanguard U.S. Growth Fund has renewed the fund’s investment advisory arrangements with Baillie Gifford Overseas Ltd. (Baillie Gifford), Jackson Square Partners, LLC (Jackson Square), Jennison Associates LLC (Jennison), Wellington Management Company LLP (Wellington Management), and William Blair Investment Management, LLC (William Blair). The board determined that renewing the fund’s advisory arrangements was in the best interests of the fund and its shareholders.

The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.

The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.

In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decision.

Nature, extent, and quality of services

The board reviewed the quality of the fund’s investment management services over both the short and long term and took into account the organizational depth and stability of each advisor. The board considered the following:

Baillie Gifford. Baillie Gifford is a unit of Baillie Gifford & Co., which was founded in 1908 and is among the largest independently owned investment management firms in the United Kingdom. Baillie Gifford aims to deliver outstanding investment performance for its clients by identifying exceptional growth companies in the United States and investing in them long enough for the advantages of their business models and strength of their cultures to become the dominant drivers of their stock prices. This long-term horizon allows the advisor to harness the asymmetry inherent in equity markets to capture the disproportionate impact of successful investments in its clients’ portfolios. Baillie Gifford began managing a portion of the fund in 2014.

Jackson Square. Founded in February 2014, Jackson Square invests primarily in common stocks of large-capitalization, growth-oriented companies that it believes have long-term capital appreciation potential and are expected to grow faster than the U.S. economy. Jackson Square uses a bottom-up approach, seeking companies that have large-end market potential, dominant business models, and strong free cash flow generation that is attractively priced compared to the intrinsic value of the securities. Jackson Square was founded by the same investment team that has managed a portion of the fund since 2010, previously as a part of Delaware Investments.

30

 

Jennison. Jennison, founded in 1969, is an indirect, wholly owned subsidiary of Prudential Financial Inc. Jennison uses internal fundamental research and a highly interactive stock selection process to identify companies that exhibit above-average growth in units, revenues, earnings, and cash flows. When analyzing a company for purchase or sale, Jennison focuses on the duration of the company’s growth opportunity and seeks to capture inflection points in its growth trajectory. Jennison began managing a portion of the fund in 2014.

Wellington Management. Founded in 1928, Wellington Management is among the nation’s oldest and most respected institutional investment managers. The firm employs a traditional, bottom-up fundamental research approach to identify companies with sustainable growth advantages and reasonable valuations. Wellington Management identifies companies that have demonstrated above-average growth in the past and follows up with a thorough review of each company’s business model and an assessment of its valuation. The goal of this review is to identify companies with high returns on capital, superior business management, and high-quality balance sheets. Wellington Management has managed a portion of the fund since 2010.

William Blair. Founded in 1935, William Blair is an independently owned full-service investment firm. William Blair uses an investment process that relies on thorough fundamental research. Based on this process, it invests in quality growth companies that it believes will grow faster than the market expects or sustain an above-average growth rate for longer than the market expects. In selecting stocks, William Blair considers each company’s leadership position within the company’s market, the quality of products or services it provides, its return on equity, its accounting policies, and the quality of the management team. William Blair has advised a portion of the fund since 2004.

The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangements.

Investment performance

The board considered the short- and long-term performance of the fund and each advisor, including any periods of outperformance or underperformance compared with a relevant benchmark and peer group. The board concluded that the performance was such that each advisory arrangement should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

The board concluded that the fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the fund’s advisory fee rate.

The board did not consider the profitability of the fund’s advisors in determining whether to approve the advisory fees because the advisors are independent of Vanguard, and the advisory fees are the result of arm’s-length negotiations.

The benefit of economies of scale

The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedules. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.

The board will consider whether to renew the advisory arrangements again after a one-year period.

31

 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

32

 

Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 195 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

InterestedTrustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

IndependentTrustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina

 

Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors); Member of the Board of Superintendence of the Institute for the Works of Religion.

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017), Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Michael Rollings

Born 1963. Treasurer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Executive Vice President and Chief Financial Officer of MassMutual Financial Group (2006–2016).

Vanguard Senior Management Team
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  
 
Chairman Emeritus and Senior Advisor
John J. Brennan  
Chairman, 1996–2009  
Chief Executive Officer and President, 1996–2008
 
Founder  
John C. Bogle  
Chairman and Chief Executive Officer, 1974–1996

 

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

    P.O. Box 2600
    Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® > vanguard.com
 
 
 
Fund Information > 800-662-7447   CFA® is a registered trademark owned by CFA Institute.
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People    
Who Are Deaf or Hard of Hearing > 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.    
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
    © 2017 The Vanguard Group, Inc.
    All rights reserved.
    Vanguard Marketing Corporation, Distributor.
 
    Q232 042017

 



Semiannual Report | February 28, 2017

Vanguard International Growth Fund

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisors’ Report. 5
Fund Profile. 9
Performance Summary. 11
Financial Statements. 12
About Your Fund’s Expenses. 30
Trustees Approve Advisory Arrangements. 32
Glossary. 34

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard International Growth Fund returned almost 4% for the six months ended February 28, 2017, behind its benchmark but ahead of the average return for its peers.

• The fund’s advisors added value in Europe, notably among Italian, Dutch, Swedish, and Danish stocks.

• Results for the fund from Pacific region countries were negative or more or less flat.

Japanese health care stocks and an underweighting of Australian financial institutions were among the biggest detractors.

• Overall returns from emerging markets were slightly negative. The fund’s lack or near-lack of exposure to poorly performing countries like Malaysia, the Philippines, and Mexico was more than offset by disappointing selection in Brazil and South Korea.

• In terms of sectors, the fund’s performance relative to its benchmark was mixed.

The advisors added value in consumer discretionary and telecommunication services, but their selections proved subpar in financials, industrials, information technology, and materials.

Total Returns: Six Months Ended February 28, 2017  
  Total
  Returns
Vanguard International Growth Fund  
Investor Shares 3.85%
Admiral™ Shares 3.91
MSCI All Country World Index ex USA 5.15
International Funds Average 3.44
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.

 

Expense Ratios      
Your Fund Compared With Its Peer Group      
  Investor Admiral Peer Group
  Shares Shares Average
International Growth Fund 0.46% 0.33% 1.34%

 

The fund expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year.
For the six months ended February 28, 2017, the fund’s annualized expense ratios were 0.45% for Investor Shares and 0.32% for Admiral
Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through
year-end 2016.

Peer group: International Funds.

1

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

More than a decade ago, a Vanguard client asked us to help improve its defined contribution retirement plan. New hires were participating in the plan at lower rates than in previous years, and the client wanted to reverse this trend. Another priority was to help more participants invest their retirement savings in balanced portfolios.

The overall goal of this longtime client: Give employees a better chance to achieve financial security in retirement.

Today, that plan automatically enrolls employees at a 5% contribution rate, puts them in a low-cost target-date fund that takes on less risk as they near retirement, and offers a comprehensive suite of advice services. On top of that, employees get an employer contribution of 5% and are eligible for a company match.

Because of this combination of attractive features and generous employer contributions, nearly all new hires now participate in the plan, 81% of plan participants invest their retirement savings in balanced portfolios, and 87% of participants meet or exceed Vanguard’s recommended total retirement savings target. (Vanguard generally recommends that retirement investors save 12%–15% of pay, including company matches.)

2

 

Changing the retirement landscape

Am I singling out an isolated Vanguard success story? Absolutely not.

Stories like these are becoming increasingly common with employer-based retirement plans, particularly among large and midsize companies. Solutions such as automatic enrollment, automatic contribution increases, and default investment in target-date funds are having a positive effect.

Insights from the relatively new discipline of behavioral finance have contributed to the advances. Simply put, retirement plans are making natural human inertia work for future retirees, rather than against them, by putting savings on autopilot as much as possible.

More than 60% of Vanguard participants are in plans with automatic enrollment, which has led to a big jump in participation. Today, more than four-fifths of eligible employees are saving for retirement, compared with only two-thirds ten years ago.

In addition, many plans have adopted automatic-escalation features, which increase plan contributions at regular intervals until a maximum level is reached or an employee opts out. Automatic increases are a crucial tool for boosting retirement savings rates.

The growing use of target-date funds is another enormous benefit. More than 70% of all participants in Vanguard plans invest at least part of their retirement savings in

Market Barometer      
  Total Returns
  Periods Ended February 28, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.10% 25.53% 13.94%
Russell 2000 Index (Small-caps) 12.61 36.11 12.89
Russell 3000 Index (Broad U.S. market) 10.29 26.29 13.85
FTSE All-World ex US Index (International) 5.40 19.87 4.00
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.19% 1.42% 2.24%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.80 0.25 3.07
Citigroup Three-Month U.S. Treasury Bill Index 0.19 0.32 0.10
 
CPI      
Consumer Price Index 1.14% 2.74% 1.36%

 

3

 

these age-appropriate, diversified strategies. And nearly 50% of Vanguard participants are invested solely in a single target-date fund.

Consider a do-it-yourself autopilot

But what if you don’t have access to a world-class, employer-based retirement plan? Unfortunately, not everyone does, which is an important policy issue.

However, you can still put the features of these plans to work. For example, you can set up automatic contributions from your paycheck to an IRA. And you can adopt your own automatic escalation by investing any pay raises.

You can also take a page from top-quality retirement plans by considering a low-cost, globally diversified target-date fund. The beauty of this approach is that you don’t need to remember to rebalance your portfolio—the fund does it for you.

Of course, you can take a more active role in picking your own investments, and this can be a good choice for some. But keep in mind the lessons from successful employer-based plans: Busy workers, faced with a lot of competing priorities, are often best served by putting their retirement savings on autopilot.

Winning by default

In highlighting some recent successes in retirement savings, I don’t want to minimize the challenges we still face. We’re living in a slow-growth, uncertain world, and investment returns for both stocks and bonds could well be modest in the coming decade.

But I believe the innovations we’ve seen in the last ten years in many retirement plans—you might call it the “default revolution”—point the way toward a solution. And that even goes for people whose employers don’t have a world-class retirement plan.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
March 14, 2017

4

 

Advisors’ Report

For the six months ended February 28, 2017, Vanguard International Growth Fund returned 3.85% for Investor Shares (3.91% for Admiral Shares), behind its benchmark index but ahead of the average return of peer funds. Your fund is managed by two independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for advisors to have different views about individual securities or the broader investment environment.

The advisors, the amount and percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed

during the fiscal half year and of how the portfolio’s positioning reflects this assessment. These comments were prepared on March 16, 2017.

Baillie Gifford Overseas Ltd.

Portfolio Managers:

James K. Anderson,
Head of Global Equities

Thomas Coutts,
Head of European Equities

We seek to invest in a relatively small number of exceptional growth companies; often, these companies are creating or capitalizing on the remarkable technological changes that are sweeping the world. While there have been some seismic

Vanguard International Growth Fund Investment Advisors
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Baillie Gifford Overseas Ltd. 60 14,130 The advisor seeks stocks that can generate
      above-average growth in earnings and cash flow,
      producing a bottom-up, stock-driven approach to
      country and asset allocation. An in-depth view on each
      company is measured against the consensus view,
      leading to discrepancies and potential opportunities to
      add value.
Schroder Investment 38 8,982 Equity analysts located around the world and an
Management North America Inc.     international team of global sector specialists help to
      identify reasonably priced companies with strong
      growth prospects and a sustainable competitive
      advantage.
Cash Investments 2 321 These short-term reserves are invested by Vanguard in
      equity index products to simulate investment in stocks.
      Each advisor may also maintain a modest cash
      position.

