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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-05628

Name of Registrant: Vanguard Malvern 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: September 30

Date of reporting period: October 1, 2016 – March 31, 2017

Item 1: Reports to Shareholders

 



Semiannual Report | March 31, 2017

Vanguard U.S. Value Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisor’s Report. 6
Fund Profile. 8
Performance Summary. 9
Financial Statements. 10
About Your Fund’s Expenses. 21
Trustees Approve Advisory Arrangement. 23
Glossary. 25

 

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

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

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


 

Your Fund’s Performance at a Glance

• For the six months ended March 31, 2017, Vanguard U.S. Value Fund returned well over 12%, outpacing both its benchmark index and the average return of its peer group. In general, value stocks bested their growth counterparts.

• Your fund’s stock selection model generated broad-based performance. As a reminder, the model focuses on five signals that rank a universe of stocks. Four of those signals—valuation, growth, management decisions, and quality—contributed to performance.

In particular, the valuation signal was a significant driver of the fund’s return.

• Seven of the fund’s 11 industry sectors generated positive results, led by materials, information technology, and industrials.

• Stocks in the energy, real estate, and telecommunication services sectors detracted the most from performance.

Total Returns: Six Months Ended March 31, 2017    
    Total
    Returns
Vanguard U.S. Value Fund   12.59%
Russell 3000 Value Index   10.45
Multi-Cap Value Funds Average   10.81
Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
 
Expense Ratios    
Your Fund Compared With Its Peer Group    
    Peer Group
  Fund Average
U.S. Value Fund 0.23% 1.10%

 

The fund expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the fund’s annualized expense ratio was 0.23%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.

Peer group: Multi-Cap Value Funds.

1


 

Chairman’s Perspective

Dear Shareholder,


For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

Bill McNabb
Chairman and Chief Executive Officer

2


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
      Total Returns
    Periods Ended March 31, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

3


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


4


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.

Sincerely,

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

5


 

Advisor’s Report

For the six months ended March 31, 2017, Vanguard U.S. Value Fund returned well over 12%. The fund bested its benchmark, the Russell 3000 Value Index, and the average return of its peer group by about 2 percentage points.

The investment environment

The period opened on an optimistic note as the U.S. economy appeared to pick up steam, with the manufacturing and housing sectors reporting solid activity and the employment rate continuing to improve. Personal consumption, private investment, and residential and nonresidential fixed investment also added to growth. Commodities, especially oil, regained some ground after price declines earlier in 2016.

That optimism carried over into the first quarter of 2017, with consumer confidence rising in March to its highest level in more than 16 years. Unemployment dropped that month to 4.5%, though the country added only 98,000 jobs and the labor force participation rate held steady at 63%.

Against this backdrop, stocks surged over the six-month period, as investors anticipated stronger growth and higher inflation. The earlier economic improvement and the prospect of more infrastructure spending, greater deregulation, and possible tax-code changes under the new administration helped fuel a shift toward riskier assets, propelling stocks to record highs in early 2017.

These developments most likely played a large part in the Federal Reserve’s decision in March to raise the federal funds target interest rate by a quarter percentage point,

to 0.75%–1%. The rate increase was the Fed’s second in three months but only the third in a decade.

Investment objective and strategy

Although it’s important to understand how overall performance is affected by the macroeconomic factors we’ve described, our strategy focuses on specific fundamentals—not technical analysis. Our stock selection model evaluates companies within our investment universe to identify those with attractive characteristics that we believe will outperform over the long run.

To do this, we use a strict quantitative process that focuses on a combination of five key themes: high quality—healthy balance sheets and consistent cash-flow generation; effective use of capital—sound investment policies that favor internal over external funding; consistent earnings growth—a demonstrated ability to grow earnings year after year; strong market sentiment—market confirmation of our view; and reasonable valuation—avoidance of overpriced stocks.

The interaction of these themes generates an opinion on all the stocks in our universe each day. Using the results of our model, we then construct our portfolio with the goal of maximizing expected return, while minimizing exposure to risks that our research indicates do not improve returns, such as industry selection and other risks relative to our benchmark.

Over the period, the broad U.S. equity market (as measured by the Russell 3000 Index) returned more than 10%. U.S. stock market performance was broad-based;

6


 

ten out of 11 market sectors advanced, led by financials, industrials, and information technology. Value stocks outperformed their growth counterparts, small-capitalization stocks topped large-caps, and U.S. equities outperformed their developed- and emerging-market peers.

Our successes and failures

The fund’s performance was driven by our valuation signal, especially in the latter months of the period. The growth, management decisions, and quality signals contributed to a lesser degree.

Stock selection results were positive in seven sectors, with materials, IT, and industrials leading the way. Energy, real estate, and telecommunication services detracted the most.

Our strength in materials was largely due to an overweighting of AK Steel, which benefited from speculation about an increase in infrastructure spending. Chemours & Co., Advanced Micro Devices, and NVIDIA were also top contributors to performance. Washington Prime Group, Denbury Resources, and Apache hurt results the most.

Portfolio Managers:

James P. Stetler

Anatoly Shtekhman, CFA

Binbin Guo, Principal, Head of Equity

Research and Portfolio Strategies

Vanguard Quantitative Equity Group

April 12, 2017

 

 

7


 

U.S. Value Fund

Fund Profile

As of March 31, 2017

Portfolio Characteristics    
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 208 2,044 3,813
Median Market Cap $35.5B $53.7B $58.2B
Price/Earnings Ratio 22.0x 24.3x 25.4x
Price/Book Ratio 2.1x 2.0x 3.0x
Return on Equity 10.4% 11.9% 16.3%
Earnings Growth Rate 5.3% 3.4% 7.3%
Dividend Yield 2.3% 2.4% 1.9%
Foreign Holdings 1.4% 0.0% 0.0%
Turnover Rate      
(Annualized) 88%
Ticker Symbol VUVLX
Expense Ratio1 0.23%
30-Day SEC Yield 2.11%
Short-Term Reserves 0.0%

 

Sector Diversification (% of equity exposure)

    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Consumer      
Discretionary 4.9% 4.9% 12.7%
Consumer Staples 8.1 8.0 8.3
Energy 11.5 11.6 6.2
Financials 26.9 27.0 14.8
Health Care 10.4 10.3 13.3
Industrials 10.3 10.4 10.7
Information      
Technology 10.0 10.0 21.2
Materials 3.2 3.1 3.4
Real Estate 5.1 5.1 4.1
Telecommunication      
Services 3.4 3.4 2.1
Utilities 6.2 6.2 3.2

 

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.95 0.89
Beta 1.01 0.98

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

 

Ten Largest Holdings (% of total net assets)

Exxon Mobil Corp. Integrated Oil & Gas 3.2%
JPMorgan Chase & Co. Diversified Banks 3.1
Johnson & Johnson Pharmaceuticals 2.8
Bank of America Corp. Diversified Banks 2.5
Procter & Gamble Co. Household Products 2.3
General Electric Co. Industrial  
  Conglomerates 2.3
AT&T Inc. Integrated  
  Telecommunication  
  Services 2.1
Wells Fargo & Co. Diversified Banks 2.1
Berkshire Hathaway Inc. Multi-Sector Holdings 2.0
Merck & Co. Inc. Pharmaceuticals 1.9
Top Ten   24.3%

The holdings listed exclude any temporary cash investments and equity index products.

 

Investment Focus


1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the annualized expense ratio was 0.23%.

8


 

U.S. Value Fund

Performance Summary

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

Fiscal-Year Total Returns (%): September 30, 2006, Through March 31, 2017


Note: For 2017, performance data reflect the six months ended March 31, 2017.

Average Annual Total Returns: Periods Ended March 31, 2017

  Inception One Five Ten
  Date Year Years Years
U.S. Value Fund 6/29/2000 19.37% 13.92% 6.48%

 

See Financial Highlights for dividend and capital gains information.

9


 

U.S. Value Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

      Market
      Value
    Shares ($000)
Common Stocks (99.4%)1    
Consumer Discretionary (4.8%)    
  Best Buy Co. Inc. 234,931 11,547
* Liberty Media Corp-Liberty    
  SiriusXM 227,782 8,865
  Lear Corp. 60,218 8,526
* Burlington Stores Inc. 85,693 8,337
  International Game    
  Technology plc 274,701 6,510
  Whirlpool Corp. 35,685 6,114
  Carnival Corp. 93,716 5,521
  General Motors Co. 156,120 5,520
  Comcast Corp. Class A 132,404 4,977
* Cooper-Standard    
  Holdings Inc. 33,872 3,758
  Darden Restaurants Inc. 35,428 2,964
  Coach Inc. 41,205 1,703
* Liberty Media Corp-Liberty    
  SiriusXM 43,116 1,672
* Iconix Brand Group Inc. 218,351 1,642
  Tailored Brands Inc. 71,859 1,074
* Beazer Homes USA Inc. 57,029 692
      79,422
Consumer Staples (8.1%)    
  Procter & Gamble Co. 430,540 38,684
  Philip Morris    
  International Inc. 236,761 26,730
  Wal-Mart Stores Inc. 329,870 23,777
  Tyson Foods Inc. Class A 159,235 9,827
  Bunge Ltd. 120,716 9,568
  Conagra Brands Inc. 191,753 7,735
  Universal Corp. 100,852 7,135
  Fresh Del Monte    
  Produce Inc. 74,365 4,405
  Walgreens Boots    
  Alliance Inc. 28,190 2,341
  Colgate-Palmolive Co. 29,974 2,194
  Kimberly-Clark Corp. 3,998 526

 

  Omega Protein Corp. 23,585 473
  Mondelez International Inc.    
  Class A 10,848 467
      133,862
Energy (11.4%)    
  Exxon Mobil Corp. 651,768 53,452
  Chevron Corp. 229,586 24,651
  Devon Energy Corp. 265,104 11,060
* Newfield Exploration Co. 255,729 9,439
  Valero Energy Corp. 140,239 9,297
* Energen Corp. 159,958 8,708
^,* Chesapeake    
  Energy Corp. 1,435,557 8,527
^,* Sanchez Energy Corp. 870,853 8,308
  Cimarex Energy Co. 64,466 7,703
* Laredo Petroleum Inc. 525,120 7,667
  Schlumberger Ltd. 82,579 6,449
* Denbury Resources Inc. 2,322,384 5,992
  Halliburton Co. 105,307 5,182
  Apache Corp. 99,950 5,136
  Baker Hughes Inc. 54,424 3,256
* Transocean Ltd. 195,961 2,440
  ConocoPhillips 48,794 2,433
  Kinder Morgan Inc. 109,156 2,373
^ Ship Finance    
  International Ltd. 158,130 2,325
^,* EP Energy Corp. Class A 318,293 1,512
* Unit Corp. 36,478 881
  Pioneer Natural    
  Resources Co. 4,597 856
* Abraxas Petroleum Corp. 365,019 737
  Williams Cos. Inc. 22,667 671
  Delek US Holdings Inc. 12,789 310
      189,365
Financials (26.8%)    
  JPMorgan Chase & Co. 587,248 51,584
  Bank of America Corp. 1,744,780 41,159
  Wells Fargo & Co. 608,975 33,896

