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: 811-03916
| Name of Registrant: | Vanguard Specialized Funds |
| 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: January 31
Date of reporting period: February 1, 2022—July 31, 2022
Item 1: Reports to Shareholders
Semiannual Report | July 31, 2022
Vanguard Energy
Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 16 |
Liquidity Risk Management | 18 |
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.
1
| Six Months Ended July 31, 2022 | |||
| Beginning Account Value 1/31/2022 | Ending Account Value 7/31/2022 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Energy Fund | |||
| Investor Shares | $1,000.00 | $1,071.60 | $2.21 |
| Admiral™ Shares | 1,000.00 | 1,072.20 | 1.80 |
| Based on Hypothetical 5% Yearly Return | |||
| Energy Fund | |||
| Investor Shares | $1,000.00 | $1,022.66 | $2.16 |
| Admiral Shares | 1,000.00 | 1,023.06 | 1.76 |
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 0.43% for Investor Shares and 0.35% 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).
2
Energy Fund
Fund Allocation
As of July 31, 2022
| United States | 52.0% |
| United Kingdom | 16.9 |
| France | 8.9 |
| Canada | 8.4 |
| Norway | 3.5 |
| Italy | 2.9 |
| Spain | 2.2 |
| India | 1.8 |
| Brazil | 1.3 |
| Germany | 1.3 |
| Other | 0.8 |
The table reflects the fund’s
investments, except for short-term investments.
3
Energy Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Energy Fund
| Face Amount ($000) | Market Value• ($000) | ||
| Repurchase Agreement (0.6%) | |||
| NatWest Markets plc, 2.230%, 8/1/22 (Dated 7/29/22, Repurchase Value $35,607,000, collateralized by U.S. Treasury Note/Bond 1.875%–2.250%, 12/31/24–7/31/26, with a value of $36,312,000) | 35,600 | 35,600 | |
| Total Temporary Cash Investments (Cost $35,704) | 35,704 | ||
| Total Investments (100.0%) (Cost $4,319,591) | 5,776,305 | ||
| Other Assets and Liabilities—Net (0.0%) | (1,155) | ||
| Net Assets (100%) | 5,775,150 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Security value determined using significant unobservable inputs. |
| 2 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
| ADR—American Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
5
Energy Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $4,319,487) | 5,776,201 |
| Affiliated Issuers (Cost $104) | 104 |
| Total Investments in Securities | 5,776,305 |
| Investment in Vanguard | 212 |
| Foreign Currency, at Value (Cost $193) | 189 |
| Receivables for Accrued Income | 6,596 |
| Receivables for Capital Shares Issued | 5,760 |
| Total Assets | 5,789,062 |
| Liabilities | |
| Due to Custodian | 457 |
| Payables to Investment Advisor | 2,841 |
| Payables for Capital Shares Redeemed | 5,993 |
| Payables to Vanguard | 445 |
| Deferred Foreign Capital Gains Taxes | 4,176 |
| Total Liabilities | 13,912 |
| Net Assets | 5,775,150 |
| At July 31, 2022, net assets consisted of: | |
| Paid-in Capital | 4,775,081 |
| Total Distributable Earnings (Loss) | 1,000,069 |
| Net Assets | 5,775,150 |
| Investor Shares—Net Assets | |
| Applicable to 41,837,020 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,863,983 |
| Net Asset Value Per Share—Investor Shares | $44.55 |
| Admiral Shares—Net Assets | |
| Applicable to 46,778,988 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 3,911,167 |
| Net Asset Value Per Share—Admiral Shares | $83.61 |
See accompanying
Notes, which are an integral part of the Financial Statements.
6
Energy Fund
Statement of Operations
| Six Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 141,377 |
| Interest2 | 175 |
| Securities Lending—Net | 66 |
| Total Income | 141,618 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 4,364 |
| Performance Adjustment | 1,100 |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 2,105 |
| Management and Administrative—Admiral Shares | 2,934 |
| Marketing and Distribution—Investor Shares | 65 |
| Marketing and Distribution—Admiral Shares | 77 |
| Custodian Fees | 61 |
| Shareholders’ Reports—Investor Shares | 33 |
| Shareholders’ Reports—Admiral Shares | 17 |
| Trustees’ Fees and Expenses | 1 |
| Other Expenses | 14 |
| Total Expenses | 10,771 |
| Net Investment Income | 130,847 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | 111,613 |
| Foreign Currencies | (1,538) |
| Realized Net Gain (Loss) | 110,075 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2,4 | 131,520 |
| Foreign Currencies | (154) |
| Change in Unrealized Appreciation (Depreciation) | 131,366 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 372,288 |
| 1 | Dividends are net of foreign withholding taxes of $7,272,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $18,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Realized gain (loss) is net of foreign capital gain taxes of $23,000. |
| 4 | The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($44,000). |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Energy Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 130,847 | 177,015 | |
| Realized Net Gain (Loss) | 110,075 | 116,270 | |
| Change in Unrealized Appreciation (Depreciation) | 131,366 | 1,155,587 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 372,288 | 1,448,872 | |
| Distributions | |||
| Investor Shares | (3,003) | (57,404) | |
| Admiral Shares | (6,813) | (119,222) | |
| Total Distributions | (9,816) | (176,626) | |
| Capital Share Transactions | |||
| Investor Shares | (24,978) | (14,569) | |
| Admiral Shares | 58,604 | 7,935 | |
| Net Increase (Decrease) from Capital Share Transactions | 33,626 | (6,634) | |
| Total Increase (Decrease) | 396,098 | 1,265,612 | |
| Net Assets | |||
| Beginning of Period | 5,379,052 | 4,113,440 | |
| End of Period | 5,775,150 | 5,379,052 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Energy Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $41.64 | $31.66 | $43.28 | $47.85 | $55.62 | $52.70 |
| Investment Operations | ||||||
| Net Investment Income1 | .978 | 1.364 | 1.449 | 1.519 | 1.300 | 1.4772 |
| Net Realized and Unrealized Gain (Loss) on Investments | 2.001 | 10.019 | (11.669) | (4.524) | (7.788) | 3.035 |
| Total from Investment Operations | 2.979 | 11.383 | (10.220) | (3.005) | (6.488) | 4.512 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.069) | (1.403) | (1.400) | (1.565) | (1.282) | (1.592) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.069) | (1.403) | (1.400) | (1.565) | (1.282) | (1.592) |
| Net Asset Value, End of Period | $44.55 | $41.64 | $31.66 | $43.28 | $47.85 | $55.62 |
| Total Return3 | 7.16% | 36.33% | -23.55% | -6.55% | -11.48% | 8.75% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $1,864 | $1,771 | $1,363 | $1,793 | $2,265 | $2,968 |
| Ratio of Total Expenses to Average Net Assets4 | 0.43% | 0.41% | 0.37% | 0.32% | 0.37% | 0.38% |
| Ratio of Net Investment Income to Average Net Assets | 4.02% | 3.68% | 4.49% | 3.20% | 2.42% | 2.86%2 |
| Portfolio Turnover Rate | 8% | 14% | 55% | 48% | 31% | 24% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Net investment income per share and the ratio of net investment income to average net assets include $.342 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017. |
| 3 | 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. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.02%, (0.02%), (0.06%), (0.01%), and 0.00%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Energy Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $78.12 | $59.39 | $81.18 | $89.77 | $104.35 | $98.88 |
| Investment Operations | ||||||
| Net Investment Income1 | 1.870 | 2.615 | 2.787 | 2.926 | 2.511 | 2.8152 |
| Net Realized and Unrealized Gain (Loss) on Investments | 3.765 | 18.794 | (21.903) | (8.512) | (14.600) | 5.730 |
| Total from Investment Operations | 5.635 | 21.409 | (19.116) | (5.586) | (12.089) | 8.545 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.145) | (2.679) | (2.674) | (3.004) | (2.491) | (3.075) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.145) | (2.679) | (2.674) | (3.004) | (2.491) | (3.075) |
| Net Asset Value, End of Period | $83.61 | $78.12 | $59.39 | $81.18 | $89.77 | $104.35 |
| Total Return3 | 7.22% | 36.43% | -23.47% | -6.50% | -11.40% | 8.84% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $3,911 | $3,608 | $2,751 | $4,388 | $5,606 | $6,796 |
| Ratio of Total Expenses to Average Net Assets4 | 0.35% | 0.33% | 0.29% | 0.24% | 0.29% | 0.30% |
| Ratio of Net Investment Income to Average Net Assets | 4.10% | 3.76% | 4.60% | 3.28% | 2.50% | 2.94%2 |
| Portfolio Turnover Rate | 8% | 14% | 55% | 48% | 31% | 24% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Net investment income per share and the ratio of net investment income to average net assets include $.643 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017. |
| 3 | 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. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.02%, (0.02%), (0.06%), (0.01%), and 0.00%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Energy Fund
Notes to Financial Statements
Vanguard Energy 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. Each of the share classes has different
eligibility and minimum purchase requirements, and is designed for different types of investors.
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. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19
pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such
disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
| 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. 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
11
Energy Fund
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.
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple
12
Energy Fund
Secured Overnight Financing Rate inclusive of
an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. 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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized
gains. 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. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. 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. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the MSCI ACWI Energy Index for periods prior to October 21, 2020, and to the current benchmark MSCI ACWI Energy + Utilities Index, beginning October 21, 2020, for the preceding three years. The benchmark change will be fully phased in by October 2023. For the six months ended July 31, 2022, the investment advisory fee paid represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net increase of $1,100,000 (0.04%) based on performance. |
13
Energy Fund
| 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, and distribution 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $212,000, representing less than 0.01% of the fund’s net
assets and 0.08% of Vanguard’s capital received pursuant to the FSA. 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). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 3,542,352 | — | — | 3,542,352 |
| Common Stocks—Other | 453,759 | 1,744,490 | — | 2,198,249 |
| Temporary Cash Investments | 104 | 35,600 | — | 35,704 |
| Total | 3,996,215 | 1,780,090 | — | 5,776,305 |
| E. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 4,321,830 |
| Gross Unrealized Appreciation | 1,644,028 |
| Gross Unrealized Depreciation | (189,553) |
| Net Unrealized Appreciation (Depreciation) | 1,454,475 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $690,633,000 that
14
Energy Fund
may be carried forward indefinitely to offset
future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year,
the losses will be added to the loss carryforward balance above.
| F. | During the six months ended July 31, 2022, the fund purchased $670,288,000 of investment securities and sold $471,214,000 of investment securities, other than temporary cash investments. |
| G. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 351,446 | 8,031 | 433,225 | 11,662 | |
| Issued in Lieu of Cash Distributions | 2,780 | 63 | 53,100 | 1,381 | |
| Redeemed | (379,204) | (8,791) | (500,894) | (13,551) | |
| Net Increase (Decrease)—Investor Shares | (24,978) | (697) | (14,569) | (508) | |
| Admiral Shares | |||||
| Issued | 742,812 | 9,053 | 851,809 | 12,163 | |
| Issued in Lieu of Cash Distributions | 6,048 | 74 | 105,042 | 1,455 | |
| Redeemed | (690,256) | (8,534) | (948,916) | (13,745) | |
| Net Increase (Decrease)—Admiral Shares | 58,604 | 593 | 7,935 | (127) | |
| H. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
15
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Energy Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the 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 the 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 periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
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 decisions.
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 the advisor. The board considered that Wellington Management, founded in
1928, is among the nation’s oldest and most respected institutional investment managers. The investment team uses a bottom-up approach in which stocks are selected based on the advisor’s estimates of
fundamental investment value. Fundamental research focuses on the quality of a company’s assets, the company’s internal reinvestment opportunities, and management quality. The firm has advised the fund
since its inception in 1984.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted the continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory
arrangement should continue.
16
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 expense rate was also below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is 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 schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets
managed by Wellington Management increase.
The board will consider
whether to renew Wellington Management’s advisory arrangement again after a one-year period.
17
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Energy Fund's Program and for carrying out the specific responsibilities
set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the
“Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program
Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
18
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Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2022
Vanguard Global
Capital Cycles Fund
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.
1
| Six Months Ended July 31, 2022 | |||
| Global Capital Cycles Fund | Beginning Account Value 1/31/2022 | Ending Account Value 7/31/2022 | Expenses Paid During Period |
| Based on Actual Fund Return | $1,000.00 | $965.90 | $2.05 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.71 | 2.11 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund's annualized six-month expense ratio for that period is 0.42%. 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).
2
Global Capital Cycles Fund
Fund Allocation
As of July 31, 2022
| United States | 31.0% |
| United Kingdom | 21.7 |
| Canada | 16.4 |
| India | 4.9 |
| France | 4.4 |
| China | 3.7 |
| Australia | 3.1 |
| Switzerland | 2.4 |
| Brazil | 2.3 |
| Japan | 2.0 |
| Italy | 1.7 |
| Sweden | 1.6 |
| South Korea | 1.5 |
| Germany | 1.4 |
| Spain | 1.2 |
| Other | 0.7 |
The table reflects the fund's
investments, except for short-term investments.