 

5

 

political events in the last six months, and more are surely on the horizon, we think that the deeper trends are more important. Accordingly, we have not changed our portfolio, or our approach, in response to recent events.

Politics matters, of course. But over the long term, a company’s success or failure is far more likely to be driven by management strategy and execution than by any other factor. Our job as investors is to cut through the short-term noise and focus on identifying long-term trends and tomorrow’s winning companies.

Long-term trends can only be exploited by leaders who run their businesses with long-term time horizons. Therefore, we seek companies with outstanding management teams and strong, deeply entrenched cultures. At a time of chronic underinvestment, we admire companies that are prepared to be bold, because we know that really important breakthroughs are hard to achieve. They require heavy investment, risk-taking, and an atmosphere in which creativity is allowed to flourish.

Founder-led or family-owned companies remain a fertile hunting ground for these rare corporate traits, and many of our holdings exhibiting them did well. Amazon, SoftBank, and Tesla are all led by founders who have visions for their businesses that extend decades into the future. These companies also share a commitment to investing the resources to realize those visions. In Europe, there may be fewer iconic entrepreneurs, but the supportive influence of significant shareholders with investment horizons stretching across generations can be incredibly important. Family control at luxury goods companies Kering and Richemont has helped build and protect valuable brands, while the Agnelli family’s stake in Fiat and Ferrari has been vital in supporting CEO Sergio Marchionne’s ambitious plans for growth.

Some companies decide to take a different path. During the half year, several holdings in our portfolio agreed to be acquired (in two cases, by other portfolio holdings). Swiss agribusiness Syngenta was bought by ChemChina; U.K. chip designer ARM was taken over by Japanese telecommunications and internet giant SoftBank; and U.K. travel website Skyscanner was purchased by Ctrip, China’s largest travel company.

While all deals were at a premium and we are pleased to retain indirect exposure to ARM and Skyscanner through their new owners, there is a sense of disappointment that these exciting businesses could not remain independent. Nervousness about both the scale of future investment and the patience of markets was a common feature in these deals—a detail that reminds us of how important it is to support great companies.

There were no particular themes among the weaker performers. Spain’s Banco Popular has continued to struggle following its rights issue last year, while ANI Technologies, the Indian online taxi-hailing business known as Ola Cabs, fell

6

 

in value after raising additional capital from SoftBank. While Ola has a market-leading position in India, it faces competition from Uber; for long-term growth, the company needs the resources of an investor like SoftBank.

We have not made any new purchases, preferring to add to existing holdings such as Dutch semiconductor manufacturer ASML and Danish biotechnology company Genmab. In both cases, this addition reflects our increasing confidence in the opportunity available to these businesses. We have also added to AIA, the Asian life insurance company, using funds from our sale of Prudential.

Schroder Investment Management
North America Inc.

Portfolio Manager:

Simon Webber, CFA

International equities made modest progress over the half year, navigating a changing macroeconomic and political framework. After the U.S. presidential election, market focus was firmly on the question of whether Donald Trump would follow through on his promised tax cuts and trade-policy reforms. Earlier, a period of rising global growth expectations began over the summer, supported by rising commodity prices and an inventory-stocking cycle that gave a boost to cyclical stocks. A fourth-quarter tilt toward value stocks was the most pronounced shift in style over a single quarter in more than a decade. With global yields expected to rise, and the operating environment for banks expected to improve, the financial sector was particularly strong. Conversely, quality growth stocks and defensive sectors were among the market’s weaker performers.

Against a backdrop of aggressive rotation into cyclical stocks and lower quality leverage, the portfolio underperformed the index, largely because of style factors. However, performance was also adversely affected by concerns regarding two stocks, Capita and GEA Group. In the case of business process outsourcing company Capita, the firm disclosed a number of charges for underperforming contracts, blemishing a historically exemplary record of delivering good service levels and savings for clients. This has raised execution concerns under current management. We sold our position given the deteriorating outlook and higher risk profile.

GEA, which supplies manufacturing equipment to the food and dairy industries, also fell following warnings of a weaker outlook. Its announcement was even more of a surprise than Capita’s was, as it came just two weeks after a capital markets day at which the company had outlined plans for significant cost reductions and efficiency improvements. While management credibility has clearly been damaged, we believe much of the shortfall is caused by cyclical issues, and we still see attractive long-term growth drivers and plenty of scope for management to improve execution. We continue to monitor the position and its alignment with our investment thesis.

7

 

One of the strongest holdings was diversified miner BHP Billiton, which benefited from an ongoing rally in the price of its key commodities—iron ore, copper, and coking coal. Because BHP’s key assets are among the lowest cost in their respective markets, the company has weathered the recent downturn better than most of its competitors.

An enduring theme in the portfolio is the excellent structural growth prospects for technology companies, from software enablers like SAP to internet platforms such as Tencent and Alibaba. We opened a position in Recruit, which owns Indeed—the world’s biggest and most successful online job-finding site. We believe the market underappreciates this asset, and we expect Recruit’s domestic Japanese business to benefit from a shrinking labor force. We also purchased Deutsche Telekom, as the outlook for its domestic market looks more promising in light of recent announcements that competitors were cutting back promotions. The company is still gaining market share in the United States via its strategic majority stake in T-Mobile US, which continues to grow through its disruptive strategy and remains a takeover target.

Going forward, we believe that plenty of opportunity remains in international equity markets. Continental European economies are in the midst of their most robust and sustainable economic growth since before the global financial crisis, yet the market focus remains on political risks. This sets up the potential of a strong equity market if those risks fail to manifest. An upturn in global trade is also set to help many Asian businesses in 2017. We look ahead with confidence and believe that a disciplined strategy of identifying companies that have strong competitive advantages—and sustainably manage their business for the long term—will continue to pay off.

8

 

International Growth Fund

Fund Profile
As of February 28, 2017

Share-Class Characteristics  
  Investor Admiral
  Shares Shares
Ticker Symbol VWIGX VWILX
Expense Ratio1 0.46% 0.33%

 

Portfolio Characteristics    
    MSCI AC
    World Index
  Fund ex USA
Number of Stocks 124 1,845
Median Market Cap $39.9B $30.8B
Price/Earnings Ratio 32.0x 20.2x
Price/Book Ratio 2.9x 1.7x
Return on Equity 16.8% 14.4%
Earnings Growth    
Rate 11.4% 6.7%
Dividend Yield 1.5% 2.9%
Turnover Rate    
(Annualized) 19%
Short-Term Reserves 0.3%

 

Sector Diversification (% of equity exposure)
    MSCI AC
    World Index
  Fund ex USA
Consumer Discretionary 22.6% 11.3%
Consumer Staples 6.3 9.8
Energy 1.4 6.7
Financials 17.4 23.4
Health Care 9.5 8.2
Industrials 10.3 11.8
Information Technology 22.8 9.6
Materials 4.4 8.2
Other 1.3 0.0
Real Estate 0.0 3.3
Telecommunication Services 4.0 4.6
Utilities 0.0 3.1

 

Volatility Measures  
  MSCI AC
  World
  Index
  ex USA
R-Squared 0.90
Beta 1.06
These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.

 

Ten Largest Holdings (% of total net assets)
Tencent Holdings Ltd. Internet Software &  
  Services 4.8%
Alibaba Group Holding Internet Software &  
Ltd. Services 4.2
AIA Group Ltd. Life & Health  
  Insurance 3.5
ASML Holding NV Semiconductor  
  Equipment 3.1
Baidu Inc. Internet Software &  
  Services 3.1
Amazon.com Inc. Internet & Direct  
  Marketing Retail 3.0
Industria de Diseno    
Textil SA Apparel Retail 2.8
SoftBank Group Corp. Wireless  
  Telecommunication  
  Services 2.0
Zalando SE Internet & Direct  
  Marketing Retail 1.8
Atlas Copco AB Industrial Machinery 1.8
Top Ten   30.1%
The holdings listed exclude any temporary cash investments and
equity index products.

 

Allocation by Region (% of equity exposure)

 

1 The expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year. For the six
months ended February 28, 2017, the annualized expense ratios were 0.45% for Investor Shares and 0.32% for Admiral Shares.

9

 

International Growth Fund

Market Diversification (% of equity exposure)
    MSCI AC
    World
    Index
  Fund ex USA
Europe    
Germany 9.7% 6.4%
United Kingdom 7.6 12.6
Sweden 5.4 2.0
France 4.7 6.8
Spain 4.5 2.2
Italy 3.3 1.4
Denmark 3.3 1.2
Netherlands 3.2 2.3
Switzerland 2.9 6.1
Norway 1.4 0.5
Other 1.2 2.1
Subtotal 47.2% 43.6%
Pacific    
Japan 12.5% 16.9%
Hong Kong 4.9 2.4
South Korea 2.1 3.5
Other 0.7 6.3
Subtotal 20.2% 29.1%
Emerging Markets    
China 15.3% 6.3%
India 2.4 2.0
Taiwan 1.2 2.9
Brazil 1.0 1.9
Other 1.3 6.7
Subtotal 21.2% 19.8%
North America    
United States 7.6% 0.0%
Canada 2.0 6.8
Subtotal 9.6% 6.8%
Middle East    
Israel 1.8% 0.7%

 

10

 

International Growth Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Fiscal-Year Total Returns (%): August 31, 2006, Through February 28, 2017

For a benchmark description, see the Glossary.
Note: For 2017, performance data reflect the six months ended February 28, 2017.

Average Annual Total Returns: Periods Ended December 31, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
Investor Shares 9/30/1981 1.71% 7.06% 2.42%
Admiral Shares 8/13/2001 1.84 7.21 2.58

 

See Financial Highlights for dividend and capital gains information.

11

 

International Growth Fund

Financial Statements (unaudited)

Statement of Net Assets
As of February 28, 2017

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value
    Shares ($000)
Common Stocks (98.0%)1    
Australia (0.4%)    
  Brambles Ltd. 12,205,050 87,114
 