 

10


 

U.S. Value Fund

      Market
      Value
    Shares ($000)
* Berkshire Hathaway Inc.    
  Class B 198,812 33,138
  Citigroup Inc. 519,051 31,050
  Goldman Sachs Group Inc. 87,330 20,061
  Morgan Stanley 400,556 17,160
  PNC Financial Services    
  Group Inc. 133,979 16,110
  Bank of New York    
  Mellon Corp. 314,170 14,838
  Prudential Financial Inc. 134,760 14,376
  Capital One Financial Corp. 159,875 13,855
  American Express Co. 145,652 11,522
  Fifth Third Bancorp 424,041 10,771
  Regions Financial Corp. 738,252 10,727
  Discover Financial Services 154,040 10,535
  Principal Financial    
  Group Inc. 166,692 10,520
  Lincoln National Corp. 151,072 9,888
  Unum Group 206,536 9,684
  Citizens Financial    
  Group Inc. 275,267 9,510
  Everest Re Group Ltd. 40,589 9,490
  Assured Guaranty Ltd. 235,512 8,740
  Ameriprise Financial Inc. 64,559 8,372
  SunTrust Banks Inc. 150,605 8,328
  Aflac Inc. 106,956 7,746
  State Street Corp. 80,768 6,430
  Universal Insurance    
  Holdings Inc. 246,578 6,041
  Navient Corp. 365,959 5,402
  US Bancorp 84,554 4,355
  Primerica Inc. 42,158 3,465
  Reinsurance Group of    
  America Inc. Class A 15,097 1,917
  Allstate Corp. 20,009 1,631
  Federal Agricultural    
  Mortgage Corp. 8,306 478
* Walker & Dunlop Inc. 10,159 423
      443,202
Health Care (10.3%)    
  Johnson & Johnson 370,295 46,120
  Merck & Co. Inc. 494,699 31,433
  Pfizer Inc. 514,933 17,616
  Baxter International Inc. 229,022 11,877
  Aetna Inc. 83,798 10,688
* HCA Holdings Inc. 114,496 10,189
* Express Scripts    
  Holding Co. 135,772 8,949
* Quintiles IMS Holdings Inc. 102,776 8,277
* WellCare Health Plans Inc. 58,877 8,255
  Medtronic plc 76,504 6,163
  Anthem Inc. 18,835 3,115
* Tivity Health Inc. 101,217 2,945
* Exelixis Inc. 88,698 1,922
* INC Research Holdings Inc.    
  Class A 31,705 1,454

 

  Eli Lilly & Co. 7,754 652
  Abbott Laboratories 7,358 327
      169,982
Industrials (10.3%)    
  General Electric Co. 1,253,471  37,353
* United Continental    
  Holdings Inc. 165,182 11,668
  L3 Technologies Inc. 59,212 9,787
  Delta Air Lines Inc. 199,243 9,157
* United Rentals Inc. 71,845 8,984
  Oshkosh Corp. 129,925 8,912
  Huntington Ingalls    
  Industries Inc. 43,272 8,665
  Spirit AeroSystems    
  Holdings Inc. Class A 147,868 8,564
  Emerson Electric Co. 133,072 7,966
  Quad/Graphics Inc. 289,661 7,311
  Global Brass & Copper    
  Holdings Inc. 203,086 6,986
  SkyWest Inc. 201,842 6,913
  General Cable Corp. 290,085 5,207
  Parker-Hannifin Corp. 28,755 4,610
  Copa Holdings SA Class A 40,286 4,522
* Chart Industries Inc. 106,595 3,724
  United Technologies Corp. 29,568 3,318
* AECOM 88,979 3,167
  GATX Corp. 51,296 3,127
  Owens Corning 49,678 3,049
* XPO Logistics Inc. 43,112 2,065
  Union Pacific Corp. 15,089 1,598
* Atkore International    
  Group Inc. 44,389 1,167
  CECO Environmental Corp. 44,926 472
  American Airlines Group Inc. 9,540 403
  LSC Communications Inc. 14,501 365
  Rockwell Automation Inc. 2,181 340
* Rush Enterprises Inc.    
  Class A 9,906 328
      169,728
Information Technology (9.9%)    
  Apple Inc. 115,365 16,573
  Cisco Systems Inc. 406,997 13,756
  HP Inc. 745,101 13,322
  Intel Corp. 330,503 11,921
  International Business    
  Machines Corp. 63,315 11,026
  Applied Materials Inc. 267,710 10,414
* Advanced Micro    
  Devices Inc. 690,427 10,046
  Computer Sciences Corp. 141,988 9,799
^,* VMware Inc. Class A 102,350 9,430
* TTM Technologies Inc. 527,959 8,516
  Booz Allen Hamilton    
  Holding Corp. Class A 235,467 8,333
  CDW Corp. 142,049 8,198
  NVIDIA Corp. 69,867 7,611

 

11


 

U.S. Value Fund

      Market
      Value
    Shares ($000)
  Oracle Corp. 156,793 6,994
* Amkor Technology Inc. 422,764 4,900
* Extreme Networks Inc. 464,622 3,489
* Tech Data Corp. 31,039 2,915
  SYNNEX Corp. 17,929 2,007
* Cirrus Logic Inc. 26,780 1,625
* Sigma Designs Inc. 253,644 1,585
  QUALCOMM Inc. 8,923 512
* Alpha & Omega    
  Semiconductor Ltd. 29,683 510
* Micron Technology Inc. 14,833 429
* Anixter International Inc. 4,724 375
      164,286
Materials (3.2%)    
* Freeport-McMoRan Inc. 791,507 10,575
  Chemours Co. 254,617 9,803
  Huntsman Corp. 389,071 9,548
  United States Steel Corp. 271,273 9,172
  Steel Dynamics Inc. 182,182 6,333
* AK Steel Holding Corp. 391,937 2,818
  Greif Inc. Class A 36,323 2,001
  Rayonier Advanced    
  Materials Inc. 97,732 1,314
  Dow Chemical Co. 10,988 698
* Cliffs Natural Resources Inc. 74,212 609
      52,871
Real Estate (5.0%)    
  Hospitality Properties Trust 296,712 9,355
  Senior Housing    
  Properties Trust 437,134 8,852
  Lexington Realty Trust 802,587 8,010
  Government Properties    
  Income Trust 322,912 6,759
  Washington Prime    
  Group Inc. 753,726 6,550
  CBL & Associates    
  Properties Inc. 676,386 6,453
  Select Income REIT 207,793 5,359
  Sabra Health Care REIT Inc. 170,933 4,774
  Omega Healthcare    
  Investors Inc. 134,699 4,444
  LaSalle Hotel Properties 108,939 3,154
  Medical Properties    
  Trust Inc. 229,645 2,960
  GEO Group Inc. 53,021 2,459
  CorEnergy Infrastructure    
  Trust Inc. 69,479 2,347
  Summit Hotel    
  Properties Inc. 122,349 1,955
  Host Hotels & Resorts Inc. 103,025 1,922
  Global Net Lease Inc. 54,992 1,324
  Colony NorthStar Inc.    
  Class A 94,825 1,224
  Care Capital Properties Inc. 38,159 1,025
  Uniti Group Inc. 38,305 990
  Brandywine Realty Trust 51,330 833

 

  Outfront Media Inc. 25,397 674
  Ashford Hospitality    
  Trust Inc. 99,573 634
  Xenia Hotels & Resorts Inc. 27,512 470
  NorthStar Realty    
  Europe Corp. 38,998 452
  New Senior Investment    
  Group Inc. 33,574 343
  Tier REIT Inc. 18,898 328
      83,650
Telecommunication Services (3.4%)  
  AT&T Inc. 831,658 34,555
* Sprint Corp. 993,485 8,623
* T-Mobile US Inc. 120,742 7,799
  Verizon    
  Communications Inc. 103,730 5,057
      56,034
Utilities (6.2%)    
  PG&E Corp. 187,919 12,470
  Edison International 151,654 12,073
  Exelon Corp. 318,040 11,443
  CenterPoint Energy Inc. 368,357 10,156
  FirstEnergy Corp. 318,157 10,124
  MDU Resources Group Inc. 337,888 9,248
  National Fuel Gas Co. 149,000 8,883
  AES Corp. 760,021 8,497
  UGI Corp. 156,223 7,717
  Southwest Gas    
  Holdings Inc. 73,678 6,109
  PPL Corp. 107,783 4,030
  NRG Energy Inc. 43,880 821
  OGE Energy Corp. 9,007 315
      101,886
Total Common Stocks    
(Cost $1,391,430)   1,644,288
Temporary Cash Investments (1.1%)1  
Money Market Fund (1.1%)    
2,3 Vanguard Market Liquidity    
  Fund, 0.965% 172,436 17,247
 
    Face  
    Amount  
    ($000)  
U.S. Government and Agency Obligations (0.0%)
4 United States Treasury Bill,    
  0.521%, 5/11/17 100 100
4 United States Treasury Bill,    
  0.592%, 7/13/17 400 399
      499
Total Temporary Cash Investments  
(Cost $17,743)   17,746
Total Investments (100.5%)    
(Cost $1,409,173)   1,662,034
 
                                                                                                                                             12

 


 

U.S. Value Fund

  Amount
  ($000)
Other Assets and Liabilities (-0.5%)  
Other Assets  
Receivables for Investment Securities Sold  3,131
Investment in Vanguard 115
Receivables for Accrued Income 2,358
Receivables for Capital Shares Issued 1,903
Other Assets 45
Total Other Assets 7,552
Liabilities  
Payables for Investment Securities  
Purchased (2,560)
Collateral for Securities on Loan (9,497)
Payables for Capital Shares Redeemed (2,847)
Payables to Vanguard (1,511)
Other Liabilities (19)
Total Liabilities (16,434)
Net Assets (100%)  
Applicable to 88,183,150 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,653,152
Net Asset Value Per Share $18.75

 

At March 31, 2017, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 1,343,175
Undistributed Net Investment Income 5,650
Accumulated Net Realized Gains 51,399
Unrealized Appreciation (Depreciation)  
Investment Securities 252,861
Futures Contracts 67
Net Assets 1,653,152

 

• See Note A in Notes to Financial Statements.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $9,112,000.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 99.9% and 0.6%, respectively,
of net assets.
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.
3 Includes $9,497,000 of collateral received for securities on loan.
4 Securities with a value of $499,000 have been segregated as initial margin for open futures contracts.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.