3
Global Capital Cycles Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Global Capital Cycles Fund
| Shares | Market Value• ($000) | |||||
| Merck & Co. Inc. | 267,474 | 23,896 | ||||
| * | Salesforce Inc. | 75,516 | 13,897 | |||
| Mosaic Co. | 205,876 | 10,841 | ||||
| * | Diamond Offshore Drilling Inc. | 1,165,041 | 7,864 | |||
| * | Metals Acquisition Corp. Warrants Exp. 7/12/26 | 330,300 | 139 | |||
| 417,519 | ||||||
| Total Common Stocks (Cost $1,276,855) | 1,345,929 | |||||
| Temporary Cash Investments (2.9%) | ||||||
| Money Market Fund (2.9%) | ||||||
| 3,4 | Vanguard Market Liquidity Fund, 1.903% (Cost $39,342) | 393,596 | 39,344 | |||
| Total Investments (101.9%) (Cost $1,316,197) | 1,385,273 | |||||
| Other Assets and Liabilities—Net (-1.9%) | (26,321) | |||||
| Net Assets (100%) | 1,358,952 | |||||
| Cost is in $000. |
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $33,395,000. |
| 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 July 31, 2022, the aggregate value was $9,242,000, representing 0.7% of net assets. |
| 3 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
| 4 | Collateral of $35,196,000 was received for securities on loan, of which $35,180,000 is held in Vanguard Market Liquidity Fund and $16,000 is held in cash. |
| ADR—American Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
5
Global Capital Cycles Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $1,276,855) | 1,345,929 |
| Affiliated Issuers (Cost $39,342) | 39,344 |
| Total Investments in Securities | 1,385,273 |
| Investment in Vanguard | 52 |
| Cash | 16 |
| Foreign Currency, at Value (Cost $213) | 208 |
| Receivables for Investment Securities Sold | 18,243 |
| Receivables for Accrued Income | 637 |
| Receivables for Capital Shares Issued | 1,558 |
| Total Assets | 1,405,987 |
| Liabilities | |
| Due to Custodian | 1,108 |
| Payables for Investment Securities Purchased | 6,775 |
| Collateral for Securities on Loan | 35,196 |
| Payables for Capital Shares Redeemed | 642 |
| Payables to Investment Advisor | 674 |
| Payables to Vanguard | 132 |
| Deferred Foreign Capital Gains Taxes | 2,508 |
| Total Liabilities | 47,035 |
| Net Assets | 1,358,952 |
| 1 Includes $33,395 of securities on loan. | |
| At July 31, 2022, net assets consisted of: | |
| Paid-in Capital | 3,387,659 |
| Total Distributable Earnings (Loss) | (2,028,707) |
| Net Assets | 1,358,952 |
| Net Assets | |
| Applicable to 124,857,428 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,358,952 |
| Net Asset Value Per Share | $10.88 |
See accompanying Notes, which are an
integral part of the Financial Statements.
6
Global Capital Cycles Fund
Statement of Operations
| Six Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 25,872 |
| Non-Cash Dividends | 5,209 |
| Interest2 | 110 |
| Securities Lending—Net | 103 |
| Total Income | 31,294 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 1,060 |
| Performance Adjustment | 307 |
| The Vanguard Group—Note C | |
| Management and Administrative | 1,569 |
| Marketing and Distribution | 44 |
| Custodian Fees | 24 |
| Shareholders’ Reports | 25 |
| Trustees’ Fees and Expenses | — |
| Other Expenses | 5 |
| Total Expenses | 3,034 |
| Net Investment Income | 28,260 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 70,888 |
| Foreign Currencies | (469) |
| Realized Net Gain (Loss) | 70,419 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2,3 | (155,940) |
| Foreign Currencies | (55) |
| Change in Unrealized Appreciation (Depreciation) | (155,995) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (57,316) |
| 1 | Dividends are net of foreign withholding taxes of $1,861,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $110,000, ($24,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($597,000). |
See accompanying Notes, which are an
integral part of the Financial Statements.
7
Global Capital Cycles Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 28,260 | 43,390 | |
| Realized Net Gain (Loss) | 70,419 | 166,516 | |
| Change in Unrealized Appreciation (Depreciation) | (155,995) | 41,453 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (57,316) | 251,359 | |
| Distributions | |||
| Total Distributions | (2,167) | (42,400) | |
| Capital Share Transactions | |||
| Issued | 242,675 | 228,666 | |
| Issued in Lieu of Cash Distributions | 1,861 | 36,640 | |
| Redeemed | (185,599) | (296,930) | |
| Net Increase (Decrease) from Capital Share Transactions | 58,937 | (31,624) | |
| Total Increase (Decrease) | (546) | 177,335 | |
| Net Assets | |||
| Beginning of Period | 1,359,498 | 1,182,163 | |
| End of Period | 1,358,952 | 1,359,498 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
8
Global Capital Cycles Fund
Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $11.28 | $9.57 | $7.97 | $7.62 | $10.57 | $10.74 |
| Investment Operations | ||||||
| Net Investment Income1 | .224 | .356 | .197 | .212 | .122 | .049 |
| Net Realized and Unrealized Gain (Loss) on Investments | (.607) | 1.715 | 1.597 | .337 | (2.858) | (.217) |
| Total from Investment Operations | (.383) | 2.071 | 1.794 | .549 | (2.736) | (.168) |
| Distributions | ||||||
| Dividends from Net Investment Income | (.017) | (.361) | (.194) | (.199) | (.214) | (.002) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.017) | (.361) | (.194) | (.199) | (.214) | (.002) |
| Net Asset Value, End of Period | $10.88 | $11.28 | $9.57 | $7.97 | $7.62 | $10.57 |
| Total Return2 | -3.41% | 21.74% | 22.63% | 7.11% | -26.17% | -1.56% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $1,359 | $1,359 | $1,182 | $1,212 | $1,399 | $2,568 |
| Ratio of Total Expenses to Average Net Assets3 | 0.42% | 0.36% | 0.35% | 0.38% | 0.33% | 0.36% |
| Ratio of Net Investment Income to Average Net Assets | 3.90% | 3.28% | 2.43% | 2.68% | 1.38% | 0.47% |
| Portfolio Turnover Rate | 32% | 57% | 70% | 56% | 110% | 35% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | Includes performance-based investment advisory fee increases (decreases) of 0.04%, (0.01%), (0.03%), 0.00%, (0.04%), and 0.00%. |
See accompanying Notes, which are an
integral part of the Financial Statements.
9
Global Capital Cycles Fund
Notes to Financial Statements
Vanguard Global Capital Cycles
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. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's
investments and fund performance.
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.
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. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
10
Global Capital Cycles Fund
5. 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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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.
6. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based
upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
11
Global Capital Cycles Fund
7. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. 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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon
net unrealized gains. 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. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. 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.
B. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the
fund's performance relative to the Custom Global Capital Cycles Index since January 31, 2019. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.15% of
the fund’s average net assets, before a net increase of $307,000 (0.04%) 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, and distribution 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 and are generally settled twice a month.
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $52,000, representing less than 0.01% of the fund’s net
assets and 0.02% of Vanguard’s capital received pursuant to the FSA. 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). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
12
Global Capital Cycles Fund
The following table summarizes
the market value of the fund's investments as of July 31, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 669,430 | — | — | 669,430 |
| Common Stocks—Other | 84,202 | 592,297 | — | 676,499 |
| Temporary Cash Investments | 39,344 | — | — | 39,344 |
| Total | 792,976 | 592,297 | — | 1,385,273 |
E. As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 1,316,197 |
| Gross Unrealized Appreciation | 193,629 |
| Gross Unrealized Depreciation | (124,553) |
| Net Unrealized Appreciation (Depreciation) | 69,076 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,193,799,000 that may be carried forward
indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net
capital losses for the year, the losses will be added to the loss carryforward balance above.
F. During the six months ended July 31, 2022, the fund purchased $561,565,000 of investment securities and sold $445,888,000 of investment securities, other than temporary cash
investments.
G. Capital shares issued and redeemed were:
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| Shares (000) | Shares (000) | ||
| Issued | 20,393 | 21,067 | |
| Issued in Lieu of Cash Distributions | 150 | 3,333 | |
| Redeemed | (16,213) | (27,397) | |
| Net Increase (Decrease) in Shares Outstanding | 4,330 | (2,997) |
H. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
13
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Global
Capital Cycles Fund (formerly known as Vanguard Precious Metals and Mining Fund) has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s investment advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the 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 advisor 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 periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
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 arrangement. 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
investment management services provided to the fund since Wellington Management began managing the fund in September 2018; it also took into account the organizational depth and stability of the advisor. The board
considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. The advisor follows a global equity strategy that seeks to provide
investors with uncorrelated returns to other asset classes through a blend of capital cycle and enduring assets. Identification of potential investments begins with the capital cycles framework, which seeks companies
that are positioned to succeed through unique and superior business models and healthy balance sheets in sectors and industries where there is capital destruction, consolidation, or retrenchment of investment.
Valuation and quality factors such as discount to intrinsic value, cash generation, capital expenditure, and future capital deployment opportunities are considered.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the performance of
Wellington Management since it began managing the fund in 2018, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the
performance was such that the advisory arrangement should continue.
14
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 below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is 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 advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
15
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global Capital Cycles Fund’s Program and for carrying out the
specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for
the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review
Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
16
Semiannual Report | July 31, 2022
Vanguard Health
Care Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 19 |
Liquidity Risk Management | 21 |
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.
1
| Six Months Ended July 31, 2022 | |||
| Beginning Account Value 1/31/2022 | Ending Account Value 7/31/2022 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Health Care Fund | |||
| Investor Shares | $1,000.00 | $1,025.80 | $1.61 |
| Admiral™ Shares | 1,000.00 | 1,026.10 | 1.36 |
| Based on Hypothetical 5% Yearly Return | |||
| Health Care Fund | |||
| Investor Shares | $1,000.00 | $1,023.21 | $1.61 |
| Admiral Shares | 1,000.00 | 1,023.46 | 1.35 |
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 0.32% for Investor Shares and 0.27% 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).
2
Health Care Fund
Fund Allocation
As of July 31, 2022
| United States | 72.9% |
| Japan | 8.7 |
| United Kingdom | 6.3 |
| Switzerland | 5.2 |
| Belgium | 3.0 |
| Denmark | 2.0 |
| China | 1.1 |
| Other | 0.8 |
The table reflects the fund’s
investments, except for short-term investments.