Belgium (0.2%)    
  Umicore SA 941,373 49,557
 
Brazil (1.0%)    
  BM&FBovespa SA -    
  Bolsa de Valores    
  Mercadorias e Futuros 14,186,100 86,427
  Raia Drogasil SA 4,201,749 80,103
  Telefonica Brasil SA    
  Preference Shares 4,806,200 70,666
      237,196
Canada (2.0%)    
  Toronto-Dominion Bank 5,579,439 287,583
  Canadian Pacific    
  Railway Ltd. 701,426 103,207
  Goldcorp Inc. 4,495,116 71,241
      462,031
China (15.2%)    
  Tencent Holdings Ltd. 42,018,500 1,115,044
* Alibaba Group    
  Holding Ltd. ADR 9,619,022 989,797
* Baidu Inc. ADR 4,162,238 724,771
* Ctrip.com International    
  Ltd. ADR 7,161,724 339,752
* New Oriental Education    
  & Technology Group    
  Inc. ADR 3,301,491 159,825
* TAL Education Group    
  ADR 1,553,687 134,347
  China Pacific Insurance    
  Group Co. Ltd. 24,886,600 91,111
      3,554,647
Denmark (3.2%)    
* Genmab A/S 2,065,568 408,496
* Novozymes A/S 3,575,387 137,460
  Chr Hansen Holding A/S 1,658,818 98,908
  Novo Nordisk A/S Class B 1,871,763 66,274
  Vestas Wind Systems A/S 669,036 49,542
        760,680
France (4.4%)      
  L’Oreal SA   1,421,187 264,588
  Kering   983,955 239,415
  Essilor International SA 1,561,734 179,282
  Schneider Electric SE 2,507,791 169,917
  Danone SA   1,398,013 92,490
  LVMH Moet Hennessy    
  Louis Vuitton SE   456,402 91,682
        1,037,374
Germany (9.4%)      
*,2 Zalando SE   10,683,180 426,422
  BASF SE   3,327,614 309,581
  SAP SE   2,354,582 219,335
  Bayerische Motoren    
  Werke AG   2,304,553 205,788
  Bayer AG   1,782,681 196,216
  Deutsche Telekom AG 8,949,706 154,538
  Continental AG   743,693 150,734
  HeidelbergCement AG 1,257,100 117,367
  GEA Group AG   2,289,862 89,001
  adidas AG   396,458 66,508
  Fresenius Medical      
  Care AG & Co. KGaA 655,445 54,533
*,^,2 Rocket Internet SE   2,762,933 52,087
*,3,4 HOME 24AG   23,630 44,854
*,3 HELLOFRESH   2,476,051 42,285
* MorphoSys AG   664,989 37,823
*,3 CureVac GmbH   12,600 28,497
* AIXTRON SE   3,130,112 10,708
        2,206,277
Hong Kong (4.8%)      
  AIA Group Ltd. 131,225,800 828,290
  Jardine Matheson      
  Holdings Ltd.   3,023,525 187,622
  Hong Kong Exchanges    
  & Clearing Ltd.   4,767,930 118,357
        1,134,269

 

12

 

International Growth Fund

      Market
      Value
    Shares ($000)
India (2.4%)    
  Housing Development    
  Finance Corp. Ltd. 7,874,012 161,450
  HDFC Bank Ltd. 7,477,936 155,694
  Zee Entertainment    
  Enterprises Ltd. 13,318,141 101,568
  Idea Cellular Ltd. 43,222,638 74,965
*,3 ANI Technologies 166,185 31,155
*,2,3 Flipkart G Series 338,176 23,243
*,2,3 Flipkart H Series 135,569 10,536
      558,611
Indonesia (0.3%)    
  Bank Mandiri Persero    
  Tbk PT 90,616,100 76,490
 
Ireland (0.4%)    
  Kerry Group plc Class A 1,064,490 81,732
 
Israel (1.8%)    
* Check Point Software    
  Technologies Ltd. 2,921,261 288,942
* Mobileye NV 2,829,083 128,780
      417,722
Italy (3.3%)    
  Ferrari NV 4,824,304 314,665
*,^ Fiat Chrysler    
  Automobiles NV 16,407,504 179,431
* EXOR NV 3,262,980 154,536
  Intesa Sanpaolo SPA    
  (Registered) 51,279,371 119,398
      768,030
Japan (12.1%)    
  SoftBank Group Corp. 6,366,800 474,995
  SMC Corp. 1,446,100 409,274
  M3 Inc. 12,243,600 310,860
  Bridgestone Corp. 4,628,300 184,694
  Rakuten Inc. 17,699,000 175,510
  Sekisui Chemical Co. Ltd. 8,991,100 148,520
  KDDI Corp. 5,667,900 148,116
  Kubota Corp. 8,718,700 138,736
  Sumitomo Mitsui    
  Financial Group Inc. 3,433,500 133,760
  ORIX Corp. 8,567,100 133,305
  Recruit Holdings Co. Ltd. 2,409,400 118,249
  Pigeon Corp. 3,300,800 97,264
  Keyence Corp. 244,800 94,660
  Suntory Beverage    
  & Food Ltd. 1,997,300 83,815
  Suzuki Motor Corp. 2,105,400 82,289
  SBI Holdings Inc. 4,470,400 62,544
  Fuji Heavy Industries Ltd. 1,280,900 47,928
      2,844,519
Luxembourg (0.3%)    
*,3 Spotify Technology SA 26,474 59,000
Mexico (0.3%)    
  Grupo Financiero Banorte    
  SAB de CV 13,899,786 69,079
 
Netherlands (3.1%)    
  ASML Holding NV 5,983,482 727,356
 
Norway (1.4%)    
^ Statoil ASA 5,080,268 89,571
  DNB ASA 4,683,937 76,796
  Schibsted ASA Class A 2,449,459 64,598
  Norsk Hydro ASA 7,847,761 44,431
  Schibsted ASA Class B 1,760,994 42,727
      318,123
Other (0.2%)    
5 Vanguard FTSE All-World    
  ex-US ETF 1,128,434 52,574
 
Peru (0.1%)    
  Credicorp Ltd. 153,844 25,326
 
Portugal (0.3%)    
  Jeronimo Martins    
  SGPS SA 3,627,182 58,360
 
South Korea (2.1%)    
  NAVER Corp. 444,611 304,828
*,^ Celltrion Inc. 2,049,104 183,855
      488,683
Spain (4.4%)    
  Industria de Diseno    
  Textil SA 20,350,848 652,161
  Banco Bilbao Vizcaya    
  Argentaria SA 38,199,155 248,867
  Distribuidora    
  Internacional de    
  Alimentacion SA 12,745,795 70,646
*,^ Banco Popular    
  Espanol SA 76,855,408 67,926
      1,039,600
Sweden (5.3%)    
  Atlas Copco AB Class A 12,605,874 411,789
  Svenska Handelsbanken    
  AB Class A 29,471,523 409,202
* Kinnevik AB 8,819,732 238,088
  Assa Abloy AB Class B 6,766,973 131,312
^ Elekta AB Class B 6,427,670 60,976
      1,251,367
Switzerland (2.9%)    
  Nestle SA 3,069,062 226,491
  Roche Holding AG 759,168 184,785
  Cie Financiere    
  Richemont SA 2,061,828 151,873
  Lonza Group AG 587,904 108,268
      671,417

 

13

 

International Growth Fund

      Market
      Value
    Shares ($000)
Taiwan (1.2%)    
  Taiwan Semiconductor    
  Manufacturing Co. Ltd. 46,450,000 284,578
 
Thailand (0.5%)    
  Kasikornbank PCL    
  (Foreign) 23,270,756 127,346
 
United Kingdom (7.4%)    
  Rolls-Royce Holdings plc 36,783,215 359,254
  Diageo plc 8,294,103 233,854
  Royal Dutch Shell plc    
  Class A 8,028,303 208,014
  Burberry Group plc 9,067,261 194,149
  BHP Billiton plc 9,683,484 156,079
  Reckitt Benckiser    
  Group plc 1,513,380 137,416
  Aviva plc 17,140,879 105,810
  Aggreko plc 7,374,149 96,465
  Barclays plc 30,488,931 85,696
  Lloyds Banking    
  Group plc 86,599,736 73,828
* Standard Chartered plc 5,325,132 47,733
*,^ Ocado Group plc 12,833,540 39,632
      1,737,930
United States (7.6%)    
* Amazon.com Inc. 823,751 696,103
* Illumina Inc. 2,408,021 403,103
  MercadoLibre Inc. 1,574,407 331,995
*,^ Tesla Inc. 1,356,844 339,197
      1,770,398
Total Common Stocks    
(Cost $18,333,435)   22,957,386
Preferred Stocks (0.5%)    
*,3 Internet Plus    
  Holdings Ltd. 18,638,108 71,956
*,3,4 You & Mr. Jones 44,800,000 51,431
Total Preferred Stocks    
(Cost $116,756)   123,387
Temporary Cash Investments (3.1%)1  
Money Market Fund (3.0%)    
6,7 Vanguard Market    
  Liquidity Fund, 0.864% 7,005,059 700,576
    Face Market
    Amount Value
    ($000) ($000)
U.S. Government and Agency Obligations (0.1%)
8 United States Treasury Bill,    
  0.454%, 4/20/17 4,700 4,697
8 United States Treasury Bill,    
  0.557%–0.566%, 4/27/17 1,600 1,599
8,9 United States Treasury Bill,    
  0.566%–0.597%, 5/4/17 6,200 6,194
9 United States Treasury Bill,    
  0.516%–0.521%, 6/1/17 3,500 3,495
8,9 United States Treasury Bill,    
  0.647%, 8/10/17 400 399
  United States Treasury Bill,    
  0.638%, 8/24/17 2,500 2,491
      18,875
Total Temporary Cash Investments  
(Cost $719,428)   719,451
Total Investments (101.6%)    
(Cost $19,169,619)   23,800,224

 

  Amount
  ($000)
Other Assets and Liabilities (-1.6%)  
Other Assets  
Investment in Vanguard 1,657
Receivables for Investment Securities Sold 27,164
Receivables for Accrued Income 30,243
Receivables for Capital Shares Issued 13,127
Other Assets 8 4,966
Total Other Assets 77,157
Liabilities  
Payables for Investment  
Securities Purchased (7,784)
Collateral for Securities on Loan (368,866)
Payables for Capital Shares Redeemed (12,956)
Payables to Investment Advisor (9,396)
Payables to Vanguard (42,755)
Other Liabilities (2,883)
Total Liabilities (444,640)
Net Assets (100%) 23,432,741

 

14

 

International Growth Fund

At February 28, 2017, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 19,128,183
Overdistributed Net Investment Income (45,230)
Accumulated Net Realized Losses (283,578)
Unrealized Appreciation (Depreciation)  
Investment Securities 4,630,605
Futures Contracts 4,792
Forward Currency Contracts (202)
Foreign Currencies (1,829)
Net Assets 23,432,741
 
 
Investor Shares—Net Assets  
Applicable to 285,671,287 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 6,555,293
Net Asset Value Per Share—  
Investor Shares $22.95
 
 
Admiral Shares—Net Assets  
Applicable to 231,426,455 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 16,877,448
Net Asset Value Per Share—  
Admiral Shares $72.93

 

See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $356,079,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 99.2% and 1.9%, respectively,
of net assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At February 28, 2017, the aggregate value of these securities was $512,288,000,
representing 2.2% of net assets.
3 Restricted securities totaling $362,957,000, representing 1.5% of net assets.
4 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
5 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
6 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is
the 7-day yield.
7 Includes $368,866,000 of collateral received for securities on loan.
8 Securities with a value of $12,524,000 and cash of $2,370,000 have been segregated as initial margin for open futures contracts.
9 Securities with a value of $1,786,000 have been segregated as collateral for open forward currency contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

15

 

International Growth Fund

Statement of Operations

  Six Months Ended
  February 28, 2017
  ($000)
Investment Income  
Income  
Dividends1 70,288
Interest 962
Securities Lending—Net 11,228
Total Income 82,478
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 16,303
Performance Adjustment 2,394
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 7,980
Management and Administrative—Admiral Shares 10,236
Marketing and Distribution—Investor Shares 565
Marketing and Distribution—Admiral Shares 633
Custodian Fees 1,578
Shareholders’ Reports—Investor Shares 111
Shareholders’ Reports—Admiral Shares 46
Trustees’ Fees and Expenses 27
Total Expenses 39,873
Net Investment Income 42,605
Realized Net Gain (Loss)  
Investment Securities Sold 201,319
Futures Contracts 13,160
Foreign Currencies and Forward Currency Contracts (26,511)
Realized Net Gain (Loss) 187,968
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 639,508
Futures Contracts 3,626
Foreign Currencies and Forward Currency Contracts (264)
Change in Unrealized Appreciation (Depreciation) 642,870
Net Increase (Decrease) in Net Assets Resulting from Operations 873,443
1 Dividends are net of foreign withholding taxes of $8,033,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