13


 

U.S. Value Fund

Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Dividends 17,662
Interest1 35
Securities Lending—Net 506
Total Income 18,203
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 478
Management and Administrative 1,098
Marketing and Distribution 163
Custodian Fees 11
Shareholders’ Reports 21
Trustees’ Fees and Expenses 1
Total Expenses 1,772
Net Investment Income 16,431
Realized Net Gain (Loss)  
Investment Securities Sold1 51,548
Futures Contracts 809
Realized Net Gain (Loss) 52,357
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 103,749
Futures Contracts 51
Change in Unrealized Appreciation (Depreciation) 103,800
Net Increase (Decrease) in Net Assets Resulting from Operations 172,588

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $35,000 and $1,000, respectively.

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

14


 

U.S. Value Fund

Statement of Changes in Net Assets    
 
  Six Months Ended Year Ended
  March 31, September 30,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 16,431 34,546
Realized Net Gain (Loss) 52,357 23,090
Change in Unrealized Appreciation (Depreciation) 103,800 81,526
Net Increase (Decrease) in Net Assets Resulting from Operations 172,588 139,162
Distributions    
Net Investment Income (30,932) (26,754)
Realized Capital Gain1 (22,230) (48,800)
Total Distributions (53,162) (75,554)
Capital Share Transactions    
Issued 280,496 306,212
Issued in Lieu of Cash Distributions 50,255 71,550
Redeemed (170,682) (282,648)
Net Increase (Decrease) from Capital Share Transactions 160,069 95,114
Total Increase (Decrease) 279,495 158,722
Net Assets    
Beginning of Period 1,373,657 1,214,935
End of Period2 1,653,152 1,373,657

 

1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $5,650,000 and $20,151,000.

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

15


 

U.S. Value Fund

Financial Highlights            
 
 
  Six Months          
    Ended          
For a Share Outstanding March 31,     Year Ended September 30,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $17.25 $16.48 $16.95 $14.41 $11.89 $9.20
Investment Operations              
Net Investment Income   .197 .440 .355 .299 .304 .2761
Net Realized and Unrealized Gain (Loss)            
on Investments   1.966 1.341 (.543) 2.531 2.506 2.632
Total from Investment Operations   2.163 1.781 (.188) 2.830 2.810 2.908
Distributions              
Dividends from Net Investment Income (. 386) (. 358) (. 282) (. 290) (. 290) (. 218)
Distributions from Realized Capital Gains (.277) (.653)
Total Distributions   (. 663) (1.011) (. 282) (. 290) (. 290) (. 218)
Net Asset Value, End of Period   $18.75 $17.25 $16.48 $16.95 $14.41 $11.89
 
Total Return2   12.59% 11.09% -1.18% 19.89% 24.16% 32.10%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $1,653 $1,374 $1,215 $1,117 $829 $602
Ratio of Total Expenses to              
Average Net Assets   0.23% 0.23% 0.26% 0.29% 0.29% 0.29%
Ratio of Net Investment Income to            
Average Net Assets   2.26% 2.63% 2.10% 1.92% 2.26% 2.54%
Portfolio Turnover Rate   88% 76% 66% 57% 75% 69%

 

The expense ratio, net income ratio, and turnover rate 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.

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

16


 

U.S. Value Fund

Notes to Financial Statements

Vanguard U.S. Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

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. Other temporary cash investments are valued at amortized cost, which approximates market value.

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

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

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

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

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

17


 

U.S. Value 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 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 Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

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

18


 

U.S. Value Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $115,000, representing 0.01% of the fund’s net assets and 0.05% of Vanguard’s capitalization. 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. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 1,644,288
Temporary Cash Investments 17,247 499
Futures Contracts—Liabilities1 (19)
Total 1,661,516 499
1 Represents variation margin on the last day of the reporting period.      

 

D. At March 31, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index June 2017 68 8,021 67

 

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

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

19


 

U.S. Value Fund

At March 31, 2017, the cost of investment securities for tax purposes was $1,409,173,000.

Net unrealized appreciation of investment securities for tax purposes was $252,861,000, consisting of unrealized gains of $271,314,000 on securities that had risen in value since their purchase and $18,453,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2017, the fund purchased $782,313,000 of investment securities and sold $659,334,000 of investment securities, other than temporary cash investments.

G. Capital shares issued and redeemed were:    
  Six Months Ended Year Ended
  March 31, 2017 September 30, 2016
  Shares Shares
  (000) (000)
Issued 15,178 18,669
Issued in Lieu of Cash Distributions 2,714 4,339
Redeemed (9,321) (17,113)
Net Increase (Decrease) in Shares Outstanding 8,571 5,895

 

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

20


 

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.

21


 

Six Months Ended March 31, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
U.S. Value Fund 9/30/2016 3/31/2017 Period
Based on Actual Fund Return $1,000.00 $1,125.89 $1.22
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.78 1.16

 

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 0.23%. 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 (182/365).

22


 

Trustees Approve Advisory Arrangement

The board of trustees of Vanguard U.S. Value Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Quantitative Equity 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 monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the 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 since Vanguard began managing the fund in 2008, and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Quantitative Equity 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 performance of the fund since Vanguard began managing the fund in 2008, 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. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

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

23


 

The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.

The benefit of economies of scale

The board concluded that the fund’s at-cost 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.

24


 

Glossary

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

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

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

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

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

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

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

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

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

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

25


 

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

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

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

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

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

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The People Who Govern Your Fund

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

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

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

InterestedTrustee1

F. William McNabb III

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

IndependentTrustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

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


 

 

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Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
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Commission, Washington, DC 20549-1520.  
 
  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q1242 052017

 



Semiannual Report | March 31, 2017

Vanguard Capital Value Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisor’s Report. 6
Fund Profile. 9
Performance Summary. 10
Financial Statements. 11
About Your Fund’s Expenses. 22
Trustees Approve Advisory Arrangement. 24
Glossary. 26

 

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

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

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


 

Your Fund’s Performance at a Glance

• Vanguard Capital Value Fund returned 9.79% for the six months ended March 31, 2017, trailing its benchmark (+10.45%) and the average return of its peers (+10.81%).

• Eight of 11 industry sectors represented in the fund recorded positive results. The highest total returns came from financials and materials, which both outperformed their sector results in the benchmark. Utilities also provided a relative boost.

• The fund’s health care stocks notably underperformed their benchmark counterparts.

The shortfall was driven mainly by holdings among health care providers and services, as well as pharmaceutical companies, which declined on concerns over potential regulatory changes. Consumer discretionary also underperformed—stocks in textiles, apparel, and luxury goods lagged, as did those of media firms.

• Among other sectors, industrials, information technology, and real estate gained ground, while energy and telecommunication services retreated.

Total Returns: Six Months Ended March 31, 2017    
    Total
    Returns
Vanguard Capital Value Fund   9.79%
Russell 3000 Value Index   10.45
Multi-Cap Value Funds Average   10.81
Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
 
Expense Ratios    
Your Fund Compared With Its Peer Group    
    Peer Group
  Fund Average
Capital Value Fund 0.25% 1.10%

 

The fund expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the fund’s annualized expense ratio was 0.26%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.

Peer group: Multi-Cap Value Funds.

1


 

Chairman’s Perspective

Dear Shareholder,


For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

Bill McNabb
Chairman and Chief Executive Officer

2


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
      Total Returns
    Periods Ended March 31, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

3


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


4


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.


F. William McNabb III

Chairman and Chief Executive Officer

April 14, 2017

5


 

Advisor’s Report

For the six months ended March 31, 2017, Vanguard Capital Value Fund returned 9.79%. Its performance reflects the management of the fund by Wellington Management Company llp, which marked its 15th anniversary as the fund’s advisor in December.

The fund’s manager, David W. Palmer, has prepared the following discussion of the investment environment that existed during the six-month period and of how the portfolio positioning reflects his assessment. These comments were prepared on April 19, 2017.

Portfolio Manager:

David W. Palmer, CFA
Senior Managing Director

We focus on stocks that trade at a discounted multiple to the broad market, based either on current earnings or on earnings we expect within a reasonable investment horizon. We search for companies with pronounced negative sentiment, controversy, or perceived event risk that, through fundamental research and analysis, we find to be temporary or overstated. Because individual holdings can be out of phase with the market for extended periods, we seek to build a portfolio of stocks with unique drivers, diversified across capitalization sizes and industries.

Equity investors took a firmly expansionary attitude over the past six months, embracing stocks and sectors that benefit

from improving economic activity. In particular, market participants sought out segments that stood to gain from several of the new administration’s indicated campaign priorities: reduced financial-industry regulation, lower headline corporate tax rates, increased infrastructure spending, and a boost for domestically produced goods over imports. Accordingly, the five top-returning sectors in the Russell 3000 Value Index during the period were all groups that could be considered economically sensitive. Financials led the pack, followed closely by materials and industrials.

The U.S. economic backdrop also generally supported corporate earnings prospects: Employment and disposable income continued to grow, inventory destocking proved less of a headwind, and investment spending resumed in several key categories. During the rally that followed the election, we reduced some of our exposure to the outperforming sectors, most notably financials. This initially restrained our relative results as banks and financial intermediaries continued to power ahead for a time.

These decisions, though, have turned constructive recently as optimism about enacting change in the near term has been tempered by political realities, and the narrative has turned more incremental than transformative. During this period, we have been able to add multiple out-of-favor holdings to the portfolio, which we expect to deliver attractive upside to the fund over time.

6


 

Security selection in the portfolio was strongest in the materials, real estate, and financial sectors, while our selections in health care and consumer discretionary were more challenging. Sector allocation contributed favorably, particularly in the underweighting of consumer staples, telecommunication services, and energy, and the overweighting of materials and information technology.

Detractors from performance included Teva Pharmaceutical, the generics and branded-drug manufacturer that lost a patent protection trial to a competitor for a key multiple sclerosis therapy. Teva shareholders were already concerned about the high price the company paid for Actavis’ generics business, so with earnings pressures and a squeeze on expected cash flows, the CEO departed and the board was compelled to rethink elements of the strategy.

Drug distributor McKesson continues to struggle with some customer contract losses and lower margins for its business serving smaller, independent pharmacies. While our purchase of McKesson last year came on the heels of an earnings reset that had already led to underperformance, the company’s difficulties in returning to profit growth have weighed on the earnings multiple that investors are willing to assign to the business.

In the energy sector, a warm end to the U.S. winter undermined the natural gas market recovery thesis behind our holding

of producer Southwestern Energy. And, in consumer discretionary, the restructuring and rethink of a distribution system at apparel maker Ralph Lauren ran aground, as new management left amid friction with the eponymous founder. While the company still has a well-respected product and brand positioning, we felt the signs pointed to a more difficult, protracted turnaround than we anticipated, and we exited the position in favor of building a new holding in branded apparel vendor VF.