3
Health Care Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Health Care Fund
5
Health Care Fund
6
Health Care Fund
| Face Amount ($000) | Market Value• ($000) | ||
| United States Treasury Bill, 0.885%, 8/11/22 | 100,000 | 99,942 | |
| 444,061 | |||
| Total Temporary Cash Investments (Cost $971,288) | 971,210 | ||
| Total Investments (100.1%) (Cost $29,588,635) | 47,094,686 | ||
| Other Assets and Liabilities—Net (-0.1%) | (62,691) | ||
| Net Assets (100%) | 47,031,995 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. |
| 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 July 31, 2022, the aggregate value was $222,468,000, representing 0.5% of net assets. |
| 3 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $5,051,000. |
| 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 | Collateral of $5,257,000 was received for securities on loan. |
| ADR—American Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Health Care Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $27,050,845) | 45,137,465 |
| Affiliated Issuers (Cost $2,537,790) | 1,957,221 |
| Total Investments in Securities | 47,094,686 |
| Investment in Vanguard | 1,742 |
| Cash | 2,993 |
| Foreign Currency, at Value (Cost $1,483) | 1,357 |
| Receivables for Investment Securities Sold | 68,637 |
| Receivables for Accrued Income | 79,724 |
| Receivables for Capital Shares Issued | 5,881 |
| Total Assets | 47,255,020 |
| Liabilities | |
| Payables for Investment Securities Purchased | 185,172 |
| Collateral for Securities on Loan | 5,257 |
| Payables to Investment Advisor | 16,048 |
| Payables for Capital Shares Redeemed | 13,531 |
| Payables to Vanguard | 3,017 |
| Total Liabilities | 223,025 |
| Net Assets | 47,031,995 |
| 1 Includes $5,051 of securities on loan. | |
| At July 31, 2022, net assets consisted of: | |
| Paid-in Capital | 28,545,204 |
| Total Distributable Earnings (Loss) | 18,486,791 |
| Net Assets | 47,031,995 |
| Investor Shares—Net Assets | |
| Applicable to 35,627,660 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 7,424,465 |
| Net Asset Value Per Share—Investor Shares | $208.39 |
| Admiral Shares—Net Assets | |
| Applicable to 450,697,541 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 39,607,530 |
| Net Asset Value Per Share—Admiral Shares | $87.88 |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Health Care Fund
Statement of Operations
| Six Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends—Unaffiliated Issuers1 | 300,789 |
| Dividends—Affiliated Issuers2 | 21,965 |
| Interest—Unaffiliated Issuers | 2,462 |
| Securities Lending—Net | 1,145 |
| Total Income | 326,361 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 33,708 |
| Performance Adjustment | (3,084) |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 6,629 |
| Management and Administrative—Admiral Shares | 26,461 |
| Marketing and Distribution—Investor Shares | 206 |
| Marketing and Distribution—Admiral Shares | 486 |
| Custodian Fees | 372 |
| Shareholders’ Reports—Investor Shares | 69 |
| Shareholders’ Reports—Admiral Shares | 67 |
| Trustees’ Fees and Expenses | 12 |
| Other Expenses | 5 |
| Total Expenses | 64,931 |
| Expenses Paid Indirectly | (16) |
| Net Expenses | 64,915 |
| Net Investment Income | 261,446 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold—Unaffiliated Issuers | 1,025,878 |
| Investment Securities Sold—Affiliated Issuers | (184,969) |
| Foreign Currencies | (1,835) |
| Realized Net Gain (Loss) | 839,074 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Unaffiliated Issuers | 343,665 |
| Investment Securities—Affiliated Issuers | (245,033) |
| Foreign Currencies | (2,452) |
| Change in Unrealized Appreciation (Depreciation) | 96,180 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,196,700 |
| 1 | Dividends are net of foreign withholding taxes of $16,752,000. |
| 2 | Dividends are net of foreign withholding taxes of $3,186,000. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Health Care Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 261,446 | 430,364 | |
| Realized Net Gain (Loss) | 839,074 | 4,838,005 | |
| Change in Unrealized Appreciation (Depreciation) | 96,180 | (2,985,233) | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,196,700 | 2,283,136 | |
| Distributions | |||
| Investor Shares | (272,400) | (650,696) | |
| Admiral Shares | (1,454,452) | (3,443,247) | |
| Total Distributions | (1,726,852) | (4,093,943) | |
| Capital Share Transactions | |||
| Investor Shares | 18,917 | (610,620) | |
| Admiral Shares | 116,004 | 737,980 | |
| Net Increase (Decrease) from Capital Share Transactions | 134,921 | 127,360 | |
| Total Increase (Decrease) | (395,231) | (1,683,447) | |
| Net Assets | |||
| Beginning of Period | 47,427,226 | 49,110,673 | |
| End of Period | 47,031,995 | 47,427,226 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Health Care Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $210.54 | $218.60 | $204.57 | $203.34 | $215.96 | $189.88 |
| Investment Operations | ||||||
| Net Investment Income1 | 1.111 | 1.869 | 2.005 | 2.506 | 2.375 | 2.162 |
| Net Realized and Unrealized Gain (Loss) on Investments | 4.457 | 8.949 | 29.203 | 23.326 | 2.489 | 38.929 |
| Total from Investment Operations | 5.568 | 10.818 | 31.208 | 25.832 | 4.864 | 41.091 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.124) | (1.951) | (1.886) | (2.428) | (2.323) | (2.059) |
| Distributions from Realized Capital Gains | (7.594) | (16.927) | (15.292) | (22.174) | (15.161) | (12.952) |
| Total Distributions | (7.718) | (18.878) | (17.178) | (24.602) | (17.484) | (15.011) |
| Net Asset Value, End of Period | $208.39 | $210.54 | $218.60 | $204.57 | $203.34 | $215.96 |
| Total Return2 | 2.58% | 4.48% | 16.16% | 13.16% | 2.76% | 22.29% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $7,424 | $7,493 | $8,342 | $8,729 | $8,850 | $9,853 |
| Ratio of Total Expenses to Average Net Assets3 | 0.32%4 | 0.30% | 0.32% | 0.32% | 0.34% | 0.38% |
| Ratio of Net Investment Income to Average Net Assets | 1.09% | 0.82% | 0.95% | 1.25% | 1.12% | 1.02% |
| Portfolio Turnover Rate | 8% | 15% | 18% | 18% | 16% | 11% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.04%), (0.01%), (0.02%), 0.00%, and 0.04%. |
| 4 | The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.32%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
11
Health Care Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $88.77 | $92.17 | $86.27 | $85.75 | $91.08 | $80.09 |
| Investment Operations | ||||||
| Net Investment Income1 | .490 | .830 | .883 | 1.097 | 1.036 | .938 |
| Net Realized and Unrealized Gain (Loss) on Investments | 1.885 | 3.780 | 12.316 | 9.844 | 1.057 | 16.436 |
| Total from Investment Operations | 2.375 | 4.610 | 13.199 | 10.941 | 2.093 | 17.374 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.063) | (.870) | (.849) | (1.068) | (1.027) | (.920) |
| Distributions from Realized Capital Gains | (3.202) | (7.140) | (6.450) | (9.353) | (6.396) | (5.464) |
| Total Distributions | (3.265) | (8.010) | (7.299) | (10.421) | (7.423) | (6.384) |
| Net Asset Value, End of Period | $87.88 | $88.77 | $92.17 | $86.27 | $85.75 | $91.08 |
| Total Return2 | 2.61% | 4.53% | 16.21% | 13.22% | 2.81% | 22.35% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $39,608 | $39,934 | $40,769 | $38,126 | $37,888 | $39,214 |
| Ratio of Total Expenses to Average Net Assets3 | 0.27%4 | 0.25% | 0.27% | 0.27% | 0.28% | 0.33% |
| Ratio of Net Investment Income to Average Net Assets | 1.13% | 0.86% | 0.99% | 1.30% | 1.18% | 1.07% |
| Portfolio Turnover Rate | 8% | 15% | 18% | 18% | 16% | 11% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.04%), (0.01%), (0.02%), 0.00%, and 0.04%. |
| 4 | The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.27%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
12
Health Care Fund
Notes to Financial Statements
Vanguard Health Care 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. Each of the share classes has different
eligibility and minimum purchase requirements, and is designed for different types of investors.
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. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19
pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such
disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
| 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. 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
13
Health Care Fund
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.
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple
14
Health Care Fund
Secured Overnight Financing Rate inclusive of
an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized
gains. 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. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. 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. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the MSCI All Country World Health Care Index for the preceding three years. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net decrease of $3,084,000 (0.01%) based on performance. |
15
Health Care Fund
| 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, and distribution 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $1,742,000, representing less than 0.01% of the fund’s
net assets and 0.70% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| D. | The fund has asked its investment advisor 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 July 31, 2022, these arrangements reduced the fund’s expenses by $16,000 (an annual rate of less than 0.01% 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). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 33,614,867 | — | — | 33,614,867 |
| Common Stocks—Other | 394,786 | 12,113,823 | — | 12,508,609 |
| Temporary Cash Investments | 5,349 | 965,861 | — | 971,210 |
| Total | 34,015,002 | 13,079,684 | — | 47,094,686 |
16
Health Care Fund
| F. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 29,706,461 |
| Gross Unrealized Appreciation | 20,781,534 |
| Gross Unrealized Depreciation | (3,393,309) |
| Net Unrealized Appreciation (Depreciation) | 17,388,225 |
| G. | During the six months ended July 31, 2022, the fund purchased $3,533,136,000 of investment securities and sold $4,865,990,000 of investment securities, other than temporary cash investments. |
| H. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 199,046 | 962 | 629,952 | 2,783 | |
| Issued in Lieu of Cash Distributions | 255,615 | 1,203 | 609,552 | 2,709 | |
| Redeemed | (435,744) | (2,129) | (1,850,124) | (8,061) | |
| Net Increase (Decrease)—Investor Shares | 18,917 | 36 | (610,620) | (2,569) | |
| Admiral Shares | |||||
| Issued | 453,772 | 5,234 | 1,787,859 | 18,432 | |
| Issued in Lieu of Cash Distributions | 1,284,039 | 14,337 | 3,027,419 | 31,867 | |
| Redeemed | (1,621,807) | (18,710) | (4,077,298) | (42,774) | |
| Net Increase (Decrease)—Admiral Shares | 116,004 | 861 | 737,980 | 7,525 | |
17
Health Care Fund
| I. | Certain of the fund’s investments were in companies that were considered to be affiliated companies of the fund because the fund owned more than 5% of the outstanding voting securities of the company or the issuer was another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows: |
| Current Period Transactions | ||||||||
| Jan. 31, 2022 Market Value ($000) | Purchases at Cost ($000) | Proceeds from Securities Sold ($000) | Realized Net Gain (Loss) ($000) | Change in Unrealized App. (Dep.) ($000) | Income ($000) | Capital Gain Distributions Received ($000) | Jul. 31, 2022 Market Value ($000) | |
| 2seventy bio Inc. | 38,211 | — | — | — | (8,760) | — | — | 29,451 |
| Agios Pharmaceuticals Inc. | 159,034 | — | — | — | (47,983) | — | — | 111,051 |
| Alkermes plc | 301,083 | — | 201,154 | (86,001) | 104,343 | — | — | NA1 |
| Bluebird Bio Inc. | 48,445 | — | 5,159 | (113,062) | 89,612 | — | — | 19,836 |
| Eisai Co. Ltd. | 894,327 | — | — | — | (76,606) | 10,553 | — | 817,721 |
| Ironwood Pharmaceuticals Inc. Class A | 121,558 | — | — | — | 3,271 | — | — | 124,829 |
| Nektar Therapeutics Class A | 126,587 | — | — | — | (81,508) | — | — | 45,079 |
| UCB SA | 1,018,749 | 45,278 | 46,817 | 14,097 | (227,402) | 11,412 | — | 803,905 |
| Vanguard Market Liquidity Fund | 4,711 | NA2 | NA2 | (3) | — | — | — | 5,349 |
| Total | 2,712,705 | 45,278 | 253,130 | (184,969) | (245,033) | 21,965 | — | 1,957,221 |
| 1 | Not applicable—at July 31, 2022, the security was still held, but the issuer was no longer an affiliated company of the fund. |
| 2 | Not applicable—purchases and sales are for temporary cash investment purposes. |
| J. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
18
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Health Care Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company LLP (Wellington Management). The board determined that renewing the fund’s advisory
arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the 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 advisor 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 periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
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 arrangement. 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 the advisor. The board considered that Wellington Management, founded in
1928, is among the nation’s oldest and most respected institutional investment managers. The portfolio manager is aided by a team of experienced Global Industry Analysts who cover health care industries. This
health care team uses intensive fundamental analysis and deep knowledge of health care science and technology to identify companies with high-quality balance sheets, strong management, and the potential for new
products that will lead to above-average growth in revenue and earnings. The advisor invests in stocks broadly representing the health care industry, seeking to maintain exposure across five primary subsectors:
large-cap biotech/pharmaceuticals, mid-cap biotech/pharmaceuticals, small-cap biotech/pharmaceuticals, health care services, and medical technology. Wellington Management has advised the fund since its inception in
1984.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
19
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory
arrangement should continue.
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 below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is 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 schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets
increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
20
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Health Care Fund's Program and for carrying out the specific
responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past
year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The
Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
21
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Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2022
Vanguard Real Estate Index Funds
| Vanguard Real Estate Index Fund |
| Vanguard Real Estate II Index Fund |
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.
1
| Six Months Ended July 31, 2022 | |||
| Beginning
Account Value 1/31/2022 |
Ending
Account Value 7/31/2022 |
Expenses
Paid During Period | |
| Based on Actual Fund Return | |||
| Real Estate Index Fund | |||
| Investor Shares | $1,000.00 | $ 939.70 | $1.20 |
| ETF Shares | 1,000.00 | 940.50 | 0.58 |
| Admiral™ Shares | 1,000.00 | 940.60 | 0.58 |
| Institutional Shares | 1,000.00 | 940.50 | 0.48 |
| Real Estate II Index Fund | $1,000.00 | $ 940.70 | $0.38 |
| Based on Hypothetical 5% Yearly Return | |||
| Real Estate Index Fund | |||
| Investor Shares | $1,000.00 | $1,023.56 | $1.25 |
| ETF Shares | 1,000.00 | 1,024.20 | 0.60 |
| Admiral Shares | 1,000.00 | 1,024.20 | 0.60 |
| Institutional Shares | 1,000.00 | 1,024.30 | 0.50 |
| Real Estate II Index Fund | $1,000.00 | $1,024.40 | $0.40 |
The calculations are
based on expenses incurred in the most recent six-month period. The funds’ annualized six-month expense ratios for that period are: for the Real Estate Index Fund, 0.25% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral Shares, and
0.10% for Institutional Shares; and for the Real Estate II Index Fund, 0.08%. 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).
2
Real Estate Index Fund
Fund
Allocation
As of July
31, 2022
| Diversified Real Estate Activities | 0.1% |
| Diversified REITs | 2.7 |
| Health Care REITs | 8.1 |
| Hotel & Resort REITs | 2.6 |
| Industrial REITs | 11.8 |
| Office REITs | 5.9 |
| Real Estate Development | 0.2 |
| Real Estate Operating Companies | 0.5 |
| Real Estate Services | 4.0 |
| Residential REITs | 15.1 |
| Retail REITs | 11.3 |
| Specialized REITs | 37.7 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities
that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in derivatives (such as
futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry Classification Standard
(“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by
Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be
obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without
limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
3
Real Estate Index Fund
Financial
Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio
holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at
www.sec.gov.
4
Real Estate Index Fund
| Shares | Market
Value• ($000) | |||||
| Temporary Cash Investments (0.6%) | ||||||
| Money Market Fund (0.6%) | ||||||
| 6,7 | Vanguard
Market Liquidity Fund, 1.903% (Cost $482,230) |
4,824,316 | 482,239 | |||
| Total
Investments (100.0%) (Cost $66,280,672) |
76,718,222 | |||||
| Other Assets and Liabilities—Net (0.0%) | (9,314) | |||||
| Net Assets (100%) | 76,708,908 | |||||
| Cost is in $000. |
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $84,190,000. |
| 2 | Security value determined using significant unobservable inputs. |
| 3 | “Other” represents securities that are not classified by the fund’s benchmark index. |
| 4 | Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group. |
| 5 | Represents a wholly owned subsidiary of the fund. See accompanying financial statements for Vanguard Real Estate II Index Fund's Schedule of Investments. |
| 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 | Collateral of $88,289,000 was received for securities on loan, of which $84,183,000 is held in Vanguard Market Liquidity Fund and $4,106,000 is held in cash. |
| REIT—Real Estate Investment Trust. |
7
Real Estate Index Fund
Derivative Financial Instruments Outstanding as of Period
End
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination
Date |
Counterparty | Notional
Amount ($000) |
Floating
Interest Rate Received (Paid)1 (%) |
Value
and Unrealized Appreciation ($000) |
Value
and Unrealized (Depreciation) ($000) |
| American Homes 4 Rent Class A | 8/31/22 | BANA | 37,212 | (1.809) | 2,511 | — |
| Digital Realty Trust Inc. | 1/31/23 | GSI | 30,245 | (2.153) | 2,853 | — |
| Digital Realty Trust Inc. | 8/31/22 | BANA | 48,687 | (1.797) | 915 | — |
| Equity Residential | 8/31/22 | BANA | 14,444 | (1.836) | 1,339 | — |
| Equity Residential | 8/31/22 | BANA | 28,888 | (1.813) | 2,678 | — |
| Redfin Corp. | 1/31/23 | GSI | 3,059 | (2.144) | — | (15) |
| Seritage Growth Properties Class A | 1/31/23 | GSI | 4,312 | (2.129) | 446 | — |
| Simon Property Group Inc. | 1/31/23 | GSI | 38,544 | (2.165) | 4,894 | — |
| VICI Properties Inc. | 8/31/22 | BANA | 160,866 | (2.234) | 25,436 | — |
| Welltower Inc. | 8/31/22 | BANA | 61,764 | (1.804) | 2,910 | — |
| 43,982 | (15) | |||||
| 1 | Based on USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly. |
| BANA—Bank of America, N.A. | |
| GSI—Goldman Sachs International. |
At July
31, 2022, the counterparties had deposited in segregated accounts securities with a value of $17,357,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral
part of the Financial Statements.