16

 

International Growth Fund

Statement of Changes in Net Assets

  Six Months Ended Year Ended
  February 28, August 31,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 42,605 328,597
Realized Net Gain (Loss) 187,968 (250,024)
Change in Unrealized Appreciation (Depreciation) 642,870 1,785,241
Net Increase (Decrease) in Net Assets Resulting from Operations 873,443 1,863,814
Distributions    
Net Investment Income    
Investor Shares (77,644) (98,317)
Admiral Shares (214,864) (219,641)
Realized Capital Gain    
Investor Shares
Admiral Shares
Total Distributions (292,508) (317,958)
Capital Share Transactions    
Investor Shares (312,439) (951,188)
Admiral Shares 760,644 885,360
Net Increase (Decrease) from Capital Share Transactions 448,205 (65,828)
Total Increase (Decrease) 1,029,140 1,480,028
Net Assets    
Beginning of Period 22,403,601 20,923,573
End of Period1 23,432,741 22,403,601
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($45,230,000) and $225,153,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

17

 

International Growth Fund

Financial Highlights

 

Investor Shares              
  Six Months          
    Ended          
For a Share Outstanding February 28, Year Ended August 31,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $22.38 $20.83 $23.79 $20.42 $17.69 $18.27
Investment Operations              
Net Investment Income   . 030 . 304 . 308 . 4711 .336 .361
Net Realized and Unrealized Gain (Loss)            
on Investments   .808 1.539 (2.774) 3.235 2.741 (.607)
Total from Investment Operations .838 1.843 (2.466) 3.706 3.077 (.246)
Distributions              
Dividends from Net Investment Income (. 268) (. 293) (. 494) (. 336) (. 347) (. 334)
Distributions from Realized Capital Gains
Total Distributions   (. 268) (. 293) (. 494) (. 336) (. 347) (. 334)
Net Asset Value, End of Period $22.95 $22.38 $20.83 $23.79 $20.42 $17.69
 
Total Return2   3.85% 8.95% -10.46% 18.26% 17.54% -1.14%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $6,555 $6,700 $7,172 $8,976 $9,056 $9,115
Ratio of Total Expenses to              
Average Net Assets3   0.45% 0.46% 0.47% 0.47% 0.48% 0.49%
Ratio of Net Investment Income to            
Average Net Assets   0.28% 1.47% 1.34% 2.08%1 1.71% 2.04%
Portfolio Turnover Rate   19% 29% 29% 21% 31% 30%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Net investment income per share and the ratio of net investment income to average net assets include $.080 and 0.35%, respectively,
resulting from income received from Vodafone Group plc in the form of cash and shares in Verizon Communications Inc. in February 2014.
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.04%, 0.03%, 0.03%, 0.03%, and 0.04%.

See accompanying Notes, which are an integral part of the Financial Statements.

18

 

International Growth Fund

Financial Highlights

Admiral Shares              
  Six Months          
    Ended          
For a Share Outstanding February 28, Year Ended August 31,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $71.19 $66.28 $75.70 $64.98 $56.31 $58.17
Investment Operations              
Net Investment Income   .147 1.062 1.088 1.6131 1.157 1.229
Net Realized and Unrealized Gain (Loss)            
on Investments   2.549 4.877 (8.821) 10.277 8.697 (1.945)
Total from Investment Operations 2.696 5.939 (7.733) 11.890 9.854 (.716)
Distributions              
Dividends from Net Investment Income (.956) (1.029) (1.687) (1.170) (1.184) (1.144)
Distributions from Realized Capital Gains
Total Distributions   (.956) (1.029) (1.687) (1.170) (1.184) (1.144)
Net Asset Value, End of Period $72.93 $71.19 $66.28 $75.70 $64.98 $56.31
 
Total Return2   3.91% 9.07% -10.32% 18.42% 17.66% -1.01%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $16,877 $15,704 $13,752 $14,415 $10,556 $7,523
Ratio of Total Expenses to              
Average Net Assets3   0.32% 0.33% 0.34% 0.34% 0.35% 0.36%
Ratio of Net Investment Income to            
Average Net Assets   0.41% 1.60% 1.47% 2.21%1 1.84% 2.17%
Portfolio Turnover Rate   19% 29% 29% 21% 31% 30%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Net investment income per share and the ratio of net investment income to average net assets include $.255 and 0.35%, respectively,
resulting from income received from Vodafone Group plc in the form of cash and shares in Verizon Communications Inc. in February 2014.
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.04%, 0.03%, 0.03%, 0.03%, and 0.04%.

See accompanying Notes, which are an integral part of the Financial Statements.

19

 

International Growth Fund

Notes to Financial Statements

Vanguard International Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearing-

20

 

International Growth Fund

house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

The fund enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts or to protect the value of securities and related receivables and payables against changes in foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counter-parties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.

During the six months ended February 28, 2017, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund’s average investment in forward currency contracts represented 2% of net assets, based on the average of notional amounts at each quarter-end during the period.

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (August 31, 2013–2016), and for the period ended February 28, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

21

 

International Growth Fund

5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at February 28, 2017, or at any time during the period then ended.

8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the fund’s understanding of the applicable countries’ tax rules and rates. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries.

22

 

International Growth Fund

Such tax reclaims received during the year, if any, are included in dividend income. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. The investment advisory firms Baillie Gifford Overseas Ltd. and Schroder Investment Management North America Inc. each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fees of Baillie Gifford Overseas Ltd. and Schroder Investment Management North America Inc. are subject to quarterly adjustments based on performance relative to the MSCI All Country World Index ex USA for the preceding three years.

Vanguard manages the cash reserves of the fund as described below.

For the six months ended February 28, 2017, the aggregate investment advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before an increase of $2,394,000 (0.02%) based on performance.

C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, distribution, and cash management services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At February 28, 2017, the fund had contributed to Vanguard capital in the amount of $1,657,000, representing 0.01% of the fund’s net assets and 0.66% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

23

 

International Growth Fund

The following table summarizes the market value of the fund’s investments as of February 28, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks—North and South America 2,564,030
Common Stocks—Other 2,818,788 17,334,998 239,570
Preferred Stocks 123,387
Temporary Cash Investments 700,576 18,875
Futures Contracts—Assets1 532
Futures Contracts—Liabilities1 (219)
Forward Currency Contracts—Assets 2,064
Forward Currency Contracts—Liabilities (2,266)
Total 6,083,707 17,353,671 362,957
1 Represents variation margin on the last day of the reporting period.

 

The determination of Level 3 fair value measurements is governed by documented policies and procedures adopted by the board of trustees. The board has designated a pricing review committee, as an agent of the board, to ensure the timely analysis and valuation of Level 3 securities held by the fund in accordance with established policies and procedures. The pricing review committee employs various methods for calibrating valuation approaches, including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity. All valuation decisions made by the pricing review committee are reported to the board on a quarterly basis for review and ratification. The board reviews the adequacy of the fair value measurement policies and procedures in place on an annual basis.

The following table summarizes changes in investments valued based on Level 3 inputs during the six months ended February 28, 2017. Transfers into or out of Level 3 are recognized based on values as of the date of transfer.

  Investments in Investments in
  Common Stocks Preferred Stocks
Amount Valued Based on Level 3 Inputs ($000) ($000)
Balance as of August 31, 2016 327,541 116,756
Purchases 339
Sales (67,484)
Net Realized Gain (Loss) 11,589
Change in Unrealized Appreciation (Depreciation) (32,415) 6,631
Balance as of February 28, 2017 239,570 123,387
Net change in unrealized appreciation (depreciation) from investments still held as of February 28, 2017, was ($32,567,000).

 

24

 

International Growth Fund

The following table provides quantitative information about the significant unobservable inputs used in fair value measurement as of February 28, 2017:

  Fair Value      
Security Type ($000) Valuation Technique Unobservable Input Amount
Common Stocks 239,570 Market Approach Purchase Price $2,261.672
      Purchase Price 2,228.610
      Recent Market Transaction 1,898.202
      Recent Market Transaction 187.474
      Discounted Purchase Price 77.720
      Discounted Recent Market 68.730
      Transaction  
      Recent Market Transaction 17.078
Preferred Stocks 123,387 Market Approach Recent Market Transaction 3.861
      Valuation of Underlying Holdings 1.148

 

Significant increases or decreases in the significant unobservable inputs used in the fair value measurement of the portfolio’s Level 3 securities, in isolation, could result in a significantly higher or lower fair value measurement.

E. At February 28, 2017, the fair values of derivatives were reflected in the Statement of Net Assets as follows:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Statement of Net Assets Caption ($000) ($000) ($000)
Other Assets 532 2,064 2,596
Other Liabilities (219) (2,266) (2,485)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended February 28, 2017, were:

 

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts 13,160 13,160
Forward Currency Contracts (6,031) (6,031)
Realized Net Gain (Loss) on Derivatives 13,160 (6,031) 7,129
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts 3,626 3,626
Forward Currency Contracts (960) (960)
Change in Unrealized Appreciation (Depreciation) on Derivatives 3,626 (960) 2,666

 

25

 

International Growth Fund

At February 28, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

      ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
Dow Jones EURO STOXX 50 Index March 2017 3,616 127,721 2,441
Topix Index March 2017 463 63,480 1,075
S&P ASX 200 Index March 2017 568 62,056 922
FTSE 100 Index March 2017 179 16,184 354
        4,792

 

Unrealized appreciation (depreciation) on open Dow Jones EURO STOXX 50 Index and FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.

At February 28, 2017, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.

            Unrealized
  Contract         Appreciation
  Settlement Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Barclays Bank plc 3/22/17 EUR 72,677 USD 77,636 (557)
Toronto Dominion Securities 3/14/17 JPY 4,523,118 USD 39,895 393
Credit Suisse International 3/21/17 AUD 46,893 USD 35,182 754
Barclays Bank plc 3/14/17 JPY 2,923,445 USD 25,744 294
Goldman Sachs International 3/22/17 EUR 15,718 USD 16,861 (191)
JPMorgan Chase Bank N.A. 3/22/17 EUR 12,176 USD 13,013 (100)
Citibank, N.A. 3/22/17 EUR 11,374 USD 12,032 29
Deutsche Bank AG 3/22/17 EUR 10,678 USD 11,278 47
BNP Paribas 3/22/17 EUR 6,527 USD 6,992 (70)
Barclays Bank plc 3/22/17 EUR 6,283 USD 6,655 9
Citibank, N.A. 3/22/17 EUR 5,434 USD 5,869 (106)
Toronto Dominion Securities 3/22/17 GBP 4,242 USD 5,390 (123)
BNP Paribas 3/21/17 AUD 6,924 USD 5,326 (20)
Barclays Bank plc 3/21/17 AUD 6,354 USD 4,786 83
Barclays Bank plc 3/21/17 AUD 4,981 USD 3,820 (3)
Citibank, N.A. 3/21/17 AUD 4,755 USD 3,657 (13)
BNP Paribas 3/21/17 AUD 4,628 USD 3,527 20
Bank of America N.A. 3/14/17 JPY 394,513 USD 3,478 36

 

26

 

International Growth Fund

            Unrealized
  Contract         Appreciation
        Contract Amount (000)  
  Settlement         (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Goldman Sachs International 3/22/17 GBP 2,680 USD 3,296 32
Citibank, N.A. 3/14/17 JPY 304,500 USD 2,725 (13)
Goldman Sachs International 3/21/17 AUD 3,719 USD 2,710 140
JPMorgan Chase Bank N.A. 3/21/17 AUD 3,442 USD 2,558 80
JPMorgan Chase Bank N.A. 3/22/17 GBP 1,937 USD 2,433 (28)
Citibank, N.A. 3/22/17 GBP 1,922 USD 2,406 (19)
Goldman Sachs International 3/21/17 AUD 2,925 USD 2,243 (1)
BNP Paribas 3/14/17 JPY 198,055 USD 1,751 13
Goldman Sachs International 3/22/17 GBP 1,363 USD 1,700 (7)
Citibank, N.A. 3/21/17 AUD 1,971 USD 1,415 95
Bank of America N.A. 3/21/17 AUD 1,611 USD 1,205 29
Citibank, N.A. 3/22/17 GBP 712 USD 874 10
Barclays Bank plc 3/22/17 GBP 569 USD 715 (9)
Bank of America N.A. 3/22/17 GBP 431 USD 548 (13)
BNP Paribas 3/22/17 USD 12,754 EUR 12,049 (24)
JPMorgan Chase Bank N.A. 3/22/17 USD 12,567 EUR 12,000 (160)
Goldman Sachs International 3/14/17 USD 12,147 JPY 1,418,740 (489)
Citibank, N.A. 3/21/17 USD 6,723 AUD 9,146 (285)
Goldman Sachs International 3/22/17 USD 1,568 GBP 1,292 (35)
            (202)
AUD—Australian dollar.
EUR—Euro.
GBP—British pound.
JPY—Japanese yen.
USD—U.S. dollar.