A number of individual holdings helped to partially offset our detractors. Regional bank PNC Financial and financial advisory firm Raymond James found strong support, with earnings buoyed by higher interest rates and rising asset markets. Celanese, an intermediate- and specialty-chemicals producer, outperformed as earnings exceeded expectations, and guidance for cash generation was favorable while bolt-on acquisitions added to future estimates of earnings capability. Finally, eastern railroad operator CSX saw its shares jump as activists succeeded in replacing the CEO with a well-respected industry legend from rival operator Canadian Pacific.

At the end of March, the largest portfolio overweights, relative to the Russell 3000 Value Index, were in the consumer discretionary, real estate, information technology, and materials sectors. In addition to the purchase in consumer discretionary of VF—based on our belief that concerns about decelerating long-term

7


 

growth and the unavailability of accretive brand acquisitions were overly discounted in the stock’s valuation—we initiated positions in automaker General Motors and Expedia, the online travel site operator.

GM’s announcement that it would sell its unprofitable Vauxhall and Opel divisions in Europe to Peugeot, of France, plugs what had been a long-running cash drain on the company. It also increases the possibility that GM shareholders could realize material value down the road through a transformative deal with an industry incumbent or a new entrant.

Expedia had been underperforming at the time of purchase as the market worried about the company’s inconsistent recent execution and the prospects for 2017 earnings weakness. The earnings concern was driven by the company’s investment in its Homeaway vacation rentals business and a transition within its IT infrastructure model. We believe the operational and capital investment issues are manageable. We think Expedia has potential to show double-digit sales growth, and earnings and cash-flow growth of 20%-plus, over each of the next several years. These growth metrics, well above those of the average stock, are remarkable for a company trading at a discount to the market on 2018 consensus forecasts of free cash flow. We believe this math will lift the stock nicely over the coming years.

In our outlook for the coming year, we expect some cooling in investor sentiment as economic surprises on growth and activity shift from being uniformly bullish to being more neutral versus expectations. Some of our purchases over the past six months included companies that had lagged the market advance in areas such as real estate, utilities, and telecom. We expect many of these holdings will appear increasingly attractive if their earnings-growth opportunities hold up, while cyclical earnings prospects flatten temporarily.

We do see the deceleration as more of a near-term headwind because of macroeconomic factors such as slower credit growth, normalizing inflation, and higher interest rates, but we expect the positive drivers to reassert themselves toward the end of the calendar year.

As always, we look to provide Capital Value shareholders with a diverse portfolio of attractive companies that have some near-term controversy restraining their current valuation, but have the potential to resolve those difficulties and demonstrate noteworthy capital appreciation over our holding period. We appreciate your trust in our team, and are steadfast in our goal to reward that confidence with favorable investment results over the long term.

8


 

Capital Value Fund

Fund Profile

As of March 31, 2017

Portfolio Characteristics

    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 90 2,044 3,813
Median Market Cap $27.6B $53.7B $58.2B
Price/Earnings Ratio 28.3x 24.3x 25.4x
Price/Book Ratio 1.8x 2.0x 3.0x
Return on Equity 13.4% 11.9% 16.3%
Earnings Growth      
Rate 7.3% 3.4% 7.3%
Dividend Yield 2.2% 2.4% 1.9%
Foreign Holdings 10.6% 0.0% 0.0%
Turnover Rate      
(Annualized) 50%
Ticker Symbol VCVLX
Expense Ratio1 0.25%
30-Day SEC Yield 1.90%
Short-Term Reserves 0.8%

 

Sector Diversification (% of equity exposure)

    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Consumer      
Discretionary 8.8% 4.9% 12.7%
Consumer Staples 3.6 8.0 8.3
Energy 9.5 11.6 6.2
Financials 22.3 27.0 14.8
Health Care 12.6 10.3 13.3
Industrials 7.6 10.4 10.7
Information      
Technology 12.3 10.0 21.2
Materials 5.7 3.1 3.4
Other 0.7 0.0 0.0
Real Estate 8.1 5.1 4.1
Telecommunication      
Services 2.1 3.4 2.1
Utilities 6.7 6.2 3.2

 

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.85 0.82
Beta 1.31 1.29

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

Ten Largest Holdings (% of total net assets)

MetLife Inc. Life & Health  
  Insurance 3.7%
Citigroup Inc. Diversified Banks 3.5
Wells Fargo & Co. Diversified Banks 3.5
PNC Financial Services    
Group Inc. Regional Banks 2.8
American Tower Corp. Specialized REITs 2.3
PG&E Corp. Electric Utilities 1.9
British American    
Tobacco plc Tobacco 1.9
QUALCOMM Inc. Semiconductors 1.9
Arthur J Gallagher & Co. Insurance Brokers 1.8
Celanese Corp. Specialty Chemicals 1.8
Top Ten   25.1%

The holdings listed exclude any temporary cash investments and equity index products.

 

Investment Focus


1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the annualized expense ratio was 0.26%.

9


 

Capital Value Fund

Performance Summary

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

Fiscal-Year Total Returns (%): September 30, 2006, Through March 31, 2017


Note: For 2017, performance data reflect the six months ended March 31, 2017.

Average Annual Total Returns: Periods Ended March 31, 2017

  Inception One Five Ten
  Date Year Years Years
Capital Value Fund 12/17/2001 20.82% 10.05% 5.11%

 

See Financial Highlights for dividend and capital gains information.

10


 

Capital Value Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

      Market
      Value
    Shares ($000)
Common Stocks (98.6%)    
Consumer Discretionary (8.8%)  
  SES SA Class A 586,718 13,641
  VF Corp. 230,995 12,698
  Las Vegas Sands Corp. 188,516 10,759
  General Motors Co. 269,933 9,545
  John Wiley & Sons Inc.    
  Class A 174,582 9,392
* Toll Brothers Inc. 220,633 7,967
  Delphi Automotive plc 95,229 7,665
  Expedia Inc. 56,600 7,141
* Global Brands Group    
  Holding Ltd. 39,158,000 4,187
      82,995
Consumer Staples (3.6%)    
  British American Tobacco    
  plc 271,387 18,005
  Coty Inc. Class A 566,623 10,273
^,* Hostess Brands Inc. 343,900 5,458
      33,736
Energy (9.4%)    
  Halliburton Co. 279,840 13,771
  Anadarko Petroleum Corp. 203,987 12,647
  Cabot Oil & Gas Corp. 403,602 9,650
  HollyFrontier Corp. 313,356 8,880
  Canadian Natural    
  Resources Ltd. 263,964 8,655
  Pioneer Natural Resources    
  Co. 41,841 7,792
  Helmerich & Payne Inc. 94,065 6,262
* Diamondback Energy Inc. 44,671 4,633
  Hess Corp. 81,098 3,910
  Marathon Oil Corp. 246,943 3,902
* Southwestern Energy Co. 466,475 3,811
* QEP Resources Inc. 202,926 2,579
* Trican Well Service Ltd. 774,796 2,360
* Cobalt International    
  Energy Inc. 1,023,054 546
      89,398

 

Financials (22.1%)    
  MetLife Inc. 665,930 35,174
  Citigroup Inc. 553,628 33,118
  Wells Fargo & Co. 593,504 33,034
  PNC Financial Services    
  Group Inc. 219,874 26,438
  Arthur J Gallagher & Co. 309,246 17,485
  American International    
  Group Inc. 249,546 15,579
  XL Group Ltd. 293,128 11,684
  Unum Group 206,247 9,671
  M&T Bank Corp. 60,252 9,323
  Principal Financial Group    
  Inc. 142,160 8,972
  Raymond James Financial    
  Inc. 111,800 8,526
      209,004
Health Care (12.5%)    
* Mylan NV 424,973 16,570
  McKesson Corp. 106,199 15,745
  Allergan plc 60,862 14,541
  Bristol-Myers Squibb Co. 265,359 14,430
* Envision Healthcare Corp. 180,803 11,087
* Biogen Inc. 30,551 8,353
  STERIS plc 114,400 7,946
* Vertex Pharmaceuticals Inc. 65,800 7,195
  Teva Pharmaceutical    
  Industries Ltd. ADR 211,821 6,797
* Regeneron    
  Pharmaceuticals Inc. 17,500 6,782
  Eli Lilly & Co. 68,600 5,770
* Alder Biopharmaceuticals    
  Inc. 147,058 3,059
      118,275
Industrials (7.6%)    
* IHS Markit Ltd. 307,168 12,886
* Genesee & Wyoming Inc.    
  Class A 181,103 12,290
  Steelcase Inc. Class A 544,704 9,124

 

11


 

Capital Value Fund

      Market
      Value
    Shares ($000)
  Eaton Corp. plc 121,410 9,002
  Herman Miller Inc. 266,013 8,393
  JB Hunt Transport    
  Services Inc. 85,676 7,860
  Sanwa Holdings Corp. 770,000 7,227
* Clean Harbors Inc. 88,300 4,911
      71,693
Information Technology (12.2%)  
  QUALCOMM Inc. 313,019 17,949
  Cisco Systems Inc. 484,679 16,382
  Western Digital Corp. 171,161 14,126
  Skyworks Solutions Inc. 135,863 13,312
  Genpact Ltd. 330,388 8,180
  Silicon Motion Technology    
  Corp. ADR 165,229 7,724
^ Acacia Communications    
  Inc. 130,209 7,633
  Samsung Electronics Co.    
  Ltd. 3,812 7,016
  Amdocs Ltd. 105,800 6,453
* Alphabet Inc. Class A 7,584 6,430
* Envestnet Inc. 164,367 5,309
* ARRIS International plc 176,081 4,657
      115,171
Materials (5.6%)    
  Celanese Corp. Class A 185,659 16,682
  Reliance Steel &    
  Aluminum Co. 196,859 15,753
  PPG Industries Inc. 73,300 7,702
  CRH plc 210,174 7,402
  Bemis Co. Inc. 75,183 3,673
* Constellium NV Class A 331,383 2,154
      53,366
Other (0.0%)    
*,1 Allstar Co-Invest LLC    
  Private Placement NA 346
 
Real Estate (8.1%)    
  American Tower    
  Corporation 182,782 22,215
  STORE Capital Corp. 681,768 16,281
  Host Hotels & Resorts Inc. 732,451 13,667
  Columbia Property Trust    
  Inc. 492,461 10,957
  Simon Property Group Inc. 47,072 8,098
  Taubman Centers Inc. 77,700 5,130
      76,348
Telecommunication Services (2.1%)  
  Verizon Communications    
  Inc. 246,262 12,005
  Nippon Telegraph &    
  Telephone Corp. 181,700 7,769
      19,774

 

Utilities (6.6%)    
PG&E Corp. 271,770 18,034
Exelon Corp. 441,709 15,893
OGE Energy Corp. 334,269 11,693
Sempra Energy 87,970 9,721
Iberdrola SA 1,057,878 7,558
    62,899
Total Common Stocks    
(Cost $823,766)   933,005
Preferred Stocks (0.6%)    
*,2 Lithium Technologies Inc.    
Pfd. (Cost $5,828) 1,195,700 6,050
Temporary Cash Investments (1.7%)  
Money Market Fund (0.9%)    
3,4 Market Liquidity Fund,    
0.965% 80,817 8,083
 