8
Real Estate Index Fund
Statement of
Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $58,590,407) | 67,257,782 |
| Affiliated Issuers (Cost $482,230) | 482,239 |
| Vanguard Real Estate II Index Fund (Cost $7,208,035) | 8,978,201 |
| Total Investments in Securities | 76,718,222 |
| Investment in Vanguard | 2,409 |
| Cash | 4,106 |
| Receivables for Investment Securities Sold | 20,197 |
| Receivables for Accrued Income | 128,280 |
| Receivables for Capital Shares Issued | 18,678 |
| Unrealized Appreciation—Over-the-Counter Swap Contracts | 43,982 |
| Total Assets | 76,935,874 |
| Liabilities | |
| Due to Custodian | 9,652 |
| Payables for Investment Securities Purchased | 102,763 |
| Collateral for Securities on Loan | 88,289 |
| Payables for Capital Shares Redeemed | 22,634 |
| Payables to Vanguard | 3,613 |
| Unrealized Depreciation—Over-the-Counter Swap Contracts | 15 |
| Total Liabilities | 226,966 |
| Net Assets | 76,708,908 |
| 1 Includes $84,190 of securities on loan. | |
9
Real Estate Index Fund
| Statement
of Assets and Liabilities
(continued) | |
|
At July 31, 2022, net assets consisted of: |
|
| ($000s, except shares and per-share amounts) | Amount |
| Paid-in Capital | 66,875,970 |
| Total Distributable Earnings (Loss) | 9,832,938 |
| Net Assets | 76,708,908 |
| Investor Shares—Net Assets | |
| Applicable
to 4,475,070 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
147,117 |
| Net Asset Value Per Share—Investor Shares | $32.87 |
| ETF Shares—Net Assets | |
| Applicable
to 413,914,080 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
40,954,284 |
| Net Asset Value Per Share—ETF Shares | $98.94 |
| Admiral Shares—Net Assets | |
| Applicable
to 170,284,766 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
23,878,936 |
| Net Asset Value Per Share—Admiral Shares | $140.23 |
| Institutional Shares—Net Assets | |
| Applicable
to 540,393,314 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
11,728,571 |
| Net Asset Value Per Share—Institutional Shares | $21.70 |
See accompanying Notes, which are an
integral part of the Financial Statements.
10
Real Estate Index Fund
Statement of
Operations
| Six
Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends—Unaffiliated Issuers | 1,063,139 |
| Dividends—Affiliated Issuers | 30,576 |
| Dividends—Vanguard Real Estate II Index Fund | 117,477 |
| Interest—Affiliated Issuers | 645 |
| Securities Lending—Net | 660 |
| Total Income | 1,212,497 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 887 |
| Management and Administrative—Investor Shares | 213 |
| Management and Administrative—ETF Shares | 22,748 |
| Management and Administrative—Admiral Shares | 12,902 |
| Management and Administrative—Institutional Shares | 5,143 |
| Marketing and Distribution—Investor Shares | 6 |
| Marketing and Distribution—ETF Shares | 722 |
| Marketing and Distribution—Admiral Shares | 459 |
| Marketing and Distribution—Institutional Shares | 186 |
| Custodian Fees | 98 |
| Shareholders’ Reports—Investor Shares | 1 |
| Shareholders’ Reports—ETF Shares | 675 |
| Shareholders’ Reports—Admiral Shares | 173 |
| Shareholders’ Reports—Institutional Shares | 64 |
| Trustees’ Fees and Expenses | 20 |
| Other Expenses | 6 |
| Total Expenses | 44,303 |
| Expenses Paid Indirectly | (23) |
| Net Expenses | 44,280 |
| Net Investment Income | 1,168,217 |
| Realized Net Gain (Loss) | |
| Capital Gain Distributions Received—Unaffiliated Issuers | 45,697 |
| Capital Gain Distributions Received—Vanguard Real Estate II Index Fund | — |
| Investment Securities Sold—Unaffiliated Issuers1 | 1,688,874 |
| Investment Securities Sold—Affiliated Issuers2 | 21,399 |
| Investment Securities Sold—Vanguard Real Estate II Index Fund | — |
| Swap Contracts | (39,546) |
| Realized Net Gain (Loss) | 1,716,424 |
11
Real Estate Index Fund
| Statement of Operations (continued) | |
| Six
Months Ended July 31, 2022 | |
| ($000) | |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Unaffiliated Issuers | (7,655,293) |
| Investment Securities—Affiliated Issuers | 204,832 |
| Investment Securities—Vanguard Real Estate II Index Fund | (683,638) |
| Swap Contracts | 43,967 |
| Change in Unrealized Appreciation (Depreciation) | (8,090,132) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (5,205,491) |
| 1 | Includes $1,805,234,000 of net gain (loss) resulting from in-kind redemptions. |
| 2 | Includes $32,314,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying Notes, which are an integral part of the
Financial Statements.
12
Real Estate Index Fund
Statement of
Changes in Net Assets
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 1,168,217 | 1,487,532 | |
| Realized Net Gain (Loss) | 1,716,424 | 2,507,302 | |
| Change in Unrealized Appreciation (Depreciation) | (8,090,132) | 14,077,791 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (5,205,491) | 18,072,625 | |
| Distributions | |||
| Investor Shares | (1,879) | (3,637) | |
| ETF Shares | (490,481) | (811,715) | |
| Admiral Shares | (276,428) | (463,925) | |
| Institutional Shares | (135,640) | (220,900) | |
| Return of Capital | |||
| Investor Shares | — | (1,874) | |
| ETF Shares | — | (418,428) | |
| Admiral Shares | — | (239,147) | |
| Institutional Shares | — | (113,871) | |
| Total Distributions | (904,428) | (2,273,497) | |
| Capital Share Transactions | |||
| Investor Shares | (33,562) | (35,113) | |
| ETF Shares | (2,289,715) | 6,252,486 | |
| Admiral Shares | (70,519) | 1,052,588 | |
| Institutional Shares | 490,722 | 221,639 | |
| Net Increase (Decrease) from Capital Share Transactions | (1,903,074) | 7,491,600 | |
| Total Increase (Decrease) | (8,012,993) | 23,290,728 | |
| Net Assets | |||
| Beginning of Period | 84,721,901 | 61,431,173 | |
| End of Period | 76,708,908 | 84,721,901 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
13
Real Estate Index Fund
Financial
Highlights
| Investor Shares | ||||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $35.37 | $28.23 | $31.21 | $27.69 | $26.40 | $27.38 |
| Investment Operations | ||||||
| Net Investment Income1 | .459 | .602 | .586 | .719 | .787 | .761 |
| Net Realized and Unrealized Gain (Loss) on Investments | (2.600) | 7.475 | (2.498) | 3.801 | 1.639 | (.614) |
| Total from Investment Operations | (2.141) | 8.077 | (1.912) | 4.520 | 2.426 | .147 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.359) | (.620) | (.624) | (.752) | (.851) | (.788) |
| Distributions from Realized Capital Gains | — | — | — | — | — | (.011) |
| Return of Capital | — | (.317) | (.444) | (.248) | (.285) | (.328) |
| Total Distributions | (.359) | (.937) | (1.068) | (1.000) | (1.136) | (1.127) |
| Net Asset Value, End of Period | $32.87 | $35.37 | $28.23 | $31.21 | $27.69 | $26.40 |
| Total Return2 | -6.03% | 28.73% | -5.88% | 16.59% | 9.53% | 0.45% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $147 | $196 | $188 | $243 | $1,871 | $2,143 |
| Ratio of Total Expenses to Average Net Assets | 0.25% 3 | 0.26% | 0.26% | 0.26% | 0.25% | 0.26% |
| Ratio of Net Investment Income to Average Net Assets | 2.58% | 1.77% | 2.18% | 2.48% | 3.02% | 2.87% |
| Portfolio Turnover Rate4 | 4% | 7% | 8% | 6% | 24% | 6% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.25%. |
| 4 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral
part of the Financial Statements.
14
Real Estate Index Fund
Financial
Highlights
| ETF Shares | ||||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $106.44 | $84.96 | $93.93 | $83.36 | $79.47 | $82.43 |
| Investment Operations | ||||||
| Net Investment Income1 | 1.470 | 1.960 | 1.889 | 2.335 | 2.487 | 2.499 |
| Net Realized and Unrealized Gain (Loss) on Investments | (7.824) | 22.486 | (7.525) | 11.379 | 4.934 | (1.945) |
| Total from Investment Operations | (6.354) | 24.446 | (5.636) | 13.714 | 7.421 | .554 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.146) | (1.943) | (1.947) | (2.364) | (2.646) | (2.458) |
| Distributions from Realized Capital Gains | — | — | — | — | — | (.034) |
| Return of Capital | — | (1.023) | (1.387) | (.780) | (.885) | (1.022) |
| Total Distributions | (1.146) | (2.966) | (3.334) | (3.144) | (3.531) | (3.514) |
| Net Asset Value, End of Period | $98.94 | $106.44 | $84.96 | $93.93 | $83.36 | $79.47 |
| Total Return | -5.95% | 28.88% | -5.80% | 16.70% | 9.70% | 0.59% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $40,954 | $46,673 | $32,064 | $37,682 | $30,857 | $32,377 |
| Ratio of Total Expenses to Average Net Assets | 0.12% 2 | 0.12% | 0.12% | 0.12% | 0.12% | 0.12% |
| Ratio of Net Investment Income to Average Net Assets | 2.76% | 1.90% | 2.33% | 2.60% | 3.15% | 3.01% |
| Portfolio Turnover Rate3 | 4% | 7% | 8% | 6% | 24% | 6% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.12%. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral
part of the Financial Statements.
15
Real Estate Index Fund
Financial
Highlights
| Admiral Shares | ||||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $150.85 | $120.40 | $133.12 | $118.14 | $112.63 | $116.83 |
| Investment Operations | ||||||
| Net Investment Income1 | 2.096 | 2.761 | 2.677 | 3.315 | 3.507 | 3.538 |
| Net Realized and Unrealized Gain (Loss) on Investments | (11.091) | 31.890 | (10.672) | 16.121 | 7.008 | (2.761) |
| Total from Investment Operations | (8.995) | 34.651 | (7.995) | 19.436 | 10.515 | .777 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.625) | (2.770) | (2.759) | (3.350) | (3.751) | (3.483) |
| Distributions from Realized Capital Gains | — | — | — | — | — | (.048) |
| Return of Capital | — | (1.431) | (1.966) | (1.106) | (1.254) | (1.447) |
| Total Distributions | (1.625) | (4.201) | (4.725) | (4.456) | (5.005) | (4.978) |
| Net Asset Value, End of Period | $140.23 | $150.85 | $120.40 | $133.12 | $118.14 | $112.63 |
| Total Return2 | -5.94% | 28.91% | -5.74% | 16.73% | 9.69% | 0.58% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $23,879 | $25,764 | $19,702 | $23,274 | $18,223 | $17,757 |
| Ratio of Total Expenses to Average Net Assets | 0.12% 3 | 0.12% | 0.12% | 0.12% | 0.11% | 0.12% |
| Ratio of Net Investment Income to Average Net Assets | 2.78% | 1.90% | 2.33% | 2.60% | 3.16% | 3.01% |
| Portfolio Turnover Rate4 | 4% | 7% | 8% | 6% | 24% | 6% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.12%. |
| 4 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral
part of the Financial Statements.
16
Real Estate Index Fund
Financial
Highlights
| Institutional Shares | ||||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $23.35 | $18.64 | $20.60 | $18.28 | $17.43 | $18.08 |
| Investment Operations | ||||||
| Net Investment Income1 | .328 | .432 | .421 | .518 | .543 | .568 |
| Net Realized and Unrealized Gain (Loss) on Investments | (1.724) | 4.933 | (1.646) | 2.496 | 1.085 | (.444) |
| Total from Investment Operations | (1.396) | 5.365 | (1.225) | 3.014 | 1.628 | .124 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.254) | (.432) | (.429) | (.522) | (.583) | (.542) |
| Distributions from Realized Capital Gains | — | — | — | — | — | (.007) |
| Return of Capital | — | (.223) | (.306) | (.172) | (.195) | (.225) |
| Total Distributions | (.254) | (.655) | (.735) | (.694) | (.778) | (.774) |
| Net Asset Value, End of Period | $21.70 | $23.35 | $18.64 | $20.60 | $18.28 | $17.43 |
| Total Return | -5.95% | 28.91% | -5.68% | 16.77% | 9.70% | 0.60% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $11,729 | $12,089 | $9,478 | $10,027 | $8,206 | $8,176 |
| Ratio of Total Expenses to Average Net Assets | 0.10% 2 | 0.10% | 0.10% | 0.10% | 0.09% | 0.10% |
| Ratio of Net Investment Income to Average Net Assets | 2.81% | 1.92% | 2.37% | 2.63% | 3.18% | 3.03% |
| Portfolio Turnover Rate3 | 4% | 7% | 8% | 6% | 24% | 6% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.10%. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral
part of the Financial Statements.