 

At February 28, 2017, the counterparty had deposited in segregated accounts cash with a value of $710,000 in connection with open forward currency contracts.

F. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

27

 

International Growth Fund

During the six months ended February 28, 2017, the fund realized net foreign currency losses of $20,480,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to overdistributed net investment income.

The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at August 31, 2016, the fund had available capital losses totaling $491,209,000 to offset future net capital gains. Of this amount, $212,308,000 is subject to expiration on August 31, 2018. Capital losses of $278,901,000 realized beginning in fiscal 2012 may be carried forward indefinitely under the Regulated Investment Company Modernization Act of 2010, but must be used before any expiring loss carryforwards. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending August 31, 2017; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.

At February 28, 2017, the cost of investment securities for tax purposes was $19,175,100,000.

Net unrealized appreciation of investment securities for tax purposes was $4,625,124,000, consisting of unrealized gains of $5,931,547,000 on securities that had risen in value since their purchase and $1,306,423,000 in unrealized losses on securities that had fallen in value since their purchase.

G. During the six months ended February 28, 2017, the fund purchased $2,150,558,000 of investment securities and sold $2,112,567,000 of investment securities, other than temporary cash investments.

H. Capital share transactions for each class of shares were:

  Six Months Ended Year Ended
  February 28, 2017 August 31, 2016
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 358,676 16,192 586,228 28,784
Issued in Lieu of Cash Distributions 75,179 3,578 95,657 4,579
Redeemed (746,294) (33,462) (1,633,073) (78,218)
Net Increase (Decrease)—Investor Shares (312,439) (13,692) (951,188) (44,855)
Admiral Shares        
Issued 1,459,751 20,676 2,523,382 38,141
Issued in Lieu of Cash Distributions 197,994 2,966 202,133 3,045
Redeemed (897,101) (12,802) (1,840,155) (28,076)
Net Increase (Decrease)—Admiral Shares 760,644 10,840 885,360 13,110

 

28

 

International Growth Fund

I. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:

    Current Period Transactions  
  Aug. 31,   Proceeds     Feb. 28,
  2016   from   Capital Gain 2017
  Market Purchases Securities   Distributions Market
  Value at Cost Sold1 Income Received Value
  ($000) ($000) ($000) ($000) ($000) ($000)
Home 24AG 38,841 44,854
Vanguard FTSE All-World ex-US            
ETF 50,757 711 52,574
Vanguard Market Liquidity Fund 565,037 NA2 NA 2 924 700,576
You & Mr. Jones 44,800 51,431
Total 699,435     1,635 849,435
1 Includes net realized gain (loss) on affiliated investment securities sold of $17,000.
2 Not applicable—purchases and sales are for temporary cash investment purposes.

 

J. Management has determined that no material events or transactions occurred subsequent to February 28, 2017, that would require recognition or disclosure in these financial statements.

29

 

About Your Fund’s Expenses

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

The accompanying table illustrates your fund’s costs in two ways:

Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“

Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

30

 

Six Months Ended February 28, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
International Growth Fund 8/31/2016 2/28/2017 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,038.55 $2.27
Admiral Shares 1,000.00 1,039.11 1.62
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,022.56 $2.26
Admiral Shares 1,000.00 1,023.21 1.61

The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that
period are 0.45% for Investor Shares and 0.32% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the
annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent
six-month period, then divided by the number of days in the most recent 12-month period (181/365).

31

 

Trustees Approve Advisory Arrangements

The board of trustees of Vanguard International Growth Fund has renewed the fund’s investment advisory arrangements with Baillie Gifford Overseas Ltd. (Baillie Gifford) and Schroder Investment Management North America Inc. (Schroder Inc.), as well as the sub-advisory agreement with Schroder Investment Management North America Ltd. (Schroder Ltd.). The board determined that renewing the fund’s advisory arrangements was in the best interests of the fund and its shareholders. Please note that in July, the fund’s trustees modified its investment advisory arrangement. M&G Investment Management Limited no longer serves as one of the fund’s advisors.

The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisory oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.

The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.

In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decision.

Nature, extent, and quality of services

The board reviewed the quality of the fund’s investment management services over both the short and long term, and took into account the organizational depth and stability of each advisor. The board considered the following:

Baillie Gifford. Baillie Gifford is a unit of Baillie Gifford & Co., which was founded in 1908 and is among the largest independently owned investment management firms in the United Kingdom. Baillie Gifford uses fundamental research to make long-term investments in companies that have above-average growth potential resulting from sustainable competitive advantages, special cultures and management, or competitive strength in underestimated technology shifts. Baillie Gifford believes that equities’ asymmetrical return pattern means that alpha is generated by focusing on the upside and the potential to earn exponential returns rather than being overly concerned with avoiding losing investments. The advisor takes a bottom-up, stock-driven approach to sector and country allocation. Baillie Gifford has advised a portion of the fund since 2003.

Schroder. Schroders plc, the parent company of Schroder Inc. and Schroder Ltd. (collectively, Schroder), founded in 1804, specializes in global equity and fixed income management. Schroder seeks to invest in securities of international companies where it has identified a significant growth gap, which is defined as forward earnings growth that is not yet recognized by the market. Schroder believes that market inefficiencies often drive material differences between underlying company

32

 

fundamentals and market estimates. The advisor also believes that in-depth fundamental research, incorporating a comprehensive macroeconomic viewpoint and a robust framework of fundamental risk analysis, is the most reliable means of finding those companies and identifying the growth gap. Schroder Inc. has advised the fund since its inception in 1981, and its affiliate Schroder Ltd. has advised the fund since 2003.

The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangements.

Investment performance

The board considered the short- and long-term performance of the fund and each advisor, including any periods of outperformance or underperformance compared with a relevant benchmark and peer group. The board concluded that the performance was such that each advisory arrangement should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the fund’s advisory fee rate.

The board did not consider profitability of the fund’s advisors in determining whether to approve the advisory fees, because the firms are independent of Vanguard, and the advisory fees are the result of arm’s-length negotiations.

The benefit of economies of scale

The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedules. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.

The board will consider whether to renew the advisory arrangements again after a one-year period.

33

 

Glossary

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

34

 

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

Benchmark Information

Spliced International Index: MSCI EAFE Index through May 31, 2010; MSCI All Country World
Index ex USA thereafter.

35

 

The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 195 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

InterestedTrustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

IndependentTrustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina

 

Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors); Member of the Board of Superintendence of the Institute for the Works of Religion.

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017), Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Michael Rollings

Born 1963. Treasurer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Executive Vice President and Chief Financial Officer of MassMutual Financial Group (2006–2016).

Vanguard Senior Management Team
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  
 
Chairman Emeritus and Senior Advisor
John J. Brennan  
Chairman, 1996–2009  
Chief Executive Officer and President, 1996–2008
 
Founder  
John C. Bogle  
Chairman and Chief Executive Officer, 1974–1996

 

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

    P.O. Box 2600
    Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® > vanguard.com
 
 
 
Fund Information > 800-662-7447   CFA® is a registered trademark owned by CFA Institute.
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People    
Who Are Deaf or Hard of Hearing > 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.    
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
    © 2017 The Vanguard Group, Inc.
    All rights reserved.
    Vanguard Marketing Corporation, Distributor.
 
    Q812 042017

 



Semiannual Report | February 28, 2017

Vanguard FTSE Social Index Fund

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Fund Profile. 5
Performance Summary. 6
Financial Statements. 7
About Your Fund’s Expenses. 21
Glossary. 23

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard FTSE Social Index Fund returned more than 10% for the six months ended February 28, 2017, closely tracking its target benchmark, the FTSE4Good US Select Index, and outpacing the average return of its large-capitalization growth fund peers.

• In tracking its socially conscious benchmark, the fund tends to have greater exposure to sectors where companies are more likely to meet the index’s environmental, social, and human rights criteria, such as the financial, technology, and health care sectors. It has less exposure to sectors where companies may fall short of the index’s requirements, such as oil and gas and industrials.

• All ten sectors advanced. Financials, the largest sector in the fund, returned 19% and had the biggest impact on overall returns. Banks and financial service firms did particularly well.

• Technology and industrials (both +14%) were the other top contributors. Basic materials (+7%), consumer services (+6%), health care (+5%), and consumer goods (+2%) contributed modestly.

Total Returns: Six Months Ended February 28, 2017  
  Total
  Returns
Vanguard FTSE Social Index Fund  
Investor Shares 10.57%
Institutional Shares 10.69
FTSE4Good US Select Index 10.75
Large-Cap Growth Funds Average 7.44
Large-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria.

 

Expense Ratios      
Your Fund Compared With Its Peer Group      
  Investor Institutional Peer Group
  Shares Shares Average
FTSE Social Index Fund 0.22% 0.12% 1.14%

The fund expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year.
For the six months ended February 28, 2017, the fund’s annualized expense ratios were 0.23% for Investor Shares and 0.12% for Institutional
Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through
year-end 2016.

Peer group: Large-Cap Growth Funds.

1

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

More than a decade ago, a Vanguard client asked us to help improve its defined contribution retirement plan. New hires were participating in the plan at lower rates than in previous years, and the client wanted to reverse this trend. Another priority was to help more participants invest their retirement savings in balanced portfolios.

The overall goal of this longtime client: Give employees a better chance to achieve financial security in retirement.

Today, that plan automatically enrolls employees at a 5% contribution rate, puts them in a low-cost target-date fund that takes on less risk as they near retirement, and offers a comprehensive suite of advice services. On top of that, employees get an employer contribution of 5% and are eligible for a company match.

Because of this combination of attractive features and generous employer contributions, nearly all new hires now participate in the plan, 81% of plan participants invest their retirement savings in balanced portfolios, and 87% of participants meet or exceed Vanguard’s recommended total retirement savings target. (Vanguard generally recommends that retirement investors save 12%–15% of pay, including company matches.)

2

 

Changing the retirement landscape

Am I singling out an isolated Vanguard success story? Absolutely not.