  Face  
  Amount  
  ($000)  
Repurchase Agreement (0.8%)  
RBS Securities, Inc.    
0.780%, 4/3/17 (Dated    
3/31/17, Repurchase    
Value $7,800,000,    
collateralized by U.S.    
Treasury Note/Bond    
0.625%,4/30/18, with    
a value of $7,959,000) 7,800 7,800
Total Temporary Cash Investments  
(Cost $15,883)   15,883
Total Investments (100.9%)    
(Cost $845,477)   954,938

 

12


 

Capital Value Fund

  Amount
  ($000)
Other Assets and Liabilities (-0.9%)  
Other Assets  
Investment in Vanguard 67
Receivables for Investment Securities Sold 59
Receivables for Accrued Income 2,015
Receivables for Capital Shares Issued 323
Other Assets 98
Total Other Assets 2,562
Liabilities  
Collateral for Securities on Loan (8,082)
Payables to Investment Advisor (84)
Payables for Capital Shares Redeemed (222)
Payables to Vanguard (2,252)
Other Liabilities (245)
Total Liabilities (10,885)
Net Assets (100%)  
Applicable to 76,219,022 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 946,615
Net Asset Value Per Share $12.42

 

At March 31, 2017, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 956,174
Undistributed Net Investment Income 1,697
Accumulated Net Realized Losses (120,472)
Unrealized Appreciation (Depreciation)  
Investment Securities 109,461
Forward Currency Contracts (244)
Foreign Currencies (1)
Net Assets 946,615

 

• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $7,858,000.
1 Restricted security represents 0.0% of net assets. The fund has a 0.17% ownership interest in the security.
2 Restricted security represents 0.6% 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 Includes $8,082,000 of collateral received for securities on loan.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

13


 

Capital Value Fund

Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Dividends1 9,684
Interest 14
Securities Lending—Net 23
Total Income 9,721
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 1,068
Performance Adjustment (926)
The Vanguard Group—Note C  
Management and Administrative 953
Marketing and Distribution 84
Custodian Fees 18
Shareholders’ Reports 18
Trustees’ Fees and Expenses 1
Total Expenses 1,216
Net Investment Income 8,505
Realized Net Gain (Loss)  
Investment Securities Sold 45,873
Foreign Currencies and Forward Currency Contracts 791
Realized Net Gain (Loss) 46,664
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 33,703
Foreign Currencies and Forward Currency Contracts (377)
Change in Unrealized Appreciation (Depreciation) 33,326
Net Increase (Decrease) in Net Assets Resulting from Operations 88,495
1 Dividends are net of foreign withholding taxes of $90,000.  

 

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

14


 

Capital Value Fund

Statement of Changes in Net Assets    
 
  Six Months Ended Year Ended
  March 31, September 30,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 8,505 14,932
Realized Net Gain (Loss) 46,664 (164,848)
Change in Unrealized Appreciation (Depreciation) 33,326 254,302
Net Increase (Decrease) in Net Assets Resulting from Operations 88,495 104,386
Distributions    
Net Investment Income (15,817) (12,846)
Realized Capital Gain1 (93,310)
Total Distributions (15,817) (106,156)
Capital Share Transactions    
Issued 55,974 100,481
Issued in Lieu of Cash Distributions 14,657 99,619
Redeemed (129,851) (323,723)
Net Increase (Decrease) from Capital Share Transactions (59,220) (123,623)
Total Increase (Decrease) 13,458 (125,393)
Net Assets    
Beginning of Period 933,157 1,058,550
End of Period2 946,615 933,157

 

1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $27,386,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $1,697,000 and $9,068,000.

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

15


 

Capital Value Fund

Financial Highlights            
 
 
  Six Months          
    Ended          
For a Share Outstanding March 31,     Year Ended September 30,
Throughout Each Period   2017 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $11.50 $11.45 $15.32 $14.57 $10.58 $8.59
Investment Operations              
Net Investment Income   .112 .180 .1291 .1782 .138 .155
Net Realized and Unrealized Gain (Loss)            
on Investments   1.009 1.060 (2.330) 2.055 4.051 2.075
Total from Investment Operations   1.121 1.240 (2.201) 2.233 4.189 2.230
Distributions              
Dividends from Net Investment Income (. 201) (.144) (.175) (.111) (.199) (.100)
Distributions from Realized Capital Gains (1.046) (1.494) (1.372) (.140)
Total Distributions   (.201) (1.190) (1.669) (1.483) (.199) (.240)
Net Asset Value, End of Period   $12.42 $11.50 $11.45 $15.32 $14.57 $10.58
 
Total Return3   9.79% 11.36% -15.67% 16.50% 40.21% 26.50%
 
Ratios/Supplemental Data              
Net Assets, End of Period (Millions) $947 $933 $1,059 $1,784 $1,249 $659
Ratio of Total Expenses to              
Average Net Assets4   0.26% 0.25% 0.50% 0.47% 0.41% 0.47%
Ratio of Net Investment Income to            
Average Net Assets   1.83% 1.51% 0.93% 1.19%2 1.03% 1.42%
Portfolio Turnover Rate   50% 134% 90% 90% 132% 123%

 

The expense ratio, net investment income ratio, and turnover rate 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 $.018 and 0.12%, respectively,
resulting from income received from Vodafone Group plc in the form of cash and shares in Verizon Communications Inc. in February 2014.
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 (0.20%), (0.20%), 0.06%, 0.02%, (0.05%), and 0.01%.

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

16


 

Capital Value Fund

Notes to Financial Statements

Vanguard Capital Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

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. Forward Currency Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified 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. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment

17


 

Capital Value Fund

by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

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

During the six months ended March 31, 2017, the fund’s average investment in forward currency contracts represented 2% of net assets, based on the average of notional amounts at each quarter-end during the period.

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

5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2013–2016), and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

7. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain

18


 

Capital Value Fund

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 Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

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 Dow Jones U.S. Total Stock Market Float Adjusted Index for the preceding three years. For the six months ended March 31, 2017, the investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets before a decrease of $926,000 (0.20%) 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

19


 

Capital Value Fund

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $67,000, representing 0.01% of the fund’s net assets and 0.03% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

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

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

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 859,854 72,805 346
Preferred Stocks 6,050
Temporary Cash Investments 8,083 7,800
Forward Currency Contracts—Liabilities (244)
Total 867,937 80,361 6,396

 

E. At March 31, 2017, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.

            Unrealized
  Contract         Appreciation
        Contract Amount (000)  
  Settlement         (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Citibank, N.A. 6/21/17 USD 8,929 EUR 8,413 (82)
BNP Paribas 6/21/17 USD 7,059 JPY 801,276 (162)
            (244)
EUR—Euro.            
JPY—Japanese yen.            
USD—U.S. dollar.            

 

20


 

Capital Value Fund

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

At March 31, 2017, the cost of investment securities for tax purposes was $845,477,000. Net unrealized appreciation of investment securities for tax purposes was $109,461,000, consisting of unrealized gains of $144,926,000 on securities that had risen in value since their purchase and $35,465,000 in unrealized losses on securities that had fallen in value since their purchase.

G. During the six months ended March 31, 2017, the fund purchased $234,418,000 of investment securities and sold $299,953,000 of investment securities, other than temporary cash investments.

H. Capital shares issued and redeemed were:    
  Six Months Ended Year Ended
  March 31, 2017 September 30, 2016
  Shares Shares
  (000) (000)
Issued 4,669 9,076
Issued in Lieu of Cash Distributions 1,209 9,106
Redeemed (10,811) (29,458)
Net Increase (Decrease) in Shares Outstanding (4,933) (11,276)

 

I. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

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.

22


 

Six Months Ended March 31, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Capital Value Fund 9/30/2016 3/31/2017 Period
Based on Actual Fund Return $1,000.00 $1,097.91 $1.36
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.64 1.31

 

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 0.26%. 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 (182/365).

23


 

Trustees Approve Advisory Arrangement

The board of trustees of Vanguard Capital Value 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 year that directed the board’s focus to relevant information and topics.

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

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

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the 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 advisor seeks long-term capital appreciation in a diversified portfolio of undervalued stocks across the capitalization spectrum, employing an opportunistic and contrarian investment style. The portfolio managers have the support of Wellington Management’s global industry analysts in conducting their research-intensive approach. Wellington Management has advised the fund since its inception in 2001.

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 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. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

24


 

Cost

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

The board did not consider 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. 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.

25


 

Glossary

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

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

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

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

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

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

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

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

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

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

26


 

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

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

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

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

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

27


 

The People Who Govern Your Fund

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

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

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

InterestedTrustee1

F. William McNabb III

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

IndependentTrustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.


 

 

  P.O. Box 2600
  Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® >   vanguard.com    
 
 
 
Fund Information > 800-662-7447 CFA® is a registered trademark owned by CFA Institute.
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q3282 052017

 



Semiannual Report | March 31, 2017

Vanguard Short-Term Inflation-Protected
Securities Index Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Fund Profile. 7
Performance Summary. 8
Financial Statements. 9
About Your Fund’s Expenses. 21
Trustees Approve Advisory Arrangement. 23
Glossary. 25

 

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


 

Your Fund’s Performance at a Glance

• For the six months ended March 31, 2017, Vanguard Short-Term Inflation-Protected Securities Index Fund returned 0.39% for Investor Shares, slightly behind its benchmark (+0.54%) but ahead of its peer-fund average (–0.47%). The 30-day SEC yield for Investor Shares began the period at –0.40% and ended at –0.66%.

• Regular U.S. Treasury securities lost favor during the period as economic prospects brightened and interest rates rose. However, Treasury Inflation-Protected Securities (TIPS) outperformed regular Treasuries as inflation expectations increased, a development that typically favors TIPS over nominal Treasuries.

• A measure of expected inflation over the next five years (the gap between nominal and TIPS yields) widened from 1.42% to 2.02%.

• To minimize the risk of overdistributing income—a recordkeeping headache for investors—the fund withheld an income distribution in March in light of the low-interest-rate environment. Distributions will be made when sufficient income is available.

Total Returns: Six Months Ended March 31, 2017        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Short-Term Inflation-Protected Securities Index Fund      
Investor Shares -0.66% 0.87% -0.48% 0.39%
ETF Shares -0.59      
Market Price       0.46
Net Asset Value       0.48
Admiral™ Shares -0.56 0.92 -0.44 0.48
Institutional Shares -0.55 0.92 -0.44 0.48
Bloomberg Barclays U.S. Treasury Inflation-Protected        
Securities (TIPS) 0–5 Year Index       0.54
Inflation-Protected Bond Funds Average       -0.47

 

Inflation-Protected Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq market price and the net asset value for a share. U.S. Pat. Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV.