17
Real Estate Index Fund
Notes to
Financial Statements
Vanguard Real Estate Index Fund is registered under the
Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, ETF Shares, Admiral Shares, and Institutional Shares. Each of the share classes has different eligibility and
minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker.
As a part of its principal investment strategy, the fund
attempts to replicate its benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through a wholly owned subsidiary—in the stocks that make up the index. Vanguard Real Estate II Index Fund is
the wholly owned subsidiary in which the fund has invested a portion of its assets. For additional financial information about the Real Estate II Index Fund, refer to the accompanying financial statements.
Significant market disruptions, such as those caused by
pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such
disruptions could have an adverse impact on the value of the fund investments and fund performance.
| 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 materially affected by
events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in affiliated Vanguard funds are valued at that
fund's net asset value.
2. Swap Contracts: The
fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the
increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the
value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the
fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all types of swaps is the
possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty
risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as
security for their
18
Real Estate Index Fund
performance. In the absence of a default, the collateral pledged or
received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, 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 swap 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 securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap 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.
The notional amounts of swap contracts are not recorded
in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Assets and Liabilities as an asset
(liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap, at which time realized gain (loss) is recorded.
During the six months ended July 31, 2022, the
fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes: The fund intends to
continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is
generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the
fund’s financial statements.
4. Distributions: Distributions to shareholders are
recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis at
the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
5. 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 before the opening of the market 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.
19
Real Estate Index Fund
While
collateral mitigates counterparty risk, in the event 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 Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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.
6. Credit Facilities and Interfund
Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility
provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the
fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the
facility, which 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 either facility bear
interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the
uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the
“Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the
“Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend
overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The
board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not
utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions received from investment
securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports annually the tax character of its distributions. Dividend
income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such
amounts for investment security distributions for which actual information has not been reported. Income, capital gain, and return of capital distributions received from affiliated Vanguard funds are recorded on ex-dividend date. Interest income
includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
20
Real Estate Index Fund
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. | In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution 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 and are generally settled twice a month. |
Upon the request of Vanguard, the fund may invest up to
0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $2,409,000, representing less than 0.01% of the fund’s net assets and 0.96% of Vanguard’s capital received
pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| C. | The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, custodian fee offset arrangements reduced the fund’s expenses by $23,000 (an annual rate of less than 0.01% of average net assets). |
| D. | Various inputs may be used to determine the value of the fund’s investments and derivatives. 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). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
21
Real Estate Index Fund
The following table summarizes the market value of the
fund's investments and derivatives as of July 31, 2022, based on the inputs used to value them:
| Level
1 ($000) |
Level
2 ($000) |
Level
3 ($000) |
Total
($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 76,235,969 | — | 14 | 76,235,983 |
| Temporary Cash Investments | 482,239 | — | — | 482,239 |
| Total | 76,718,208 | — | 14 | 76,718,222 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Swap Contracts | — | 43,982 | — | 43,982 |
| Liabilities | ||||
| Swap Contracts | — | 15 | — | 15 |
| E. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount
($000) | |
| Tax Cost | 66,532,469 |
| Gross Unrealized Appreciation | 16,444,842 |
| Gross Unrealized Depreciation | (6,215,122) |
| Net Unrealized Appreciation (Depreciation) | 10,229,720 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,552,105,000 that may be carried forward indefinitely to offset future net capital
gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward
balance above.
| F. | During the six months ended July 31, 2022, the fund purchased $6,666,599,000 of investment securities and sold $8,517,790,000 of investment securities, other than temporary cash investments. Purchases and sales include $2,716,008,000 and $5,022,320,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares. |
The fund purchased securities from and sold securities to
other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such
purchases were $11,282,000 and sales were $2,771,000, resulting in net realized loss of $235,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
22
Real Estate Index Fund
| G. | Capital share transactions for each class of shares were: |
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||||
| Amount
($000) |
Shares
(000) |
Amount
($000) |
Shares
(000) | ||
| Investor Shares | |||||
| Issued | 8,183 | 239 | 40,853 | 1,192 | |
| Issued in Lieu of Cash Distributions | 1,879 | 58 | 5,511 | 161 | |
| Redeemed | (43,624) | (1,361) | (81,477) | (2,463) | |
| Net Increase (Decrease)—Investor Shares | (33,562) | (1,064) | (35,113) | (1,110) | |
| ETF Shares | |||||
| Issued | 2,739,304 | 26,810 | 12,323,320 | 119,786 | |
| Issued in Lieu of Cash Distributions | — | — | — | — | |
| Redeemed | (5,029,019) | (51,400) | (6,070,834) | (58,700) | |
| Net Increase (Decrease)—ETF Shares | (2,289,715) | (24,590) | 6,252,486 | 61,086 | |
| Admiral Shares | |||||
| Issued | 1,491,343 | 10,427 | 4,265,102 | 29,377 | |
| Issued in Lieu of Cash Distributions | 242,660 | 1,768 | 616,726 | 4,188 | |
| Redeemed | (1,804,522) | (12,701) | (3,829,240) | (26,405) | |
| Net Increase (Decrease)—Admiral Shares | (70,519) | (506) | 1,052,588 | 7,160 | |
| Institutional Shares | |||||
| Issued | 1,257,128 | 57,103 | 2,230,405 | 98,845 | |
| Issued in Lieu of Cash Distributions | 125,971 | 5,933 | 311,998 | 13,695 | |
| Redeemed | (892,377) | (40,438) | (2,320,764) | (103,325) | |
| Net Increase (Decrease)—Institutional Shares | 490,722 | 22,598 | 221,639 | 9,215 | |
23
Real Estate Index Fund
H.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 | ||||||||
| Jan.
31, 2022 Market Value ($000) |
Purchases
at Cost ($000) |
Proceeds
from Securities Sold1 ($000) |
Realized
Net Gain (Loss) ($000) |
Change
in Unrealized App. (Dep.) ($000) |
Income
($000) |
Capital
Gain Distributions Received ($000) |
Jul.
31, 2022 Market Value ($000) | |
| Easterly Government Properties Inc. | 90,343 | 5,544 | 16,623 | (251) | (2,921) | 2,164 | — | NA 2 |
| Equity Commonwealth | NA 3 | 10,687 | 27,803 | (1,498) | 12,511 | — | — | NA 2 |
| Hudson Pacific Properties Inc. | NA 3 | 11,338 | 17,834 | (4,079) | (57,207) | 3,572 | — | NA 2 |
| Vanguard Market Liquidity Fund | 147,613 | NA 4 | NA 4 | (50) | (14) | 645 | — | 482,239 |
| Vanguard Real Estate II Index Fund | 9,542,041 | 117,477 | — | — | (683,638) | 117,477 | — | 8,978,201 |
| VICI Properties Inc. | NA 3,5 | 488,161 | 282,110 | 27,277 | 252,463 | 24,840 | — | NA 2 |
| Total | 9,779,997 | 633,207 | 344,370 | 21,399 | (478,806) | 148,698 | — | 9,460,440 |
| 1 | Does not include adjustments related to return of capital. |
| 2 | Not applicable—at July 31, 2022, the security was still held, but the issuer was no longer an affiliated company of the fund. |
| 3 | Not applicable—at January 31, 2022, the issuer was not an affiliated company of the fund. |
| 4 | Not applicable—purchases and sales are for temporary cash investment purposes. |
| 5 | Not applicable—in April 2022, VICI Properties Inc. acquired MGM Growth Properties LLC. |
| I. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
24
Real Estate II Index Fund
Fund
Allocation
As of July
31, 2022
| Diversified Real Estate Activities | 0.1% |
| Diversified REITs | 2.7 |
| Health Care REITs | 8.1 |
| Hotel & Resort REITs | 2.5 |
| Industrial REITs | 11.6 |
| Office REITs | 5.9 |
| Real Estate Development | 0.2 |
| Real Estate Operating Companies | 0.5 |
| Real Estate Services | 4.0 |
| Residential REITs | 15.2 |
| Retail REITs | 11.3 |
| Specialized REITs | 37.9 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities
that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in derivatives (such as
futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry Classification Standard
(“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by
Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be
obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without
limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
25
Real Estate II Index
Fund
Financial Statements (unaudited)
Schedule of
Investments
As of July
31, 2022
The fund files its complete schedule of portfolio
holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at
www.sec.gov.
26
Real Estate II Index
Fund
Derivative Financial Instruments Outstanding as of Period
End
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination
Date |
Counterparty | Notional
Amount ($000) |
Floating
Interest Rate Received (Paid)1 (%) |
Value
and Unrealized Appreciation ($000) |
Value
and Unrealized (Depreciation) ($000) |
| Americold Realty Trust Inc. | 1/31/23 | GSI | 7,788 | (2.093) | 396 | — |
| Park Hotels & Resorts Inc. | 1/31/23 | GSI | 5,544 | (2.110) | 690 | — |
| 1,086 | — | |||||
| 1 | Based on USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly. |
| GSI—Goldman Sachs International. |
At July
31, 2022, the counterparties had deposited in segregated accounts securities with a value of $1,092,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral
part of the Financial Statements.
29
Real Estate II Index
Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $7,229,000) | 8,963,469 |
| Affiliated Issuers (Cost $26,840) | 26,840 |
| Total Investments in Securities | 8,990,309 |
| Investment in Vanguard | 316 |
| Receivables for Investment Securities Sold | 1,218 |
| Receivables for Accrued Income | 16,915 |
| Unrealized Appreciation—Over-the-Counter Swap Contracts | 1,086 |
| Total Assets | 9,009,844 |
| Liabilities | |
| Due to Custodian | 1,218 |
| Payables for Investment Securities Purchased | 15,788 |
| Collateral for Securities on Loan | 14,336 |
| Payables to Vanguard | 301 |
| Total Liabilities | 31,643 |
| Net Assets | 8,978,201 |
| 1 Includes $13,847 of securities on loan. | |
|
At July 31, 2022, net assets consisted of: |
|
| Paid-in Capital | 7,206,235 |
| Total Distributable Earnings (Loss) | 1,771,966 |
| Net Assets | 8,978,201 |
| Net Assets | |
| Applicable
to 376,527,417 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
8,978,201 |
| Net Asset Value Per Share | $23.84 |
See accompanying Notes, which are an
integral part of the Financial Statements.
30
Real Estate II Index
Fund
Statement of Operations
| Six
Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 142,749 |
| Interest 1 | 17 |
| Securities Lending—Net | 70 |
| Total Income | 142,836 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 618 |
| Management and Administrative | 2,872 |
| Marketing and Distribution | 79 |
| Custodian Fees | 13 |
| Shareholders’ Reports | — |
| Trustees’ Fees and Expenses | 2 |
| Other Expenses | 6 |
| Total Expenses | 3,590 |
| Expenses Paid Indirectly | (1) |
| Net Expenses | 3,589 |
| Net Investment Income | 139,247 |
| Realized Net Gain (Loss) | |
| Capital Gain Distributions Received | 5,521 |
| Investment Securities Sold1 | 14,480 |
| Swap Contracts | (1,523) |
| Realized Net Gain (Loss) | 18,478 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | (722,651) |
| Swap Contracts | 1,086 |
| Change in Unrealized Appreciation (Depreciation) | (721,565) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (563,840) |
| 1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $17,000, ($6,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which
are an integral part of the Financial Statements.
31
Real Estate II Index
Fund
Statement of Changes in Net Assets
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 139,247 | 176,897 | |
| Realized Net Gain (Loss) | 18,478 | 53,384 | |
| Change in Unrealized Appreciation (Depreciation) | (721,565) | 1,912,230 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (563,840) | 2,142,511 | |
| Distributions | |||
| Net Investment Income and/or Realized Capital Gains | (117,477) | (186,333) | |
| Return of Capital | — | (76,790) | |
| Total Distributions | (117,477) | (263,123) | |
| Capital Share Transactions | |||
| Issued | — | — | |
| Issued in Lieu of Cash Distributions | 117,477 | 263,123 | |
| Redeemed | — | — | |
| Net Increase (Decrease) from Capital Share Transactions | 117,477 | 263,123 | |
| Total Increase (Decrease) | (563,840) | 2,142,511 | |
| Net Assets | |||
| Beginning of Period | 9,542,041 | 7,399,530 | |
| End of Period | 8,978,201 | 9,542,041 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
32
Real Estate II Index
Fund
Financial Highlights
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | September 26,
20171 to January 31, 2018 | |||
| 2022 | 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $25.69 | $20.50 | $22.64 | $20.10 | $19.17 | $20.00 |
| Investment Operations | ||||||
| Net Investment Income2 | .373 | .484 | .471 | .571 | .611 | .268 |
| Net Realized and Unrealized Gain (Loss) on Investments | (1.908) | 5.427 | (1.808) | 2.752 | 1.176 | (.834) |
| Total from Investment Operations | (1.535) | 5.911 | (1.337) | 3.323 | 1.787 | (.566) |
| Distributions | ||||||
| Dividends from Net Investment Income | (.315) | (.477) | (.465) | (.590) | (.626) | (.225) |
| Distributions from Realized Capital Gains | — | (.034) | — | — | — | (.030) |
| Return of Capital | — | (.210) | (.338) | (.193) | (.231) | (.009) |
| Total Distributions | (.315) | (.721) | (.803) | (.783) | (.857) | (.264) |
| Net Asset Value, End of Period | $23.84 | $25.69 | $20.50 | $22.64 | $20.10 | $19.17 |
| Total Return | -5.93% | 28.96% | -5.70% | 16.78% | 9.68% | -2.89% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $8,978 | $9,542 | $7,400 | $7,848 | $6,719 | $6,126 |
| Ratio of Total Expenses to Average Net Assets | 0.08% 3 | 0.08% | 0.08% | 0.08% | 0.08% | 0.08% 4 |
| Ratio of Net Investment Income to Average Net Assets | 2.90% | 1.95% | 2.41% | 2.63% | 3.22% | 3.84% 4 |
| Portfolio Turnover Rate | 3% | 6% | 4% | 3% | 23% | 1% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.08%. |
| 4 | Annualized. |
See accompanying Notes, which are an integral
part of the Financial Statements.