Stories like these are becoming increasingly common with employer-based retirement plans, particularly among large and midsize companies. Solutions such as automatic enrollment, automatic contribution increases, and default investment in target-date funds are having a positive effect.

Insights from the relatively new discipline of behavioral finance have contributed to the advances. Simply put, retirement plans are making natural human inertia work for future retirees, rather than against them, by putting savings on autopilot as much as possible.

More than 60% of Vanguard participants are in plans with automatic enrollment, which has led to a big jump in participation. Today, more than four-fifths of eligible employees are saving for retirement, compared with only two-thirds ten years ago.

In addition, many plans have adopted automatic-escalation features, which increase plan contributions at regular intervals until a maximum level is reached or an employee opts out. Automatic increases are a crucial tool for boosting retirement savings rates.

The growing use of target-date funds is another enormous benefit. More than 70% of all participants in Vanguard plans invest at least part of their retirement savings in

Market Barometer      
      Total Returns
    Periods Ended February 28, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.10% 25.53% 13.94%
Russell 2000 Index (Small-caps) 12.61 36.11 12.89
Russell 3000 Index (Broad U.S. market) 10.29 26.29 13.85
FTSE All-World ex US Index (International) 5.40 19.87 4.00
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.19% 1.42% 2.24%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.80 0.25 3.07
Citigroup Three-Month U.S. Treasury Bill Index 0.19 0.32 0.10
 
CPI      
Consumer Price Index 1.14% 2.74% 1.36%

 

3

 

these age-appropriate, diversified strategies. And nearly 50% of Vanguard participants are invested solely in a single target-date fund.

Consider a do-it-yourself autopilot

But what if you don’t have access to a world-class, employer-based retirement plan? Unfortunately, not everyone does, which is an important policy issue.

However, you can still put the features of these plans to work. For example, you can set up automatic contributions from your paycheck to an IRA. And you can adopt your own automatic escalation by investing any pay raises.

You can also take a page from top-quality retirement plans by considering a low-cost, globally diversified target-date fund. The beauty of this approach is that you don’t need to remember to rebalance your portfolio—the fund does it for you.

Of course, you can take a more active role in picking your own investments, and this can be a good choice for some. But keep in mind the lessons from successful employer-based plans: Busy workers, faced with a lot of competing priorities, are often best served by putting their retirement savings on autopilot.

Winning by default

In highlighting some recent successes in retirement savings, I don’t want to minimize the challenges we still face. We’re living in a slow-growth, uncertain world, and investment returns for both stocks and bonds could well be modest in the coming decade.

But I believe the innovations we’ve seen in the last ten years in many retirement plans—you might call it the “default revolution”—point the way toward a solution. And that even goes for people whose employers don’t have a world-class retirement plan.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
March 14, 2017

4

 

FTSE Social Index Fund

Fund Profile
As of February 28, 2017

Share-Class Characteristics  
  Investor Institutional
  Shares Shares
Ticker Symbol VFTSX VFTNX
Expense Ratio1 0.22% 0.12%
30-Day SEC Yield 1.61% 1.71%

 

Portfolio Characteristics    
    FTSE DJ
    4Good U.S. Total
    US Select Market
  Fund Index FA Index
Number of Stocks 444 441 3,807
Median Market Cap $79.2B $79.2B $57.6B
Price/Earnings Ratio 23.8x 23.8x 24.8x
Price/Book Ratio 3.0x 3.0x 3.0x
Return on Equity 18.6% 18.6% 16.4%
Earnings Growth      
Rate 7.3% 7.3% 7.6%
Dividend Yield 1.8% 1.8% 1.9%
Foreign Holdings 0.0% 0.0% 0.0%
Turnover Rate      
(Annualized) 11%
Short-Term Reserves 0.0%

 

Sector Diversification (% of equity exposure)
      DJ
      U.S.
    FTSE Total
    4Good Market
    US Select FA
  Fund Index Index
Basic Materials 1.9% 1.9% 2.6%
Consumer Goods 9.8 9.8 9.8
Consumer Services 9.6 9.6 13.1
Financials 25.0 25.0 20.6
Health Care 17.3 17.3 12.6
Industrials 8.1 8.1 12.8
Oil & Gas 4.0 4.0 6.2
Technology 23.7 23.7 17.1
Telecommunications 0.3 0.3 2.1
Utilities 0.3 0.3 3.1

 

Volatility Measures    
  FTSE DJ
  4Good U.S. Total
  US Select Market
  Index FA Index
R-Squared 1.00 0.97
Beta 1.00 1.03
These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.

 

Ten Largest Holdings (% of total net assets)
Apple Inc. Computer Hardware 5.0%
Alphabet Inc. Internet 3.3
Microsoft Corp. Software 3.3
Johnson & Johnson Pharmaceuticals 2.3
JPMorgan Chase & Co. Banks 2.2
Facebook Inc. Internet 2.0
Wells Fargo & Co. Banks 2.0
Bank of America Corp. Banks 1.7
Procter & Gamble Co. Nondurable  
  Household Products 1.6
Pfizer Inc. Pharmaceuticals 1.4
Top Ten   24.8%
The holdings listed exclude any temporary cash investments and
equity index products.

 

Investment Focus

 

1 The expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year. For the six
months ended February 28, 2017, the annualized expense ratios were 0.23% for Investor Shares and 0.12% for Institutional Shares.

5

 

FTSE Social Index Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Fiscal-Year Total Returns (%): August 31, 2006, Through February 28, 2017


Note: For 2017, performance data reflect the six months ended February 28, 2017.

Average Annual Total Returns: Periods Ended December 31, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
Investor Shares 5/31/2000 10.24% 15.80% 6.04%
Institutional Shares 1/14/2003 10.34 15.90 6.17

 

See Financial Highlights for dividend and capital gains information.

6

 

FTSE Social Index Fund

Financial Statements (unaudited)

Statement of Net Assets
As of February 28, 2017

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value
    Shares ($000)
Common Stocks (100.0%)    
Basic Materials (1.9%)    
  Praxair Inc. 54,605 6,482
  Ecolab Inc. 50,602 6,273
  LyondellBasell Industries    
  NV Class A 65,621 5,987
  Air Products & Chemicals    
  Inc. 41,512 5,831
  PPG Industries Inc. 50,606 5,184
  Nucor Corp. 60,715 3,799
  Newmont Mining Corp. 101,384 3,471
  Arconic Inc. 83,245 2,397
  Albemarle Corp. 21,555 2,188
  Mosaic Co. 67,572 2,108
  International Flavors &    
  Fragrances Inc. 15,279 1,920
  FMC Corp. 25,544 1,472
  Ashland Global Holdings    
  Inc. 11,894 1,435
  CF Industries Holdings Inc. 44,672 1,404
  Avery Dennison Corp. 17,094 1,380
* Alcoa Corp. 34,986 1,210
* Versum Materials Inc. 20,558 623
* AdvanSix Inc. 6,119 167
      53,331
Consumer Goods (9.8%)    
  Procter & Gamble Co. 490,109 44,634
  PepsiCo Inc. 275,904 30,454
  Mondelez International Inc.    
  Class A 297,540 13,068
  Colgate-Palmolive Co. 170,409 12,437
  NIKE Inc. Class B 212,026 12,119
  Kraft Heinz Co. 114,152 10,446
  General Motors Co. 269,280 9,920
  Ford Motor Co. 744,756 9,332
  Kimberly-Clark Corp. 69,042 9,152
  General Mills Inc. 114,278 6,899
  Activision Blizzard Inc. 133,029 6,004
*,^ Tesla Inc. 23,064 5,766
* Electronic Arts Inc. 55,350 4,788
  Newell Brands Inc. 92,430 4,532
  Delphi Automotive plc 52,328 3,984
  Stanley Black & Decker Inc. 28,776 3,659
  Conagra Brands Inc. 83,661 3,448
* Monster Beverage Corp. 82,100 3,402
  Estee Lauder Cos. Inc.    
  Class A 40,961 3,394
  Clorox Co. 24,746 3,386
  Kellogg Co. 45,637 3,380
  VF Corp. 63,173 3,313
  Dr Pepper Snapple Group    
  Inc. 35,210 3,290
  Hershey Co. 29,285 3,173
  Mead Johnson Nutrition    
  Co. 35,733 3,137
  JM Smucker Co. 21,648 3,068
  Genuine Parts Co. 28,683 2,745
* Mohawk Industries Inc. 11,896 2,693
  Whirlpool Corp. 14,395 2,571
  Church & Dwight Co. Inc. 49,194 2,452
  Bunge Ltd. 26,718 2,187
  McCormick & Co. Inc. 21,961 2,161
  DR Horton Inc. 65,162 2,085
  Coach Inc. 53,762 2,048
  Campbell Soup Co. 34,444 2,044
  Lear Corp. 13,455 1,911
  Harley-Davidson Inc. 33,885 1,910
  Hormel Foods Corp. 52,562 1,853
  Snap-on Inc. 10,667 1,810
^ Autoliv Inc. 16,871 1,766
  Goodyear Tire & Rubber    
  Co. 50,299 1,763
  BorgWarner Inc. 41,066 1,733
  Mattel Inc. 65,582 1,687
* LKQ Corp. 53,184 1,680
  Coca-Cola European    
  Partners plc 44,432 1,541
  Ingredion Inc. 12,534 1,515

 

7

 