1


 

Expense Ratios          
Your Fund Compared With Its Peer Group          
  Investor ETF Admiral Institutional Peer Group
  Shares Shares Shares Shares Average
Short-Term Inflation-Protected Securities Index          
Fund 0.16% 0.07% 0.07% 0.04% 0.74%

 

The fund expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2017, the fund’s annualized expense ratios were 0.16% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.04% for Institutional Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.

Peer group: Inflation-Protected Bond Funds.

2


 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

3


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
      Total Returns
    Periods Ended March 31, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

4


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


5


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III

Chairman and Chief Executive Officer

April 14, 2017

6


 

Short-Term Inflation-Protected Securities Index Fund

Fund Profile
As of March 31, 2017

Share-Class Characteristics        
  Investor   Admiral Institutional
  Shares ETF Shares Shares Shares
Ticker Symbol VTIPX VTIP VTAPX VTSPX
Expense Ratio1 0.16% 0.07% 0.07% 0.04%
30-Day SEC Yield2 -0.66% -0.59% -0.56% -0.55%

 

Financial Attributes    
 
    Bloomberg  
    Barclays Bloomberg
    TIPS Barclays
    0-5 Year Aggregate
  Fund Index Bond Index
 
Number of Bonds 15 15 10,170
 
Yield to Maturity      
(before expenses) 1.6% 1.6% 2.6%
 
Average Coupon 0.6% 0.6% 3.1%
 
Average Duration 2.5 years 2.5 years 6.0 years
 
Average Effective      
Maturity 2.6 years 2.6 years 8.2 years
 
Short-Term      
Reserves 0.0%

 

Sector Diversification (% of portfolio)  
Treasury/Agency 100.0%

 

Volatility Measures    
  Bloomberg  
  Barclays Bloomberg
  TIPS Barclays
  0-5 Year Aggregate Bond
  Index Index
R-Squared 0.99 0.27
Beta 1.01 0.31

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

 

Distribution by Credit Quality (% of portfolio)
U.S. Government 100.0%

Credit-quality ratings are obtained from Barclays and are from Moody's, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. For more information about these ratings, see the Glossary entry for Credit Quality.

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

 

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 15.9%
1 - 3 Years 35.1
3 - 5 Years 49.0

 

Investment Focus

1 The expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2017, the fund’s annualized expense ratios were 0.16% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.04% for Institutional Shares.

2 Yields of inflation-protected securities tend to be lower than those of nominal bonds, because the former do not incorporate market expectations about inflation. The principal amounts—and thus the interest payments—of inflation-protected securities are adjusted over time to reflect inflation.

7


 

Short-Term Inflation-Protected Securities Index Fund

Performance Summary

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

Fiscal-Year Total Returns (%): October 16, 2012, Through March 31, 2017  
        Bloomberg
        Barclays TIPS
      Investor Shares 0-5 Year Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2013 0.09% -1.00% -0.91% -1.20%
2014 0.02 -0.04 -0.02 0.21
2015 0.70 -2.06 -1.36 -1.19
2016 0.43 2.05 2.48 2.62
2017 0.87 -0.48 0.39 0.54
Note: For 2017, performance data reflect the six months ended March 31, 2017.    

 

Average Annual Total Returns: Periods Ended March 31, 2017      
 
          Since Inception
  Inception Date One Year Income Capital Total
Investor Shares 10/16/2012 1.45% 0.31% -0.19% 0.12%
ETF Shares 10/12/2012        
Market Price   1.53     0.24
Net Asset Value   1.59     0.22
Admiral Shares 10/16/2012 1.58 0.39 -0.17 0.22
Institutional Shares 10/17/2012 1.62 0.40 -0.15 0.25

See Financial Highlights for dividend and capital gains information.

 

8


 

Short-Term Inflation-Protected Securities Index Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
U.S. Government and Agency Obligations (99.8%)        
U.S. Government Securities (99.8%)        
United States Treasury Inflation Indexed Bonds 0.125% 4/15/17 1,660,669 1,776,906
United States Treasury Inflation Indexed Bonds 2.625% 7/15/17 485,705 577,183
United States Treasury Inflation Indexed Bonds 1.625% 1/15/18 537,527 635,834
United States Treasury Inflation Indexed Bonds 0.125% 4/15/18 1,932,333 2,046,438
United States Treasury Inflation Indexed Bonds 1.375% 7/15/18 530,817 618,039
United States Treasury Inflation Indexed Bonds 2.125% 1/15/19 501,638 596,637
United States Treasury Inflation Indexed Bonds 0.125% 4/15/19 1,936,709 2,036,291
United States Treasury Inflation Indexed Bonds 1.875% 7/15/19 565,138 682,612
United States Treasury Inflation Indexed Bonds 1.375% 1/15/20 691,955 818,329
United States Treasury Inflation Indexed Bonds 0.125% 4/15/20 1,942,047 2,043,730
United States Treasury Inflation Indexed Bonds 1.250% 7/15/20 1,051,728 1,238,988
United States Treasury Inflation Indexed Bonds 1.125% 1/15/21 1,207,537 1,411,089
United States Treasury Inflation Indexed Bonds 0.125% 4/15/21 1,710,845 1,771,565
United States Treasury Inflation Indexed Bonds 0.625% 7/15/21 1,334,286 1,491,307
United States Treasury Inflation Indexed Bonds 0.125% 1/15/22 1,489,657 1,610,270
Total U.S. Government and Agency Obligations (Cost $19,270,637)     19,355,218
 
      Shares  
Temporary Cash Investment (0.0%)        
Money Market Fund (0.0%)        
1 Vanguard Market Liquidity Fund (Cost $5,052) 0.965%   50,515 5,053
Total Investments (99.8%) (Cost $19,275,689)       19,360,271

 

9


 

Short-Term Inflation-Protected Securities Index Fund

  Amount
  ($000)
Other Assets and Liabilities (0.2%)  
Other Assets  
Investment in VGI 1,294
Receivables for Accrued Income 28,380
Receivables for Capital Shares Issued 336,111
Total Other Assets 365,785
Liabilities  
Payables for Investment Securities Purchased (307,823)
Payables for Capital Shares Redeemed (8,237)
Payables to Vanguard (4,349)
Other Liabilities (374)
Total Liabilities (320,783)
Net Assets (100%) 19,405,273
 
 
At March 31, 2017, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 19,346,907
Undistributed Net Investment Income 66,985
Accumulated Net Realized Losses (93,201)
Unrealized Appreciation (Depreciation) 84,582
Net Assets 19,405,273
 
Investor Shares—Net Assets  
Applicable to 219,487,794 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 5,442,089
Net Asset Value Per Share—Investor Shares $24.79
 
ETF Shares—Net Assets  
Applicable to 68,141,811 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 3,369,359
Net Asset Value Per Share—ETF Shares $49.45
 
Admiral Shares—Net Assets  
Applicable to 179,324,752 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 4,448,966
Net Asset Value Per Share—Admiral Shares $24.81
 
Institutional Shares—Net Assets  
Applicable to 247,554,028 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 6,144,859
Net Asset Value Per Share—Institutional Shares $24.82

 

• 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.

10


 

Short-Term Inflation-Protected Securities Index Fund

Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Interest1 135,345
Total Income 135,345
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 296
Management and Administrative—Investor Shares 3,599
Management and Administrative—ETF Shares 823
Management and Administrative—Admiral Shares 1,070
Management and Administrative—Institutional Shares 944
Marketing and Distribution—Investor Shares 497
Marketing and Distribution—ETF Shares 112
Marketing and Distribution—Admiral Shares 206
Marketing and Distribution—Institutional Shares 84
Custodian Fees 49
Shareholders’ Reports—Investor Shares 35
Shareholders’ Reports—ETF Shares 50
Shareholders’ Reports—Admiral Shares 24
Shareholders’ Reports—Institutional Shares 1
Trustees’ Fees and Expenses 7
Total Expenses 7,797
Net Investment Income 127,548
Realized Net Gain (Loss)  
Investment Securities Sold1 2,876
Futures Contracts (1,180)
Realized Net Gain (Loss) 1,696
Change in Unrealized Appreciation (Depreciation) of Investment Securities (38,552)
Net Increase (Decrease) in Net Assets Resulting from Operations 90,692

 

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $376,000 and $0, respectively.

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

11


 

Short-Term Inflation-Protected Securities Index Fund

Statement of Changes in Net Assets    
 
  Six Months Ended Year Ended
  March 31, September 30,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 127,548 70,180
Realized Net Gain (Loss) 1,696 (12,164)
Change in Unrealized Appreciation (Depreciation) (38,552) 307,524
Net Increase (Decrease) in Net Assets Resulting from Operations 90,692 365,540
Distributions    
Net Investment Income    
Investor Shares (27,992)
ETF Shares (21,465)
Admiral Shares (26,937)
Institutional Shares (44,908)
Realized Capital Gain    
Investor Shares
ETF Shares
Admiral Shares
Institutional Shares
Total Distributions (121,302)  
Capital Share Transactions    
Investor Shares 358,544 443,641
ETF Shares 896,231 583,428
Admiral Shares 1,080,797 1,173,766
Institutional Shares 661,035 1,539,781
Net Increase (Decrease) from Capital Share Transactions 2,996,607 3,740,616
Total Increase (Decrease) 2,965,997 4,106,156
Net Assets    
Beginning of Period 16,439,276 12,333,120
End of Period1 19,405,273 16,439,276

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $66,985,000 and $60,698,000.

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

 

12


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights          
 
 
Investor Shares          
  Six Months       Oct. 16,
  Ended       20121 to
    Year Ended September 30,  
  March 31,       Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.83 $24.23 $24.74 $24.75 $25.00
Investment Operations          
Net Investment Income .167 2 .0802 (.131) .183 . 015
Net Realized and Unrealized Gain (Loss)          
on Investments (. 072) . 520 (. 206) (.189) (. 241)
Total from Investment Operations . 095 . 600 (. 337) (. 006) (. 226)
Distributions          
Dividends from Net Investment Income (.135) (.173) (. 004) (. 024)
Distributions from Realized Capital Gains
Total Distributions (.135) (.173) (. 004) (. 024)
Net Asset Value, End of Period $24.79 $24.83 $24.23 $24.74 $24.75
 
Total Return3 0.39% 2.48% -1.36% -0.02% -0.91%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $5,442 $5,088 $4,532 $4,517 $3,702
Ratio of Total Expenses to Average Net Assets 0.16% 0.16% 0.17% 0.20% 0.20%4
Ratio of Net Investment Income to          
Average Net Assets 1.38% 0.42% (0.53%) 0.88% 0.01%4
Portfolio Turnover Rate 5 18% 28% 26% 18% 13%

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.

1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
4 Annualized.
5 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.