33
Real Estate II Index
Fund
Notes to Financial Statements
Vanguard Real Estate II Index Fund is registered under
the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund is a wholly owned subsidiary of Vanguard Real Estate Index Fund (“Real Estate Index Fund”), and at July 31, 2022, the Real Estate Index Fund
was the record and beneficial owner of 100% of the fund’s net assets. As part of the Real Estate Index Fund’s principal investment strategy, it attempts to replicate the benchmark index by investing all, or substantially all, of its
assets—either directly or indirectly through the fund—in the stocks that make up the index.
Significant market disruptions, such as those caused by
pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such
disruptions could have an adverse impact on the value of the fund investments and fund performance.
| 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 materially affected by
events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at
that fund's net asset value.
2. Swap
Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e.,
receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that
represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the
same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all types of swaps is the
possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty
risk by entering into swaps only with a diverse group of prequalified counterparties, 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. In the event of a counterparty’s default (including bankruptcy), the fund may terminate
any swap contracts with that counterparty, 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
34
Real Estate II Index
Fund
arrangements. The swap 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 securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap 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.
The notional amounts of swap contracts are not recorded
in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Assets and Liabilities as an asset
(liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap, at which time realized gain (loss) is recorded.
During the six months ended July 31, 2022, the
fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes: The fund intends to
continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is
generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the
fund’s financial statements.
4. Distributions: Distributions to shareholders are
recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis at
the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
5. 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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period the
securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities
35
Real Estate II Index
Fund
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.
6. Credit Facilities and Interfund Lending Program:
The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by
Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s
regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which
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 either facility bear interest at an
agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted
credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the
“Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the
“Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend
overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The
board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not
utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions received from investment
securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports annually the tax character of its distributions. Dividend
income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such
amounts for investment security distributions for which actual information has not been reported. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
| B. | In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution 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 and are generally settled twice a month. |
36
Real Estate II Index
Fund
Upon the request of Vanguard, the fund may invest up to
0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $316,000, representing less than 0.01% of the fund’s net assets and 0.13% of Vanguard’s capital received
pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| C. | The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, custodian fee offset arrangements reduced the fund’s expenses by $1,000 (an annual rate of less than 0.01% of average net assets). |
| D. | Various inputs may be used to determine the value of the fund’s investments and derivatives. 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). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the
fund's investments and derivatives as of July 31, 2022, based on the inputs used to value them:
| Level
1 ($000) |
Level
2 ($000) |
Level
3 ($000) |
Total
($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 8,963,469 | — | — | 8,963,469 |
| Temporary Cash Investments | 26,840 | — | — | 26,840 |
| Total | 8,990,309 | — | — | 8,990,309 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Swap Contracts | — | 1,086 | — | 1,086 |
| E. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount
($000) | |
| Tax Cost | 7,288,336 |
| Gross Unrealized Appreciation | 2,502,589 |
| Gross Unrealized Depreciation | (799,530) |
| Net Unrealized Appreciation (Depreciation) | 1,703,059 |
37
Real Estate II Index
Fund
| F. | During the six months ended July 31, 2022, the fund purchased $461,971,000 of investment securities and sold $306,012,000 of investment securities, other than temporary cash investments. |
The fund purchased securities from and sold securities to
other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such
purchases were $1,390,000 and sales were $140,000, resulting in net realized loss of $19,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
| G. | Capital shares issued and redeemed were: |
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||
| Shares
(000) |
Shares
(000) | ||
| Issued | — | — | |
| Issued in Lieu of Cash Distributions | 5,076 | 10,506 | |
| Redeemed | — | — | |
| Net Increase (Decrease) in Shares Outstanding | 5,076 | 10,506 |
| H. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
38
Trustees Approve Advisory
Arrangements
The board of trustees of Vanguard Real Estate Index Fund and the board
of trustees of Vanguard Real Estate II Index Fund have renewed their respective fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. Each board determined that continuing the
respective fund’s internalized management structure was in the best interests of the fund and its shareholders.
Each board based its decision upon an evaluation of the
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 advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
Each 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, each board received periodic reports
throughout the year, which included information about the respective fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the
advisor.
Prior to their meeting, the trustees of
each board 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 either board
approved its respective fund’s arrangement. Rather, it was the totality of the circumstances that drove each board’s decision.
Nature, extent, and quality of services
The board of the Real Estate Index Fund reviewed the quality of that
fund’s investment management services over both the short and long term, while the board of the Real Estate II Index Fund reviewed the quality of that fund’s investment management services since its inception in 2017; they each took into
account the organizational depth and stability of the advisor. Each board considered that Vanguard has been managing investments for more than four decades. The Equity Index Group adheres to a sound, disciplined investment management process; the
team has considerable experience, stability, and depth.
Each board concluded that Vanguard’s experience,
stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement with its respective fund.
Investment performance
The board of the Real Estate Index Fund considered the short- and
long-term performance of that fund, including any periods of outperformance or underperformance compared with its target index and peer group, while the board of the Real Estate II Index Fund considered the short-term and since inception performance
of that fund compared with its target index and peer group. Each board concluded that the performance of its respective fund was such that its advisory arrangement should continue.
39
Cost
Each board concluded that the respective fund’s expense ratio was
below the average expense ratio charged by funds in its peer group and that the respective fund’s advisory expenses were also below the peer-group average.
Neither board conducts a profitability analysis of
Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of scale
Each board concluded that its respective fund’s arrangement with
Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
Each board will consider whether to renew its respective
advisory arrangement again after a one-year period.
40
Liquidity Risk Management
Vanguard funds (except for the money market funds) have
adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to
assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity
risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term
cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for
classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Real Estate Index Funds
approved the appointment of liquidity risk management program administrators responsible for administering the Program for Vanguard Real Estate Index Fund and Vanguard Real Estate II Index Fund, and for carrying out the specific responsibilities set
forth in the Program, including reporting to the board on at least an annual basis regarding the Program's operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The
board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and
was implemented effectively to manage the funds' liquidity risk.
41
Semiannual Report | July 31, 2022
Vanguard Dividend
Growth Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Liquidity Risk Management | 15 |
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.
1
| Six Months Ended July 31, 2022 | |||
| Dividend Growth Fund | Beginning Account Value 1/31/2022 | Ending Account Value 7/31/2022 | Expenses Paid During Period |
| Based on Actual Fund Return | $1,000.00 | $973.70 | $1.47 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.31 | 1.51 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.30%. 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).
2
Dividend Growth Fund
Fund Allocation
As of July 31, 2022
| Communication Services | 1.5% |
| Consumer Discretionary | 11.7 |
| Consumer Staples | 16.0 |
| Financials | 8.4 |
| Health Care | 18.5 |
| Industrials | 20.8 |
| Information Technology | 15.1 |
| Materials | 5.1 |
| Real Estate | 2.9 |
The table reflects the fund’s
investments, except for short-term investments. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which
includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
3
Dividend Growth Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Dividend Growth Fund
See
accompanying Notes, which are an integral part of the Financial Statements.
5
Dividend Growth Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $30,939,411) | 52,972,762 |
| Affiliated Issuers (Cost $26) | 26 |
| Total Investments in Securities | 52,972,788 |
| Investment in Vanguard | 1,931 |
| Cash | 18 |
| Receivables for Accrued Income | 95,889 |
| Receivables for Capital Shares Issued | 31,086 |
| Total Assets | 53,101,712 |
| Liabilities | |
| Foreign Currency Due to Custodian, at Value (Proceeds $3) | 3 |
| Payables to Investment Advisor | 18,930 |
| Payables for Capital Shares Redeemed | 15,817 |
| Payables to Vanguard | 3,160 |
| Total Liabilities | 37,910 |
| Net Assets | 53,063,802 |
| At July 31, 2022, net assets consisted of: | |
| Paid-in Capital | 29,805,208 |
| Total Distributable Earnings (Loss) | 23,258,594 |
| Net Assets | 53,063,802 |
| Net Assets | |
| Applicable to 1,487,643,077 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 53,063,802 |
| Net Asset Value Per Share | $35.67 |
See accompanying
Notes, which are an integral part of the Financial Statements.
6
Dividend Growth Fund
Statement of Operations
| Six Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 520,937 |
| Interest2 | 3,124 |
| Securities Lending—Net | — |
| Total Income | 524,061 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 34,501 |
| Performance Adjustment | 7,006 |
| The Vanguard Group—Note C | |
| Management and Administrative | 34,703 |
| Marketing and Distribution | 1,635 |
| Custodian Fees | 126 |
| Shareholders’ Reports | 223 |
| Trustees’ Fees and Expenses | 13 |
| Other Expenses | 5 |
| Total Expenses | 78,212 |
| Expenses Paid Indirectly | (21) |
| Net Expenses | 78,191 |
| Net Investment Income | 445,870 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 1,106,933 |
| Foreign Currencies | (768) |
| Realized Net Gain (Loss) | 1,106,165 |
| Change in Unrealized Appreciation (Depreciation) of Investment Securities2 | (2,986,458) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,434,423) |
| 1 | Dividends are net of foreign withholding taxes of $1,580,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $0, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Dividend Growth Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 445,870 | 808,227 | |
| Realized Net Gain (Loss) | 1,106,165 | 3,426,528 | |
| Change in Unrealized Appreciation (Depreciation) | (2,986,458) | 7,167,222 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,434,423) | 11,401,977 | |
| Distributions | |||
| Total Distributions | (1,748,801) | (2,973,671) | |
| Capital Share Transactions | |||
| Issued | 3,746,446 | 5,053,981 | |
| Issued in Lieu of Cash Distributions | 1,548,289 | 2,627,602 | |
| Redeemed | (3,233,292) | (7,022,848) | |
| Net Increase (Decrease) from Capital Share Transactions | 2,061,443 | 658,735 | |
| Total Increase (Decrease) | (1,121,781) | 9,087,041 | |
| Net Assets | |||
| Beginning of Period | 54,185,583 | 45,098,542 | |
| End of Period | 53,063,802 | 54,185,583 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Dividend Growth Fund
Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $37.85 | $31.82 | $30.63 | $26.03 | $27.85 | $23.72 |
| Investment Operations | ||||||
| Net Investment Income1 | .304 | .576 | .557 | .536 | .520 | .514 |
| Net Realized and Unrealized Gain (Loss) on Investments | (1.276) | 7.593 | 1.572 | 5.499 | (.178) | 4.985 |
| Total from Investment Operations | (.972) | 8.169 | 2.129 | 6.035 | .342 | 5.499 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.256) | (.574) | (.539) | (.525) | (.526) | (.509) |
| Distributions from Realized Capital Gains | (.952) | (1.565) | (.400) | (.910) | (1.636) | (.860) |
| Total Distributions | (1.208) | (2.139) | (.939) | (1.435) | (2.162) | (1.369) |
| Net Asset Value, End of Period | $35.67 | $37.85 | $31.82 | $30.63 | $26.03 | $27.85 |
| Total Return2 | -2.63% | 25.66% | 7.03% | 23.33% | 1.63% | 23.65% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $53,064 | $54,186 | $45,099 | $43,024 | $32,856 | $34,706 |
| Ratio of Total Expenses to Average Net Assets3 | 0.30%4 | 0.27% | 0.26% | 0.27% | 0.22% | 0.26% |
| Ratio of Net Investment Income to Average Net Assets | 1.65% | 1.56% | 1.85% | 1.82% | 1.93% | 2.00% |
| Portfolio Turnover Rate | 9% | 15% | 15% | 17% | 23% | 15% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | Includes performance-based investment advisory fee increases (decreases) of 0.03%, (0.00%), (0.01%), 0.00%, (0.05%), and (0.01%). |
| 4 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset and broker commission abatement arrangements was 0.30%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend Growth Fund
is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or
environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have
an adverse impact on the value of the fund’s investments and fund performance.
| 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. 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
10
Dividend Growth Fund
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.
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple
11
Dividend Growth Fund
Secured Overnight Financing Rate inclusive of
an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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.
| B. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the NASDAQ US Dividend Achievers Select Index for periods prior to September 20, 2021, and to the current benchmark S&P U.S. Dividend Growers Index, beginning September 20, 2021, for the preceding three years. The benchmark change will be fully phased in by October 2024. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets, before a net increase of $7,006,000 (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, and distribution 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $1,931,000, representing less than 0.01% of the fund’s
net assets and 0.77% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| D. | The fund has asked its investment advisor 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 |
12
Dividend Growth Fund
administrative expenses. The fund’s
custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, these arrangements reduced the
fund’s management and administrative expenses by $14,000 and custodian fees by $7,000. The total expense reduction represented an effective annual rate of less than 0.01% of the fund’s 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). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 50,941,895 | 1,040,896 | — | 51,982,791 |
| Temporary Cash Investments | 26 | 989,971 | — | 989,997 |
| Total | 50,941,921 | 2,030,867 | — | 52,972,788 |
| F. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 30,945,943 |
| Gross Unrealized Appreciation | 22,644,231 |
| Gross Unrealized Depreciation | (617,386) |
| Net Unrealized Appreciation (Depreciation) | 22,026,845 |
| G. | During the six months ended July 31, 2022, the fund purchased $4,866,130,000 of investment securities and sold $4,788,245,000 of investment securities, other than temporary cash investments. |
The fund purchased securities
from and sold securities to other funds or accounts managed by its investment advisor or their affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended July 31, 2022, such purchases were $50,920,000 and sales were $0; these
13
Dividend Growth Fund
amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities noted above.
| H. | Capital shares issued and redeemed were: |
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| Shares (000) | Shares (000) | ||
| Issued | 103,990 | 137,831 | |
| Issued in Lieu of Cash Distributions | 42,294 | 68,554 | |
| Redeemed | (90,098) | (192,414) | |
| Net Increase (Decrease) in Shares Outstanding | 56,186 | 13,971 |
| I. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
14
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Growth Fund's Program and for carrying out the specific
responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past
year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The
Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
15
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Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2022
Vanguard Dividend
Appreciation Index Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 19 |
Liquidity Risk Management | 21 |
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.