FTSE Social Index Fund

      Market
      Value
    Shares ($000)
  Harman International    
  Industries Inc. 13,371 1,493
  Hanesbrands Inc. 72,376 1,448
  PVH Corp. 14,759 1,352
* Lululemon Athletica Inc. 18,822 1,228
* Adient plc 18,043 1,211
  Gentex Corp. 55,069 1,158
  PulteGroup Inc. 52,075 1,148
* Michael Kors Holdings Ltd. 30,543 1,115
  Lamb Weston Holdings Inc. 27,885 1,093
* Herbalife Ltd. 17,789 1,005
* Toll Brothers Inc. 28,828 984
^ Polaris Industries Inc. 11,399 971
  Ralph Lauren Corp. Class A 10,678 847
* Edgewell Personal Care Co. 11,390 841
* Under Armour Inc. Class A 33,701 695
* Under Armour Inc. 37,077 688
      277,617
Consumer Services (9.6%)    
  Home Depot Inc. 236,871 34,325
  Walt Disney Co. 308,092 33,918
  McDonald’s Corp. 159,205 20,322
  CVS Health Corp. 205,894 16,591
* Priceline Group Inc. 9,544 16,455
  Starbucks Corp. 269,598 15,332
  Time Warner Inc. 149,114 14,644
  Lowe’s Cos. Inc. 167,679 12,470
  TJX Cos. Inc. 126,978 9,961
  McKesson Corp. 43,137 6,476
  Ross Stores Inc. 76,589 5,252
  Sysco Corp. 97,505 5,140
  Cardinal Health Inc. 61,075 4,970
* O’Reilly Automotive Inc. 18,198 4,945
* AutoZone Inc. 5,533 4,075
  Omnicom Group Inc. 45,338 3,858
  Dollar General Corp. 50,232 3,668
* Dollar Tree Inc. 42,595 3,266
* Ulta Beauty Inc. 11,526 3,152
  Nielsen Holdings plc 65,750 2,917
  AmerisourceBergen Corp.    
  Class A 31,645 2,896
  Viacom Inc. Class B 66,438 2,887
  Expedia Inc. 22,994 2,737
* CarMax Inc. 36,702 2,369
*,^ Chipotle Mexican Grill Inc.    
  Class A 5,598 2,344
  Alaska Air Group Inc. 23,624 2,311
  Advance Auto Parts Inc. 14,038 2,198
  L Brands Inc. 41,263 2,171
  Best Buy Co. Inc. 48,653 2,147
  Tiffany & Co. 22,218 2,041
  Macy’s Inc. 59,121 1,964
  Foot Locker Inc. 25,541 1,933
* Yum China Holdings Inc. 70,346 1,870
  Interpublic Group of    
  Cos. Inc. 76,087 1,834
  Darden Restaurants Inc. 23,590 1,762
* Liberty Media Corp-Liberty    
  SiriusXM 35,289 1,374
  Kohl’s Corp. 32,016 1,365
  Tractor Supply Co. 19,119 1,356
^ Nordstrom Inc. 26,941 1,257
  Bed Bath & Beyond Inc. 29,141 1,177
  Staples Inc. 123,863 1,114
  Scripps Networks    
  Interactive Inc. Class A 13,667 1,104
  Gap Inc. 43,447 1,078
  TEGNA Inc. 41,302 1,059
  Signet Jewelers Ltd. 15,032 956
  H&R Block Inc. 42,824 880
* TripAdvisor Inc. 19,871 824
  Dun & Bradstreet Corp. 7,123 752
* Liberty Media Corp-Liberty    
  SiriusXM 17,254 679
* AutoNation Inc. 12,613 579
      270,755
Financials (25.0%)    
  JPMorgan Chase & Co. 692,450 62,750
  Wells Fargo & Co. 962,810 55,727
  Bank of America Corp. 1,937,180 47,810
  Citigroup Inc. 546,300 32,674
  Visa Inc. Class A 361,647 31,803
  Mastercard Inc. Class A 186,052 20,551
  US Bancorp 325,856 17,922
  Goldman Sachs Group Inc. 71,657 17,775
  American International    
  Group Inc. 196,911 12,587
  American Express Co. 154,080 12,336
  Chubb Ltd. 88,803 12,270
  PNC Financial Services    
  Group Inc. 94,202 11,985
  Morgan Stanley 254,904 11,641
  Simon Property Group Inc. 60,239 11,108
  Bank of New York Mellon    
  Corp. 202,693 9,555
  American Tower    
  Corporation 81,007 9,299
  Prudential Financial Inc. 82,429 9,112
  BlackRock Inc. 23,303 9,029
  MetLife Inc. 170,601 8,946
  Capital One Financial Corp. 92,453 8,678
  Charles Schwab Corp. 214,035 8,649
  BB&T Corp. 155,467 7,497
  CME Group Inc. 61,198 7,433
  Marsh & McLennan    
  Cos. Inc. 98,852 7,264
  Travelers Cos. Inc. 54,456 6,657
  Intercontinental Exchange    
  Inc. 113,817 6,502

 

8

 

FTSE Social Index Fund

      Market
      Value
    Shares ($000)
  Crown Castle International    
  Corp. 69,129 6,466
  S&P Global Inc. 49,671 6,431
  Public Storage 27,801 6,324
  State Street Corp. 73,945 5,894
  Aon plc 50,788 5,874
  Allstate Corp. 70,597 5,800
  Synchrony Financial 159,158 5,768
  SunTrust Banks Inc. 95,020 5,653
  Aflac Inc. 75,376 5,453
  Discover Financial Services 75,607 5,379
  Prologis Inc. 100,452 5,128
  Equinix Inc. 13,625 5,124
  Welltower Inc. 69,493 4,891
  Weyerhaeuser Co. 143,213 4,829
  AvalonBay Communities    
  Inc. 26,238 4,822
  M&T Bank Corp. 28,235 4,714
  Ventas Inc. 67,881 4,416
  Equity Residential 69,075 4,357
  Moody’s Corp. 36,865 4,106
  Boston Properties Inc. 29,406 4,088
  Progressive Corp. 102,823 4,029
  Ameriprise Financial Inc. 30,297 3,984
  Fifth Third Bancorp 144,823 3,974
  KeyCorp 207,410 3,893
  Northern Trust Corp. 43,737 3,820
  Citizens Financial Group    
  Inc. 98,108 3,666
  Regions Financial Corp. 235,922 3,602
  Vornado Realty Trust 32,481 3,569
  Hartford Financial Services    
  Group Inc. 72,403 3,540
  Principal Financial Group    
  Inc. 55,128 3,448
  Willis Towers Watson plc 26,338 3,383
  Digital Realty Trust Inc. 30,541 3,298
  T. Rowe Price Group Inc. 44,798 3,190
  Lincoln National Corp. 43,808 3,074
  Realty Income Corp. 49,380 3,026
  Equifax Inc. 22,809 2,990
  Huntington Bancshares Inc. 207,571 2,935
  HCP Inc. 89,143 2,923
  First Republic Bank 29,443 2,763
* SBA Communications Corp.    
  Class A 22,707 2,629
  Invesco Ltd. 78,734 2,534
* Markel Corp. 2,468 2,418
  Loews Corp. 51,322 2,411
* GGP Inc. 96,546 2,400
  Comerica Inc. 33,011 2,353
  SL Green Realty Corp. 19,418 2,188
  Unum Group 44,487 2,172
  Annaly Capital    
  Management Inc. 195,264 2,167
  XL Group Ltd.   51,565 2,088
  Ally Financial Inc.   92,287 2,075
* Arch Capital Group Ltd. 21,826 2,064
  Cincinnati Financial Corp. 27,206 1,985
  Kimco Realty Corp.   81,447 1,975
* CBRE Group Inc. Class A 54,933 1,957
  Arthur J Gallagher & Co. 33,865 1,929
* Alleghany Corp.   2,984 1,927
  UDR Inc.   51,194 1,869
  Macerich Co.   27,526 1,855
  Everest Re Group Ltd. 7,854 1,847
  Western Union Co.   92,942 1,825
* E*TRADE Financial Corp. 52,452 1,810
  Zions Bancorporation   39,445 1,771
  Nasdaq Inc.   24,873 1,769
  Duke Realty Corp.   67,970 1,743
  VEREIT Inc.   184,967 1,678
  Torchmark Corp.   21,602 1,675
  Iron Mountain Inc.   45,971 1,671
  CIT Group Inc.   38,694 1,660
  TD Ameritrade Holding    
  Corp.   39,538 1,546
  Voya Financial Inc.   37,296 1,538
  Regency Centers Corp. 20,017 1,408
  New York Community      
  Bancorp Inc.   89,216 1,363
  WR Berkley Corp.   19,146 1,360
  AGNC Investment Corp. 63,755 1,251
  SEI Investments Co.   22,997 1,158
  People’s United Financial    
  Inc.   59,403 1,140
  Liberty Property Trust   28,309 1,116
  RenaissanceRe Holdings    
  Ltd.   7,525 1,111
  Axis Capital Holdings Ltd. 15,929 1,104
  Commerce Bancshares Inc. 18,436 1,088
  Assurant Inc.   10,973 1,086
  Hospitality Properties Trust 31,469 1,000
  Navient Corp.   58,080 895
  Weingarten Realty Investors 22,304 791
* Quality Care Properties Inc. 17,980 341
        705,925
Health Care (17.3%)      
  Johnson & Johnson   526,477 64,341
  Pfizer Inc. 1,162,673 39,670
  Merck & Co. Inc.   532,034 35,045
  UnitedHealth Group Inc. 184,001 30,430
  Amgen Inc.   143,463 25,326
  Medtronic plc   267,144 21,615
  AbbVie Inc.   310,052 19,174
* Celgene Corp.   149,844 18,507
  Bristol-Myers Squibb Co. 319,667 18,128
  Allergan plc   71,905 17,604
  Eli Lilly & Co.   188,718 15,628
  Abbott Laboratories   329,802 14,867

 

9

 

FTSE Social Index Fund

      Market
      Value
    Shares ($000)
* Biogen Inc. 41,919 12,098
  Aetna Inc. 67,423 8,681
* Express Scripts Holding Co. 118,209 8,351
  Anthem Inc. 50,495 8,323
  Stryker Corp. 62,920 8,089
  Becton Dickinson and Co. 40,817 7,472
  Cigna Corp. 49,339 7,347
* Boston Scientific Corp. 260,102 6,386
  Humana Inc. 28,400 5,999
* Regeneron Pharmaceuticals    
  Inc. 15,579 5,819
* Alexion Pharmaceuticals Inc. 42,947 5,637
* Intuitive Surgical Inc. 7,379 5,438
  Baxter International Inc. 104,260 5,309
  Zoetis Inc. 95,848 5,110
* HCA Holdings Inc. 55,308 4,825
  Zimmer Biomet Holdings    
  Inc. 38,115 4,463
* Vertex Pharmaceuticals Inc. 47,230 4,280
* Incyte Corp. 32,074 4,269
* Edwards Lifesciences Corp. 40,593 3,817
* Mylan NV 87,155 3,647
  CR Bard Inc. 14,162 3,473
* BioMarin Pharmaceutical    
  Inc. 32,081 3,013
  Dentsply Sirona Inc. 44,253 2,811
* Laboratory Corp. of    
  America Holdings 19,629 2,792
* Henry Schein Inc. 15,431 2,647
* DaVita Inc. 37,840 2,626
  Quest Diagnostics Inc. 26,650 2,597
* Waters Corp. 14,671 2,274
* Centene Corp. 31,867 2,247
* Hologic Inc. 53,438 2,169
  Universal Health Services    
  Inc. Class B 17,206 2,161
* Quintiles IMS Holdings Inc. 27,300 2,113
  ResMed Inc. 26,897 1,937
  Perrigo Co. plc 25,527 1,909
* Varian Medical Systems    
  Inc. 17,894 1,501
* Jazz Pharmaceuticals plc 10,422 1,382
  Bioverativ Inc. 21,053 1,096
* Mallinckrodt plc 20,741 1,087
* Alnylam Pharmaceuticals    
  Inc. 14,102 728
  Patterson Cos. Inc. 15,340 697
* Endo International plc 42,500 580
* Varex Imaging Corp. 7,397 258
      487,793
Industrials (8.1%)    
  Union Pacific Corp. 157,991 17,054
  Accenture plc Class A 125,646 15,392
  United Parcel Service Inc.    
  Class B 132,368 13,999
  FedEx Corp. 47,853 9,235
  Automatic Data Processing    
  Inc. 87,332 8,962
  CSX Corp. 181,350 8,806
* PayPal Holdings Inc. 208,236 8,746
  Illinois Tool Works Inc. 60,566 7,995
  Johnson Controls    
  International plc 180,430 7,567
  Norfolk Southern Corp. 56,275 6,811
  Deere & Co. 56,986 6,239
  Eaton Corp. plc 86,591 6,233
  Waste Management Inc. 84,728 6,212
* Fiserv Inc. 41,609 4,802
  Cummins Inc. 32,329 4,800
  PACCAR Inc. 67,766 4,527
  Sherwin-Williams Co. 14,496 4,473
  Parker-Hannifin Corp. 25,572 3,960
  Rockwell Automation Inc. 24,806 3,748
  Fortive Corp. 56,313 3,246
  Agilent Technologies Inc. 62,180 3,190
  Vulcan Materials Co. 25,430 3,067
  Republic Services Inc.    
  Class A 44,678 2,768
  Alliance Data Systems    
  Corp. 11,071 2,690
  Martin Marietta Materials    
  Inc. 12,170 2,628
  WestRock Co. 48,660 2,614
  Fastenal Co. 51,171 2,560
* Verisk Analytics Inc.    
  Class A 29,804 2,471
  Ball Corp. 33,398 2,456
  WW Grainger Inc. 9,820 2,435
  AMETEK Inc. 44,739 2,415
  Dover Corp. 29,991 2,402
  Global Payments Inc. 29,062 2,316
  CH Robinson Worldwide    
  Inc. 27,145 2,182
  Masco Corp. 62,919 2,125
  Expeditors International of    
  Washington Inc. 34,899 1,968
* Vantiv Inc. Class A 29,339 1,918
* United Rentals Inc. 14,529 1,860
  Kansas City Southern 20,798 1,843
  Sealed Air Corp. 37,052 1,722
  Fortune Brands Home &    
  Security Inc. 29,565 1,710
* Flex Ltd. 103,493 1,707
  Acuity Brands Inc. 8,058 1,703
  Valspar Corp. 15,232 1,694
  JB Hunt Transport Services    
  Inc. 17,059 1,675
  Xylem Inc. 34,377 1,654
  Total System Services Inc. 29,912 1,630