13


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights          
 
 
ETF Shares          
  Six Months       Oct. 12,
  Ended       20121 to
    Year Ended September 30,  
  March 31,       Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $49.59 $48.36 $49.38 $49.36 $49.83
Investment Operations          
Net Investment Income . 370 2 .2512 (. 210) . 414 . 065
Net Realized and Unrealized Gain (Loss)          
on Investments (.136) . 979 (. 415) (. 371) (. 483)
Total from Investment Operations .234 1.230 (.625) .043 (.418)
Distributions          
Dividends from Net Investment Income (. 374) (. 395) (. 023) (. 052)
Distributions from Realized Capital Gains
Total Distributions (. 374) (. 395) (. 023) (. 052)
Net Asset Value, End of Period $49.45 $49.59 $48.36 $49.38 $49.36
 
Total Return 0.48% 2.54% -1.26% 0.09% -0.84%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $3,369 $2,478 $1,838 $1,336 $967
Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.08% 0.10% 0.10%3
Ratio of Net Investment Income to          
Average Net Assets 1.47% 0.51% (0.44%) 0.98% 0.11%3
Portfolio Turnover Rate 4 18% 28% 26% 18% 13%

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.

1 Inception.
2 Calculated based on average shares outstanding.
3 Annualized.
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


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights

Admiral Shares          
  Six Months       Oct. 16,
  Ended       20121 to
    Year Ended September 30,  
  March 31,       Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.88 $24.27 $24.77 $24.77 $25.00
Investment Operations          
Net Investment Income .185 2 .1492 (.105) . 209 . 025
Net Realized and Unrealized Gain (Loss)          
on Investments (. 068) . 461 (.197) (.195) (. 229)
Total from Investment Operations .117 . 610 (. 302) . 014 (. 204)
Distributions          
Dividends from Net Investment Income (.187) (.198) (. 014) (. 026)
Distributions from Realized Capital Gains
Total Distributions (.187) (.198) (. 014) (. 026)
Net Asset Value, End of Period $24.81 $24.88 $24.27 $24.77 $24.77
 
Total Return3 0.48% 2.51% -1.22% 0.06% -0.82%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,449 $3,373 $2,126 $1,518 $776
Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.08% 0.10% 0.10%4
Ratio of Net Investment Income to          
Average Net Assets 1.47% 0.51% (0.44%) 0.98% 0.11%4
Portfolio Turnover Rate 5 18% 28% 26% 18% 13%

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
4 Annualized.
5 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


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights          
 
 
Institutional Shares          
  Six Months       Oct. 17,
  Ended       20121 to
    Year Ended September 30,  
  March 31,       Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.90 $24.28 $24.78 $24.77 $24.99
Investment Operations          
Net Investment Income .180 2 .1392 (. 099) . 215 . 026
Net Realized and Unrealized Gain (Loss)          
on Investments (. 062) . 481 (.196) (.189) (. 220)
Total from Investment Operations .118 .620 (. 295) .026 (.194)
Distributions          
Dividends from Net Investment Income (.198) (. 205) (. 016) (. 026)
Distributions from Realized Capital Gains
Total Distributions (.198) (. 205) (. 016) (. 026)
Net Asset Value, End of Period $24.82 $24.90 $24.28 $24.78 $24.77
 
Total Return3 0.48% 2.55% -1.19% 0.11% -0.78%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $6,145 $5,500 $3,837 $2,706 $1,262
Ratio of Total Expenses to Average Net Assets 0.04% 0.04% 0.05% 0.07% 0.07%4
Ratio of Net Investment Income to          
Average Net Assets 1.50% 0.54% (0.41%) 1.01% 0.14%4
Portfolio Turnover Rate 5 18% 28% 26% 18% 13%

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable transaction fees.
4 Annualized.
5 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


 

Short-Term Inflation-Protected Securities Index Fund

Notes to Financial Statements

Vanguard Short-Term Inflation-Protected Securities 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. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on Nasdaq; they can be purchased and sold through a broker. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.

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

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Bonds and 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. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. 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 by methods deemed by the board of trustees to represent fair value.

2. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearing-house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

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

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts each represented less than 1% of net assets, based on the average of aggregate settlement values at each quarter-end during the period. The fund had no open futures contracts at March 31, 2017.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2013–2016), and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

17


 

Short-Term Inflation-Protected Securities Index Fund

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

6. Other: Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Inflation adjustments to the face amount of inflation-indexed securities are included in interest income. 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. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $1,294,000, representing 0.01% of the fund’s net assets and 0.52% of Vanguard’s capitalization. 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. 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.

18


 

Short-Term Inflation-Protected Securities Index Fund

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 19,355,218
Temporary Cash Investments 5,053
Total 5,053 19,355,218

 

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

Certain of the fund’s U.S. Treasury inflation-indexed securities experienced deflation and amortization adjustments that reduced interest income and the cost of investments for financial statement purposes by an amount greater than the reduction of taxable income; the additional income reduction will be deferred for tax purposes until it is used to offset future inflation adjustments that increase taxable income. The difference becomes permanent if the securities are sold. During the six months ended March 31, 2017, the fund realized gains of $41,000 that were included in ordinary income for tax purposes as a result of deferred deflation and amortization adjustments; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Deferred inflation and amortization adjustments to securities held at March 31, 2017, totaling $586,000 are reflected as a reduction of the amount of tax-basis unrealized appreciation of investment securities.

During the six months ended March 31, 2017, the fund realized $6,956,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.

The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at September 30, 2016, the fund had available capital losses totaling $85,072,000 that may be carried forward indefinitely to offset future capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending September 30, 2017; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.

19


 

Short-Term Inflation-Protected Securities Index Fund

At March 31, 2017, the cost of investment securities for tax purposes was $19,279,071,000. Net unrealized appreciation of investment securities for tax purposes was $81,200,000, consisting of unrealized gains of $93,648,000 on securities that had risen in value since their purchase and $12,448,000 in unrealized losses on securities that had fallen in value since their purchase.

E. During the six months ended March 31, 2017, the fund purchased $4,274,692,000 of investment securities and sold $1,614,314,000 of investment securities, other than temporary cash investments. Purchases and sales include $800,043,000 and $81,724,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

F. Capital share transactions for each class of shares were:      
  Six Months Ended   Year Ended
  March 31, 2017 September 30, 2016
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 422,130 17,085 873,920 35,645
Issued in Lieu of Cash Distributions 27,936 1,136
Redeemed (91,522) (3,704) (430,279) (17,713)
Net Increase (Decrease)—Investor Shares 358,544 14,517 443,641 17,932
ETF Shares        
Issued 982,688 19,925 955,615 19,579
Issued in Lieu of Cash Distributions
Redeemed (86,457) (1,750) (372,187) (7,625)
Net Increase (Decrease)—ETF Shares 896,231 18,175 583,428 11,954
Admiral Shares        
Issued 1,384,349 56,007 1,743,525 71,273
Issued in Lieu of Cash Distributions 25,001 1,016
Redeemed (328,553) (13,280) (569,759) (23,298)
Net Increase (Decrease)—Admiral Shares 1,080,797 43,743 1,173,766 47,975
Institutional Shares        
Issued 1,239,599 50,060 2,316,657 94,659
Issued in Lieu of Cash Distributions 44,322 1,801
Redeemed (622,886) (25,170) (776,876) (31,833)
Net Increase (Decrease)—Institutional Shares 661,035 26,691 1,539,781 62,826

 

At March 31, 2017, one shareholder was the record or beneficial owner of 38% of the fund’s net assets. If the shareholder were to redeem its investment in the fund, the redemption might result in an increase in the fund’s expense ratio, cause the fund to incur higher transaction costs, or lead to the realization of taxable capital gains.

G. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

20


 

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.

21


 

Six Months Ended March 31, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Short-Term Inflation-Protected Securities Index Fund 9/30/2016 3/31/2017 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,003.87 $0.80
ETF Shares 1,000.00 1,004.81 0.35
Admiral Shares 1,000.00 1,004.77 0.35
Institutional Shares 1,000.00 1,004.81 0.20
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,024.13 $0.81
ETF Shares 1,000.00 1,024.58 0.35
Admiral Shares 1,000.00 1,024.58 0.35
Institutional Shares 1,000.00 1,024.73 0.20

 

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 0.16% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.04% for Institutional 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 (182/365).

22


 

Trustees Approve Advisory Arrangement

The board of trustees of Vanguard Short-Term Inflation-Protected Securities Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Fixed Income 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 monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the 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 its inception in 2012, and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Fixed Income 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 performance of the fund since its inception in 2012, 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. Information about the fund’s performance can be found in the Performance Summary section of this report.

Cost

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

23


 

The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.

The benefit of economies of scale

The board concluded that the fund’s at-cost 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 after a one-year period.

24


 

Glossary

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

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the fund’s bonds will fluctuate in response to a change in “real” interest rates—meaning rates without inflation expectations built in. Real interest rates are reflected in market yields for inflation-adjusted securities. To see how the fund’s bond values could change, multiply the average duration by the change in real rates. For example, if the average duration were five years, then the value of the fund’s bonds would decline by about 5% if real interest rates rose by 1 percentage point. Conversely, if real rates fell by a percentage point, the value of the bonds would rise about 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Barclays and are from Moody’s, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available.

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

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

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

25


 

Yield to Maturity. This term generally refers to the rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates. For the Short-Term Inflation-Protected Securities Index Fund, the calculation is modified by adding in the inflation adjustment made over the past 12 months. This change results in a figure more directly comparable to the yield-to-maturity figures for other types of bond funds. (An unmodified yield to maturity is used in calculating the fund’s 30-Day SEC Yield.)

26


 

Vanguard Short-Term Inflation-Protected Securities Index Fund is not sponsored, endorsed, issued, sold, or promoted by Barclays Risk Analytics and Index Solutions Limited or any of its affiliates (“Barclays”). Barclays makes no representation or warranty, express or implied, to the owners or purchasers of Vanguard Short-Term Inflation-Protected Securities Index Fund or any member of the public regarding the advisability of investing in securities generally or in Vanguard Short-Term Inflation-Protected Securities Index Fund particularly or the ability of the Barclays index to track general bond market performance. Barclays has not passed on the legality or suitability of Vanguard Short-Term Inflation-Protected Securities Index Fund with respect to any person or entity. Barclays’ only relationship to Vanguard and Vanguard Short-Term Inflation-Protected Securities Index Fund is the licensing of the Barclays index, which is determined, composed, and calculated by Barclays without regard to Vanguard or Vanguard Short-Term Inflation-Protected Securities Index Fund or any owners or purchasers of Vanguard Short-Term Inflation-Protected Securities Index Fund. Barclays has no obligation to take the needs of Vanguard, Vanguard Short-Term Inflation-Protected Securities Index Fund, or the owners of Vanguard Short-Term Inflation-Protected Securities Index Fund into consideration in determining, composing, or calculating the Barclays index. Barclays is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of Vanguard Short-Term Inflation-Protected Securities Index Fund to be issued. Barclays has no obligation or liability in connection with the administration, marketing, or trading of Vanguard Short-Term Inflation-Protected Securities Index Fund.