1
| Six Months Ended July 31, 2022 | |||
| Beginning Account Value 1/31/2022 | Ending Account Value 7/31/2022 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Dividend Appreciation Index Fund | |||
| ETF Shares | $1,000.00 | $950.30 | $0.29 |
| Admiral™ Shares | 1,000.00 | 950.30 | 0.39 |
| Based on Hypothetical 5% Yearly Return | |||
| Dividend Appreciation Index Fund | |||
| ETF Shares | $1,000.00 | $1,024.50 | $0.30 |
| Admiral Shares | 1,000.00 | 1,024.40 | 0.40 |
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 0.06% for ETF Shares and 0.08% 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).
2
Dividend Appreciation Index Fund
Fund Allocation
As of July 31, 2022
| Communication Services | 1.9% |
| Consumer Discretionary | 9.2 |
| Consumer Staples | 13.3 |
| Energy | 0.1 |
| Financials | 14.5 |
| Health Care | 15.7 |
| Industrials | 13.1 |
| Information Technology | 24.0 |
| Materials | 4.7 |
| Utilities | 3.5 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if
applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in
derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
3
Dividend Appreciation Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Dividend Appreciation Index Fund
5
Dividend Appreciation Index Fund
6
Dividend Appreciation Index Fund
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number of Long (Short) Contracts | Notional Amount | Value and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | September 2022 | 765 | 158,106 | 10,877 |
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination Date | Counterparty | Notional Amount ($000) | Floating Interest Rate Received (Paid)1 (%) | Value and Unrealized Appreciation ($000) | Value and Unrealized (Depreciation) ($000) |
| Kroger Co. | 1/31/23 | GSI | 47,750 | (1.570) | — | (1,333) |
| Visa Inc. Class A | 8/31/22 | BANA | 94,389 | (1.470) | — | (89) |
| — | (1,422) | |||||
| 1 | Based on 1M USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly. |
| 1M—1-month. | |
| BANA—Bank of America, N.A. | |
| GSI—Goldman Sachs International. |
At July 31, 2022,
the counterparties had deposited in segregated accounts cash of $5,970,000 in connection with open over-the-counter swap contracts.
See
accompanying Notes, which are an integral part of the Financial Statements.
7
Dividend Appreciation Index Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $57,907,133) | 75,614,703 |
| Affiliated Issuers (Cost $198,451) | 198,447 |
| Total Investments in Securities | 75,813,150 |
| Investment in Vanguard | 2,731 |
| Cash Collateral Pledged—Futures Contracts | 8,040 |
| Cash Collateral Pledged—Over-the-Counter Swap Contracts | 2,060 |
| Receivables for Investment Securities Sold | 9,768 |
| Receivables for Accrued Income | 92,142 |
| Receivables for Capital Shares Issued | 7,120 |
| Variation Margin Receivable—Futures Contracts | 2,295 |
| Total Assets | 75,937,306 |
| Liabilities | |
| Due to Custodian | 5,115 |
| Payables for Investment Securities Purchased | 6,341 |
| Collateral for Securities on Loan | 959 |
| Payables for Capital Shares Redeemed | 4,488 |
| Payables to Vanguard | 2,040 |
| Unrealized Depreciation—Over-the-Counter Swap Contracts | 1,422 |
| Total Liabilities | 20,365 |
| Net Assets | 75,916,941 |
| 1 Includes $932 of securities on loan. | |
| At July 31, 2022, net assets consisted of: | |
| Paid-in Capital | 58,331,816 |
| Total Distributable Earnings (Loss) | 17,585,125 |
| Net Assets | 75,916,941 |
| ETF Shares—Net Assets | |
| Applicable to 416,611,760 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 63,819,075 |
| Net Asset Value Per Share—ETF Shares | $153.19 |
| Admiral Shares—Net Assets | |
| Applicable to 291,012,273 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 12,097,866 |
| Net Asset Value Per Share—Admiral Shares | $41.57 |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Dividend Appreciation Index Fund
Statement of Operations
| Six Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 750,407 |
| Interest1 | 557 |
| Securities Lending—Net | — |
| Total Income | 750,964 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 886 |
| Management and Administrative—ETF Shares | 16,331 |
| Management and Administrative—Admiral Shares | 4,367 |
| Marketing and Distribution—ETF Shares | 1,091 |
| Marketing and Distribution—Admiral Shares | 221 |
| Custodian Fees | 162 |
| Shareholders’ Reports—ETF Shares | 546 |
| Shareholders’ Reports—Admiral Shares | 69 |
| Trustees’ Fees and Expenses | 20 |
| Other Expenses | 5 |
| Total Expenses | 23,698 |
| Net Investment Income | 727,266 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold1,2 | 1,789,278 |
| Futures Contracts | (23,309) |
| Swap Contracts | (1,598) |
| Realized Net Gain (Loss) | 1,764,371 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | (6,425,781) |
| Futures Contracts | 16,426 |
| Swap Contracts | (1,424) |
| Change in Unrealized Appreciation (Depreciation) | (6,410,779) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (3,919,142) |
| 1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $548,000, ($30,000), and ($4,000), respectively. Purchases and sales are for temporary cash investment purposes. |
| 2 | Includes $2,143,724,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 727,266 | 1,283,185 | |
| Realized Net Gain (Loss) | 1,764,371 | 7,696,290 | |
| Change in Unrealized Appreciation (Depreciation) | (6,410,779) | 3,906,835 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (3,919,142) | 12,886,310 | |
| Distributions | |||
| ETF Shares | (578,771) | (1,043,492) | |
| Admiral Shares | (108,695) | (206,613) | |
| Total Distributions | (687,466) | (1,250,105) | |
| Capital Share Transactions | |||
| ETF Shares | 2,078,658 | 4,113,142 | |
| Admiral Shares | (46,930) | 215,802 | |
| Net Increase (Decrease) from Capital Share Transactions | 2,031,728 | 4,328,944 | |
| Total Increase (Decrease) | (2,574,880) | 15,965,149 | |
| Net Assets | |||
| Beginning of Period | 78,491,821 | 62,526,672 | |
| End of Period | 75,916,941 | 78,491,821 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Dividend Appreciation Index Fund
Financial Highlights
| ETF Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $162.69 | $137.11 | $125.38 | $104.09 | $107.10 | $86.66 |
| Investment Operations | ||||||
| Net Investment Income1 | 1.482 | 2.736 | 2.299 | 2.214 | 2.084 | 1.951 |
| Net Realized and Unrealized Gain (Loss) on Investments | (9.593) | 25.504 | 11.728 | 21.210 | (3.056) | 20.408 |
| Total from Investment Operations | (8.111) | 28.240 | 14.027 | 23.424 | (.972) | 22.359 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.389) | (2.660) | (2.297) | (2.134) | (2.038) | (1.919) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (1.389) | (2.660) | (2.297) | (2.134) | (2.038) | (1.919) |
| Net Asset Value, End of Period | $153.19 | $162.69 | $137.11 | $125.38 | $104.09 | $107.10 |
| Total Return | -4.97% | 20.71% | 11.44% | 22.68% | -0.87% | 26.10% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $63,819 | $65,589 | $51,842 | $42,217 | $30,969 | $28,717 |
| Ratio of Total Expenses to Average Net Assets | 0.06% | 0.06% | 0.06% | 0.06% | 0.06% | 0.08% |
| Ratio of Net Investment Income to Average Net Assets | 1.93% | 1.74% | 1.84% | 1.90% | 2.01% | 2.06% |
| Portfolio Turnover Rate2 | 11% | 26% | 25% | 14% | 16% | 14% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
11
Dividend Appreciation Index Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2022 | Year Ended January 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $44.15 | $37.21 | $34.03 | $28.25 | $29.07 | $23.52 |
| Investment Operations | ||||||
| Net Investment Income1 | .398 | .734 | .617 | .594 | .560 | .528 |
| Net Realized and Unrealized Gain (Loss) on Investments | (2.605) | 6.920 | 3.179 | 5.757 | (.830) | 5.542 |
| Total from Investment Operations | (2.207) | 7.654 | 3.796 | 6.351 | (.270) | 6.070 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.373) | (.714) | (.616) | (.571) | (.550) | (.520) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.373) | (.714) | (.616) | (.571) | (.550) | (.520) |
| Net Asset Value, End of Period | $41.57 | $44.15 | $37.21 | $34.03 | $28.25 | $29.07 |
| Total Return2 | -4.97% | 20.67% | 11.44% | 22.65% | -0.89% | 26.11% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $12,098 | $12,903 | $10,685 | $9,955 | $6,755 | $6,014 |
| Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.08% | 0.08% | 0.08% | 0.08% |
| Ratio of Net Investment Income to Average Net Assets | 1.91% | 1.72% | 1.82% | 1.87% | 1.99% | 2.06% |
| Portfolio Turnover Rate3 | 11% | 26% | 25% | 14% | 16% | 14% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | 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. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
12
Dividend Appreciation Index Fund
Notes to Financial Statements
Vanguard Dividend Appreciation
Index 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: ETF Shares and Admiral Shares. Each of the share classes has
different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca, Inc.; they can be purchased and sold through a broker.
Significant market
disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
| 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 materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are
valued by methods deemed by the board of trustees to represent fair value. 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. Futures Contracts:
The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures
contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for
liquidity. 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. Any securities pledged as initial margin for open
contracts are noted in the Schedule of Investments.
Futures contracts are valued
at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of
Assets and Liabilities 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
contracts.
13
Dividend Appreciation Index Fund
During the six months ended
July 31, 2022, 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 the notional amounts at each quarter-end
during the period.
3. Swap Contracts: The
fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced
stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of
time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is
based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all
types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on
the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, 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. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, 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 swap 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 securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral
received or pledged is compared daily to the value of the swap 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.
The notional amounts of swap
contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is
recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap,
at which time realized gain (loss) is recorded.
During the six months ended
July 31, 2022, the fund’s average amounts of investments in total return swaps represented less than 1% 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. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is
14
Dividend Appreciation Index Fund
generally three years after the filing of the
tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial
statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market 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 event 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 Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based
upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and
15
Dividend Appreciation Index Fund
borrowings normally extend overnight but can
have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of
trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $2,731,000, representing less than 0.01% of the fund’s
net assets and 1.09% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. 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). Any investments and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
16
Dividend Appreciation Index Fund
The following table summarizes
the market value of the fund’s investments and derivatives as of July 31, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 75,614,703 | — | — | 75,614,703 |
| Temporary Cash Investments | 198,447 | — | — | 198,447 |
| Total | 75,813,150 | — | — | 75,813,150 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Futures Contracts1 | 10,877 | — | — | 10,877 |
| Liabilities | ||||
| Swap Contracts | — | 1,422 | — | 1,422 |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
| D. | As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 58,133,102 |
| Gross Unrealized Appreciation | 19,687,635 |
| Gross Unrealized Depreciation | (1,996,710) |
| Net Unrealized Appreciation (Depreciation) | 17,690,925 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,047,712,000 that may be carried forward
indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net
capital losses for the year, the losses will be added to the loss carryforward balance above.
| E. | During the six months ended July 31, 2022, the fund purchased $14,316,029,000 of investment securities and sold $12,273,708,000 of investment securities, other than temporary cash investments. Purchases and sales include $5,775,086,000 and $3,922,035,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
The fund purchased securities
from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended July 31, 2022, such purchases were $645,125,000 and sales were $693,561,000, resulting in net realized loss of $31,960,000; these amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities noted above.
17
Dividend Appreciation Index Fund
| F. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2022 | Year Ended January 31, 2022 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| ETF Shares | |||||
| Issued | 6,003,404 | 38,666 | 22,417,718 | 148,569 | |
| Issued in Lieu of Cash Distributions | — | — | — | — | |
| Redeemed | (3,924,746) | (25,200) | (18,304,576) | (123,525) | |
| Net Increase (Decrease)—ETF Shares | 2,078,658 | 13,466 | 4,113,142 | 25,044 | |
| Admiral Shares | |||||
| Issued | 779,928 | 18,583 | 1,970,820 | 46,680 | |
| Issued in Lieu of Cash Distributions | 92,770 | 2,299 | 176,877 | 4,201 | |
| Redeemed | (919,628) | (22,118) | (1,931,895) | (45,799) | |
| Net Increase (Decrease)—Admiral Shares | (46,930) | (1,236) | 215,802 | 5,082 | |
| G. | Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements. |
18
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Dividend Appreciation Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. The board determined that continuing the
fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the 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 advisor 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 periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
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 arrangement. 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 the advisor. The board considered that Vanguard has been managing
investments for more than four decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that
Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with its target index and peer group. The board concluded that the performance was such that the advisory arrangement
should continue.
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 expenses were also below the peer-group average.
19
The board does not conduct a
profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of
scale
The board concluded that the fund’s
arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
20
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Appreciation Index Fund's Program and for carrying out the
specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for
the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review
Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
21
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Semiannual Report | July 31, 2022
Vanguard Global ESG Select Stock Fund
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.