 

10

 

FTSE Social Index Fund

        Market
        Value
      Shares ($000)
  Broadridge Financial      
  Solutions Inc.   22,669 1,572
  Xerox Corp.   194,060 1,444
  Allegion plc   18,346 1,332
* Sensata Technologies      
  Holding NV   32,325 1,327
* Stericycle Inc.   15,491 1,284
  ManpowerGroup Inc.   12,845 1,246
* Arrow Electronics Inc.   17,158 1,239
* Keysight Technologies Inc.   32,820 1,234
  Avnet Inc.   24,613 1,134
  Robert Half International Inc. 23,455 1,131
  MDU Resources Group Inc. 37,440 1,015
  Bemis Co. Inc.   17,959 890
  Jabil Circuit Inc.   32,808 837
* Conduent Inc.   38,513 620
        228,515
Oil & Gas (4.0%)      
  Schlumberger Ltd.   266,815 21,441
  ConocoPhillips   235,372 11,197
  EOG Resources Inc.   110,519 10,719
  Occidental Petroleum Corp. 146,471 9,601
  Kinder Morgan Inc.   363,639 7,749
  Anadarko Petroleum Corp.   106,140 6,862
  Pioneer Natural Resources      
  Co.   32,515 6,047
  Valero Energy Corp.   86,780 5,897
  Baker Hughes Inc.   81,043 4,885
  Devon Energy Corp.   100,460 4,356
  Williams Cos. Inc.   143,270 4,060
  Apache Corp.   72,181 3,796
  Marathon Oil Corp.   161,735 2,588
  Cimarex Energy Co.   18,179 2,286
  EQT Corp.   33,117 1,983
  Tesoro Corp.   21,286 1,813
* Newfield Exploration Co.   37,986 1,385
  Helmerich & Payne Inc.   19,568 1,338
  Range Resources Corp.   39,094 1,080
* Transocean Ltd.   70,292 972
  Core Laboratories NV   8,402 961
  Murphy Oil Corp.   30,802 871
* First Solar Inc.   14,094 510
  Enbridge Inc.   2,024 85
        112,482
Technology (23.7%)      
  Apple Inc. 1,022,241 140,037
  Microsoft Corp. 1,449,073 92,712
* Facebook Inc. Class A   426,315 57,783
* Alphabet Inc. Class A   56,534 47,767
* Alphabet Inc. Class C   55,628 45,793
  Cisco Systems Inc.   964,714 32,974
  Intel Corp.   907,933 32,867
  Oracle Corp.   606,056 25,812
  Broadcom Ltd.   76,170 16,066
  QUALCOMM Inc. 281,600 15,905
  Texas Instruments Inc. 192,525 14,751
* Adobe Systems Inc. 96,152 11,379
  NVIDIA Corp. 98,275 9,973
* salesforce.com Inc. 118,353 9,628
  Applied Materials Inc. 208,787 7,562
* Cognizant Technology    
  Solutions Corp. Class A 117,036 6,937
  HP Inc. 331,018 5,750
  Intuit Inc. 45,789 5,744
* NXP Semiconductors NV 52,401 5,387
  Corning Inc. 182,327 5,034
* Micron Technology Inc. 200,202 4,693
  Western Digital Corp. 51,990 3,997
  Lam Research Corp. 31,210 3,700
* Autodesk Inc. 42,538 3,671
  Symantec Corp. 119,517 3,415
  Skyworks Solutions Inc. 35,942 3,408
* Cerner Corp. 55,738 3,068
* Red Hat Inc. 34,426 2,851
  Xilinx Inc. 48,406 2,847
  KLA-Tencor Corp. 29,892 2,694
  Seagate Technology plc 54,553 2,629
* ServiceNow Inc. 30,233 2,628
* Dell Technologies Inc.    
  Class V 41,317 2,623
* Check Point Software    
  Technologies Ltd. 25,146 2,487
  Maxim Integrated Products    
  Inc. 54,613 2,419
* Citrix Systems Inc. 29,849 2,357
  NetApp Inc. 53,340 2,231
* Synopsys Inc. 29,042 2,075
  Juniper Networks Inc. 72,897 2,041
* Akamai Technologies Inc. 32,152 2,013
* Twitter Inc. 123,341 1,945
* Workday Inc. Class A 23,386 1,939
  CA Inc. 59,917 1,933
  CDK Global Inc. 28,779 1,912
  Computer Sciences Corp. 26,918 1,845
* F5 Networks Inc. 12,519 1,794
  Amdocs Ltd. 28,972 1,757
* VeriSign Inc. 20,044 1,653
* Mobileye NV 34,459 1,569
* Splunk Inc. 24,867 1,535
  Marvell Technology Group    
  Ltd. 80,858 1,261
*,^ VMware Inc. Class A 12,185 1,095
* Yandex NV Class A 47,351 1,065
  CSRA Inc. 31,317 934
      669,945
Telecommunications (0.3%)    
* Level 3 Communications    
  Inc. 55,845 3,197
* T-Mobile US Inc. 50,454 3,155

 

11

 

FTSE Social Index Fund

    Market
    Value
  Shares ($000)
* Sprint Corp. 159,775 1,408
Frontier Communications    
Corp. 220,855 647
    8,407
Utilities (0.3%)    
American Water Works    
Co. Inc. 34,285 2,674
CenterPoint Energy Inc. 81,826 2,236
ONEOK Inc. 40,284 2,177
NiSource Inc. 61,625 1,473
* Calpine Corp. 57,919 678
Avangrid Inc. 11,407 499
    9,737
Total Common Stocks    
(Cost $2,133,384)   2,824,507
Temporary Cash Investments (0.2%)  
Money Market Fund (0.2%)    
1,2 Vanguard Market Liquidity    
Fund, 0.864% 39,988 3,999
 
  Face  
  Amount  
  ($000)  
U.S. Government and Agency Obligations (0.0%)
United States Treasury Bill,    
0.501%, 3/16/17 200 200
United States Treasury Bill,    
0.607%, 5/25/17 100 100
    300
Total Temporary Cash Investments  
(Cost $4,299)   4,299
Total Investments (100.2%)    
(Cost $2,137,683)   2,828,806
  Amount
  ($000)
Other Assets and Liabilities (-0.2%)  
Other Assets  
Investment in Vanguard 187
Receivables for Investment Securities Sold 5,299
Receivables for Accrued Income 4,618
Receivables for Capital Shares Issued 60,308
Total Other Assets 70,412
Liabilities  
Payables for Investment Securities  
Purchased (66,083)
Collateral for Securities on Loan (3,997)
Payables for Capital Shares Redeemed (2,166)
Payables to Vanguard (1,339)
Other Liabilities (1,750)
Total Liabilities (75,335)
Net Assets (100%) 2,823,883
At February 28, 2017, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 2,142,350
Undistributed Net Investment Income 4,264
Accumulated Net Realized Losses (13,854)
Unrealized Appreciation (Depreciation) 691,123
Net Assets 2,823,883
 
 
Investor Shares—Net Assets  
Applicable to 109,461,921 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,671,806
Net Asset Value Per Share—  
Investor Shares $15.27
 
 
Institutional Shares—Net Assets  
Applicable to 75,367,488 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,152,077
Net Asset Value Per Share—  
Institutional Shares $15.29

 

See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $3,895,000.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
2 Includes $3,997,000 of collateral received for securities on loan.
See accompanying Notes, which are an integral part of the Financial Statements.

12

 

FTSE Social Index Fund

Statement of Operations

  Six Months Ended
  February 28, 2017
  ($000)
Investment Income  
Income  
Dividends 22,118
Interest1 12
Securities Lending—Net 38
Total Income 22,168
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 175
Management and Administrative—Investor Shares 1,373
Management and Administrative—Institutional Shares 452
Marketing and Distribution—Investor Shares 177
Marketing and Distribution—Institutional Shares 14
Custodian Fees 37
Shareholders’ Reports—Investor Shares 16
Shareholders’ Reports—Institutional Shares 15
Trustees’ Fees and Expenses 1
Total Expenses 2,260
Net Investment Income 19,908
Realized Net Gain (Loss)  
Investment Securities Sold1 8,433
Futures Contracts 25
Realized Net Gain (Loss) 8,458
Change in Unrealized Appreciation (Depreciation) of Investment Securities 229,496
Net Increase (Decrease) in Net Assets Resulting from Operations 257,862
1 Interest income and realized net gain (loss) from an affiliated company of the fund were $11,000 and $1,000, respectively.

 

See accompanying Notes, which are an integral part of the Financial Statements.

13

 

FTSE Social Index Fund

Statement of Changes in Net Assets

  Six Months Ended Year Ended
  February 28, August 31,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 19,908 38,816
Realized Net Gain (Loss) 8,458 2,858
Change in Unrealized Appreciation (Depreciation) 229,496 159,803
Net Increase (Decrease) in Net Assets Resulting from Operations 257,862 201,477
Distributions    
Net Investment Income    
Investor Shares (14,929) (28,370)
Institutional Shares (9,632) (18,570)
Realized Capital Gain    
Investor Shares
Institutional Shares
Total Distributions (24,561) (46,940)
Capital Share Transactions    
Investor Shares 92,902 208,652
Institutional Shares 186,300 111,431
Net Increase (Decrease) from Capital Share Transactions 279,202 320,083
Total Increase (Decrease) 512,503 474,620
Net Assets    
Beginning of Period 2,311,380 1,836,760
End of Period1 2,823,883 2,311,380
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $4,264,000 and $8,917,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

14

 

FTSE Social Index Fund

Financial Highlights

Investor Shares              
  Six Months          
    Ended          
For a Share Outstanding February 28, Year Ended August 31,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $13.95 $12.99 $12.74 $10.28 $8.30 $7.31
Investment Operations              
Net Investment Income   .111 .241 .183 .167 .153 .117
Net Realized and Unrealized Gain (Loss)            
on Investments   1.351 1.025 .231 2.442 1.969 .962
Total from Investment Operations 1.462 1.266 .414 2.609 2.122 1.079
Distributions              
Dividends from Net Investment Income (.142) (. 306) (.164) (.149) (.142) (. 089)
Distributions from Realized Capital Gains
Total Distributions   (.142) (. 306) (.164) (.149) (.142) (. 089)
Net Asset Value, End of Period $15.27 $13.95 $12.99 $12.74 $10.28 $8.30
 
Total Return1   10.57% 9.95% 3.25% 25.58% 25.90% 14.94%
 
Ratios/Supplemental Data