1
| Six Months Ended July 31, 2022 | |||
| Beginning
Account Value 1/31/2022 |
Ending
Account Value 7/31/2022 |
Expenses
Paid During Period | |
| Based on Actual Fund Return | |||
| Global ESG Select Stock Fund | |||
| Investor Shares | $1,000.00 | $ 917.90 | $2.71 |
| Admiral™ Shares | 1,000.00 | 918.50 | 2.24 |
| Based on Hypothetical 5% Yearly Return | |||
| Global ESG Select Stock Fund | |||
| Investor Shares | $1,000.00 | $1,021.97 | $2.86 |
| Admiral Shares | 1,000.00 | 1,022.46 | 2.36 |
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 0.57% for Investor Shares and 0.47% 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).
2
Global ESG Select Stock Fund
Fund
Allocation
As of July
31, 2022
| United States | 46.3% |
| United Kingdom | 9.2 |
| Japan | 6.8 |
| Netherlands | 6.8 |
| France | 6.6 |
| Spain | 5.8 |
| Canada | 4.7 |
| Switzerland | 3.2 |
| Hong Kong | 3.1 |
| Denmark | 2.6 |
| Singapore | 2.6 |
| Taiwan | 2.3 |
The table reflects the fund's
investments, except for short-term investments.
3
Global ESG Select Stock
Fund
Financial Statements (unaudited)
Schedule of
Investments
As of July
31, 2022
The fund files its complete schedule of portfolio
holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at
www.sec.gov.
4
Global ESG Select Stock
Fund
| Shares | Market
Value• ($000) | |||||
| Temporary Cash Investments (2.9%) | ||||||
| Money Market Fund (2.9%) | ||||||
| 1 | Vanguard
Market Liquidity Fund, 1.903% (Cost $22,072) |
220,804 | 22,072 | |||
| Total
Investments (100.0%) (Cost $738,158) |
773,711 | |||||
| Other Assets and Liabilities—Net (0.0%) | 195 | |||||
| Net Assets (100%) | 773,906 | |||||
| Cost is in $000. |
| • | See Note A in Notes to Financial Statements. |
| 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. |
See accompanying Notes, which are an integral
part of the Financial Statements.
5
Global ESG Select Stock
Fund
Statement of Assets and Liabilities
As of July 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $716,086) | 751,639 |
| Affiliated Issuers (Cost $22,072) | 22,072 |
| Total Investments in Securities | 773,711 |
| Investment in Vanguard | 26 |
| Cash | 347 |
| Receivables for Investment Securities Sold | 1,491 |
| Receivables for Accrued Income | 1,168 |
| Receivables for Capital Shares Issued | 562 |
| Total Assets | 777,305 |
| Liabilities | |
| Due to Custodian | 1,490 |
| Payables for Investment Securities Purchased | 30 |
| Payables for Capital Shares Redeemed | 1,355 |
| Payables to Investment Advisor | 443 |
| Payables to Vanguard | 81 |
| Total Liabilities | 3,399 |
| Net Assets | 773,906 |
|
At July 31, 2022, net assets consisted of: |
|
| Paid-in Capital | 731,213 |
| Total Distributable Earnings (Loss) | 42,693 |
| Net Assets | 773,906 |
| Investor Shares—Net Assets | |
| Applicable
to 5,645,414 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
159,714 |
| Net Asset Value Per Share—Investor Shares | $28.29 |
| Admiral Shares—Net Assets | |
| Applicable
to 17,354,073 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
614,192 |
| Net Asset Value Per Share—Admiral Shares | $35.39 |
See accompanying Notes, which are an
integral part of the Financial Statements.
6
Global ESG Select Stock
Fund
Statement of Operations
| Six
Months Ended July 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends 1 | 9,846 |
| Interest 2 | 70 |
| Total Income | 9,916 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 828 |
| Performance Adjustment | 75 |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 232 |
| Management and Administrative—Admiral Shares | 604 |
| Marketing and Distribution—Investor Shares | 8 |
| Marketing and Distribution—Admiral Shares | 14 |
| Custodian Fees | 16 |
| Shareholders’ Reports—Investor Shares | 12 |
| Shareholders’ Reports—Admiral Shares | 5 |
| Trustees’ Fees and Expenses | — |
| Other Expenses | 10 |
| Total Expenses | 1,804 |
| Net Investment Income | 8,112 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 647 |
| Foreign Currencies | (69) |
| Realized Net Gain (Loss) | 578 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (70,534) |
| Foreign Currencies | (21) |
| Change in Unrealized Appreciation (Depreciation) | (70,555) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (61,865) |
| 1 | Dividends are net of foreign withholding taxes of $877,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $70,000, ($8,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which
are an integral part of the Financial Statements.
7
Global ESG Select Stock
Fund
Statement of Changes in Net Assets
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 8,112 | 9,979 | |
| Realized Net Gain (Loss) | 578 | 9,849 | |
| Change in Unrealized Appreciation (Depreciation) | (70,555) | 70,974 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (61,865) | 90,802 | |
| Distributions | |||
| Investor Shares | (819) | (4,101) | |
| Admiral Shares | (3,050) | (14,372) | |
| Total Distributions | (3,869) | (18,473) | |
| Capital Share Transactions | |||
| Investor Shares | 5,671 | 65,231 | |
| Admiral Shares | 58,796 | 304,765 | |
| Net Increase (Decrease) from Capital Share Transactions | 64,467 | 369,996 | |
| Total Increase (Decrease) | (1,267) | 442,325 | |
| Net Assets | |||
| Beginning of Period | 775,173 | 332,848 | |
| End of Period | 773,906 | 775,173 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
8
Global ESG Select Stock
Fund
Financial Highlights
| Investor Shares | ||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | May
21, 20191 to January 31, 2020 | |
| 2022 | 2021 | |||
| Net Asset Value, Beginning of Period | $30.97 | $26.32 | $22.34 | $20.00 |
| Investment Operations | ||||
| Net Investment Income2 | .305 | .487 | .378 | .258 |
| Net Realized and Unrealized Gain (Loss) on Investments | (2.839) | 5.004 | 3.866 | 2.257 |
| Total from Investment Operations | (2.534) | 5.491 | 4.244 | 2.515 |
| Distributions | ||||
| Dividends from Net Investment Income | (.027) | (.386) | (.229) | (.167) |
| Distributions from Realized Capital Gains | (.119) | (.455) | (.035) | (.008) |
| Total Distributions | (.146) | (.841) | (.264) | (.175) |
| Net Asset Value, End of Period | $28.29 | $30.97 | $26.32 | $22.34 |
| Total Return3 | -8.21% | 20.86% | 19.06% | 12.57% |
| Ratios/Supplemental Data | ||||
| Net Assets, End of Period (Millions) | $160 | $169 | $86 | $34 |
| Ratio of Total Expenses to Average Net Assets | 0.57% 4 | 0.56% 4 | 0.55% 4 | 0.58% 5,6 |
| Ratio of Net Investment Income to Average Net Assets | 2.10% | 1.61% | 1.62% | 1.81% 5 |
| Portfolio Turnover Rate | 18% | 19% | 21% | 15% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||
| 1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $20.00. |
| 2 | Calculated based on average shares outstanding. |
| 3 | 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. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.01%, and 0.00%. |
| 5 | Annualized. |
| 6 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.55%. |
See accompanying Notes, which are an integral
part of the Financial Statements.
9
Global ESG Select Stock
Fund
Financial Highlights
| Admiral Shares | ||||
| For
a Share Outstanding Throughout Each Period |
Six
Months Ended July 31, 2022 |
Year Ended January 31, | May
21, 20191 to January 31, 2020 | |
| 2022 | 2021 | |||
| Net Asset Value, Beginning of Period | $38.73 | $32.91 | $27.93 | $25.00 |
| Investment Operations | ||||
| Net Investment Income2 | .395 | .649 | .504 | .338 |
| Net Realized and Unrealized Gain (Loss) on Investments | (3.544) | 6.258 | 4.830 | 2.823 |
| Total from Investment Operations | (3.149) | 6.907 | 5.334 | 3.161 |
| Distributions | ||||
| Dividends from Net Investment Income | (.043) | (.517) | (.310) | (.221) |
| Distributions from Realized Capital Gains | (.148) | (.570) | (.044) | (.010) |
| Total Distributions | (.191) | (1.087) | (.354) | (.231) |
| Net Asset Value, End of Period | $35.39 | $38.73 | $32.91 | $27.93 |
| Total Return3 | -8.15% | 20.99% | 19.17% | 12.64% |
| Ratios/Supplemental Data | ||||
| Net Assets, End of Period (Millions) | $614 | $606 | $247 | $74 |
| Ratio of Total Expenses to Average Net Assets | 0.47% 4 | 0.46% 4 | 0.45% 4 | 0.48% 5,6 |
| Ratio of Net Investment Income to Average Net Assets | 2.18% | 1.71% | 1.71% | 1.89% 5 |
| Portfolio Turnover Rate | 18% | 19% | 21% | 15% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||
| 1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $25.00. |
| 2 | Calculated based on average shares outstanding. |
| 3 | 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. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.01%, and 0.00%. |
| 5 | Annualized. |
| 6 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.45%. |
See accompanying Notes, which are an integral part of the
Financial Statements.
10
Global ESG Select Stock
Fund
Notes to Financial Statements
Vanguard Global ESG Select Stock 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. Each of the share classes has different eligibility and minimum purchase requirements,
and is designed for different types of investors.
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. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g.,
Russia's invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund
performance.
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.
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. Federal Income Taxes: The fund intends to
continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is
generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the
fund’s financial statements.
4. Distributions: Distributions to shareholders are
recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
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Global ESG Select Stock
Fund
5. Credit Facilities and Interfund Lending Program:
The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by
Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s
regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which
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 either facility bear interest at an
agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted
credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the
“Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the
“Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend
overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The
board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not
utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend income is recorded on the
ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average
net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the FTSE All-World Index since July 31, 2019. For the six months ended July 31, 2022, the investment advisory fee represented an effective
annual basic rate of 0.23% of the fund’s average net assets, before a net increase of $75,000 (0.02%) based on performance.
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Global ESG Select Stock
Fund
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, and distribution 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 and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to
0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $26,000, representing less than 0.01% of the fund’s net assets and 0.01% of Vanguard’s capital received
pursuant to the FSA. 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). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the
fund's investments as of July 31, 2022, based on the inputs used to value them:
| Level
1 ($000) |
Level
2 ($000) |
Level
3 ($000) |
Total
($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 383,275 | — | — | 383,275 |
| Common Stocks—Other | — | 368,364 | — | 368,364 |
| Temporary Cash Investments | 22,072 | — | — | 22,072 |
| Total | 405,347 | 368,364 | — | 773,711 |
E. As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
| Amount
($000) | |
| Tax Cost | 739,803 |
| Gross Unrealized Appreciation | 81,467 |
| Gross Unrealized Depreciation | (47,559) |
| Net Unrealized Appreciation (Depreciation) | 33,908 |
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Global ESG Select Stock
Fund
F. During the
six months ended July 31, 2022, the fund purchased $193,810,000 of investment securities and sold $131,220,000 of investment securities, other than temporary cash investments.
G. Capital
share transactions for each class of shares were:
| Six
Months Ended July 31, 2022 |
Year
Ended January 31, 2022 | ||||
| Amount
($000) |
Shares
(000) |
Amount
($000) |
Shares
(000) | ||
| Investor Shares | |||||
| Issued | 27,394 | 952 | 125,865 | 4,203 | |
| Issued in Lieu of Cash Distributions | 713 | 24 | 3,550 | 113 | |
| Redeemed | (22,436) | (797) | (64,184) | (2,117) | |
| Net Increase (Decrease)—Investor Shares | 5,671 | 179 | 65,231 | 2,199 | |
| Admiral Shares | |||||
| Issued | 126,583 | 3,610 | 414,883 | 11,050 | |
| Issued in Lieu of Cash Distributions | 2,520 | 68 | 11,765 | 301 | |
| Redeemed | (70,307) | (1,970) | (121,883) | (3,207) | |
| Net Increase (Decrease)—Admiral Shares | 58,796 | 1,708 | 304,765 | 8,144 | |
H. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
14
Liquidity Risk Management
Vanguard funds (except for the money market funds) have
adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to
assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity
risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term
cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for
classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds
approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global ESG Select Stock Fund’s Program and for carrying out the specific responsibilities set forth in the Program, including
reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the
Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented
effectively to manage the fund’s liquidity risk.
15
Item 2: Code of Ethics.
Not applicable.
Item 3: Audit Committee Financial Expert.
Not applicable.
Item 4: Principal Accountant Fees and Services.
Not applicable.
Item 5: Audit Committee of Listed Registrants.
Not applicable.
Item 6: Investments.
Not applicable. The complete schedule of investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in the Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13: Exhibits.
| (a)(1) | Not applicable. |
| (a)(2) | Certifications filed herewith. |
| (b) | Certifications filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VANGUARD SPECIALIZED FUNDS | ||
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER |
Date: September 19, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| VANGUARD SPECIALIZED FUNDS | ||
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER |
Date: September 19, 2022
| VANGUARD SPECIALIZED FUNDS | ||
| BY: | /s/ CHRISTINE BUCHANAN* | |
| CHRISTINE BUCHANAN | ||
| CHIEF FINANCIAL OFFICER |
Date: September 19, 2022
| * By: | /s/ Anne E. Robinson |
Anne E. Robinson, pursuant to a Power of Attorney filed on November 29, 2021 (see File Number 33-64845), a Power of Attorney filed on October 12, 2021 (see File Number 33-23444), and a Power of Attorney filed on August 26, 2021 (see file Number 811-02652), Incorporated by Reference.