BARCLAYS SHALL HAVE NO LIABILITY TO THIRD PARTIES FOR THE QUALITY, ACCURACY, AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. BARCLAYS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF VANGUARD SHORT-TERM INFLATION-PROTECTED SECURITIES INDEX FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. BARCLAYS RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS U.S. TREASURY INFLATION-PROTECTED SECURITIES (TIPS) 0–5 YEAR INDEX, AND BARCLAYS SHALL NOT BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED, OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS U.S. TREASURY INFLATION-PROTECTED SECURITIES (TIPS) 0–5 YEAR INDEX. BARCLAYS MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. BARCLAYS SHALL NOT BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY INDIRECT OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THE INDEX OR

ANY DATA INCLUDED THEREIN.

© 2017 Barclays. Used with Permission.

Source: Barclays Global Family of Indices. Copyright 2017, Barclays. All rights reserved.

27


 

The People Who Govern Your Fund

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

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

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

InterestedTrustee1

F. William McNabb III

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

IndependentTrustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.


 

 

  P.O. Box 2600
  Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® > vanguard.com  
 
 
 
Fund Information > 800-662-7447  
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q19672 052017

 



Semiannual Report | March 31, 2017

Vanguard Core Bond Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisor’s Report. 6
Fund Profile. 9
Performance Summary. 10
Financial Statements. 11
About Your Fund’s Expenses. 50
Trustees Approve Advisory Arrangement. 52
Glossary. 54

 

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

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

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


 

Your Fund’s Performance at a Glance

• Vanguard Core Bond Fund returned roughly –2% for the six months ended March 31, 2017, outpacing its benchmark but lagging the average return of its peers.

• U.S. taxable bond prices slumped as the outlook for faster growth and higher inflation bolstered demand for riskier assets through much of the period. That outlook pushed yields of longer-term bonds higher, while the Federal Reserve’s two interest rate increases, in December and March, lifted short-term yields as well.

• The fund’s underweighting of U.S. Treasuries was a positive, as they were especially out of favor in this risk-on environment. Also adding value were an allocation to Treasury Inflation-Protected Securities, whose value rises as inflation expectations increase; an overweighting of BBB-rated bonds; and security selection across corporate bonds.

• The fund’s holdings in agency and commercial mortgage-backed securities dampened performance.

Total Returns: Six Months Ended March 31, 2017        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Core Bond Fund        
Investor Shares 2.35% 1.02% -3.20% -2.18%
Admiral™ Shares 2.45 1.08 -3.25 -2.17
Bloomberg Barclays U.S. Aggregate Float Adjusted Index       -2.23
Core Bond Funds Average       -1.77
Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.      
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.  
 
 
Expense Ratios        
Your Fund Compared With Its Peer Group        
  Investor Admiral   Peer Group
  Shares Shares   Average
Core Bond Fund 0.25% 0.15%   0.78%

 

The fund expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year. For the period from inception through March 31, 2017, the fund’s annualized expense ratios were 0.25% for Investor Shares and 0.15% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.

Peer group: Core Bond Funds.

1


 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

2


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
      Total Returns
    Periods Ended March 31, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

3


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


4


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.


F. William McNabb III

Chairman and Chief Executive Officer

April 14, 2017

5


 

Advisor’s Report

For the six months ended March 31, 2017, Vanguard Core Bond Fund returned –2.18% for Investor Shares and –2.17% for Admiral Shares. Those performances were just above the –2.23% return of the benchmark (the Bloomberg Barclays U.S. Aggregate Float Adjusted Index) and a little below the average return of –1.77% for peer funds.

Because bond prices and yields move in opposite directions, the 30-day SEC yield for the fund’s Investor Shares rose, climbing 54 basis points to finish the period at 2.35%. (A basis point is one-hundredth of a percentage point.) The yield of its Admiral Shares rose by the same amount, to 2.45%.

The investment environment

As turmoil from Britain’s surprise vote to leave the European Union subsided, markets began anticipating faster growth and higher inflation. In the United States, economic activity appeared to pick up steam after subpar readings in the first half of 2016, and the employment picture continued to improve, with signs of a long-awaited upturn in wages. These factors played a part in the Fed’s decision in December to raise the federal funds rate—only the second increase in a decade—by a quarter percentage point, to 0.5%–0.75%.

The brighter outlook, along with the prospect of more infrastructure spending, greater deregulation, repatriation of corporate profits held overseas, and

comprehensive tax-code changes under a new U.S. administration, helped fuel a rally in riskier assets that carried into 2017.

In March, the Fed raised rates another quarter percentage point; that pushed very short-term yields even higher, whereas longer-term yields seesawed amid concerns about the implementation of the administration’s pro-growth agenda.

This risk-on environment sapped demand for U.S. Treasuries, pushing their yields higher across the board by the end of the period. The 2-year Treasury yield rose 50 basis points to 1.26%, the 10-year yield jumped 79 basis points to 2.39%, and the 30-year yield climbed 69 basis points to 3.01%.

Demand for corporate bonds held up better, especially for lower-rated investment-grade debt, as growth expectations improved and investors continued to reach for yield. The average spread in yield of corporate bonds over Treasuries shrunk to 118 basis points from 138 six months earlier. Segments of the corporate bond market that significantly compressed included energy, mining, and financial companies. Financials benefited from the potential for a boost in profitability from rising interest rates and decreased regulation.

Abroad, monetary policy remained largely accommodative in many developed markets even as inflation expectations ticked higher. The Bank of England shifted

6


 

from an easing bias to a neutral stance; the European Central Bank announced it would continue buying bonds but slow the pace starting in April; and the Bank of Japan stood pat on its zero-yield policy for 10-year government bonds. With yields in those countries so low, U.S. bonds continued to attract international investors.

Management of the fund

Being underweighted in Treasuries, which as a whole returned about –3% for the period, significantly helped the fund’s relative performance.

So did our allocation to Treasury Inflation-Protected Securities, which are not part of the benchmark index. Because we thought consumer prices were likely to rise faster than the market was anticipating, we felt that these securities—which are indexed to inflation—were likely to appreciate in value. Factors supporting our view included improvement in the price of oil and other commodities, an uptick in wages, and the prospect of fiscal stimulus through tax cuts and infrastructure spending.

The spread in yields between corporate bonds and Treasuries narrowed as investors grew more comfortable taking on more risk for more yield. As a consequence, lower-rated investment-grade bonds outperformed higher-rated ones, so our fund’s tilt toward BBB-rated bonds was a positive. Security selection in corporates and our favoring of financials over industrials also added value.

There were some disappointments, however. Our holdings in agency and commercial mortgage-backed securities dampened performance. Being overweighted in asset-backed securities detracted as well, but we largely made up for that through security selection.

Although we kept the fund’s average duration close to that of its benchmark index, our being slightly longer as rates rose sharply in late 2016 detracted a little from performance. Duration is a measure, in years, of the sensitivity of a bond fund’s holdings to changes in interest rates. It stood at about six years at the end of the period, in line with the benchmark’s duration.

Outlook

Absent an unexpected external shock, the U.S. economy looks to maintain its steady growth, with real GDP likely to be about 2% in 2017, or maybe closer to 2.5% if policy implementation proves expansionary. Although job growth may slow given the tightening in the labor market, competition for labor could push the pace of annual wage increases into the 3%–4% range. That should fan inflation in the short term, but not to the point of overheating.

Even though interest rates rose sharply in the fourth quarter, we’re not expecting the cost of borrowing to get out of hand. The continued strength of the U.S. dollar is likely to hold down import prices. And as long as there’s a significant yield

7


 

differential between U.S. bonds and those of other developed economies, demand from international investors is likely to continue capping how high U.S. bond yields can rise.

We’re encouraged by the Fed’s decision to continue normalizing rates, which have been near zero since 2009. The federal funds rate could increase to 1.25%–1.5% by the end of 2017, but we nevertheless think the Fed will maintain its gradual and dovish approach to tightening given the anti-inflationary forces still at work in the global economy.

Although the economy stands to benefit from the administration’s pro-business, pro-growth agenda, we’re also closely monitoring developments that could dim our outlook. They include hitches in implementing the agenda; the adoption of trade, taxation, and immigration policies that dampen growth; destabilizing political developments in Europe; and further weakness in China’s economy. We could certainly see volatility pick up from the low levels we have been experiencing as the government works to put its agenda in place.

Given the fund’s relatively defensive positioning, we have plenty of scope to take on more credit risk should spreads widen significantly.

Regardless of what the markets may bring, our experienced team of portfolio managers, traders, and credit analysts will continue to seek out opportunities to add to the funds’ performance through security selection, sector allocation, and, to a lesser extent, duration decisions.

Portfolio Managers:

Brian W. Quigley, CFA

Gemma Wright-Casparius, Principal

Gregory S. Nassour, CFA, Principal

Vanguard Fixed Income Group

April 21, 2017

8


 

Core Bond Fund

Fund Profile
As of March 31, 2017

Share-Class Characteristics

  Investor Admiral
  Shares Shares
Ticker Symbol VCORX VCOBX
Expense Ratio1 0.25% 0.15%
30-Day SEC Yield 2.35% 2.45%

 

Financial Attributes

    Bloomberg
    Barclays U.S.
    Aggregate
    Float Adjusted
  Fund Index
 
Number of Bonds 806 10,170
 
Yield to Maturity    
(before expenses) 2.7% 2.6%
 
Average Coupon 1.7% 3.1%
 
Average Duration 6.0 years 6.0 years
 
Average Effective    
Maturity 7.5 years 8.2 years
 
Short-Term    
Reserves 9.1%

 

Sector Diversification (% of portfolio)  
Asset-Backed 4.0%
Commercial Mortgage-Backed 4.6
Finance 12.3
Foreign 4.2
Government Mortgage-Backed 23.4
Industrial 14.3
Treasury/Agency 34.6
Utilities 2.3
Other 0.3

 

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 5.7%
1 - 3 Years 16.8
3 - 5 Years 19.5
5 - 7 Years 15.2
7 - 10 Years 29.0
10 - 20 Years 5.7
20 - 30 Years 7.9
Over 30 Years 0.2

 

Distribution by Credit Quality (% of portfolio)

U.S. Government 49.3%
Aaa 6.2
Aa 3.5
A 11.1
Baa 19.1
Ba 0.5
B 0.4
Not Rated 9.9

Credit-quality ratings are obtained from Moody's and S&P, and the higher rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. Not rated securities include a fund's investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus


1 The expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year. For the period from inception through March 31, 2017, the annualized expense ratios were 0.25% for Investor Shares and 0.15% for Admiral Shares.

9


 

Core Bond Fund

Performance Summary

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

Fiscal-Year Total Returns (%): March 28, 2016, Through March 31, 2017    
          Bloomberg
          Barclays U.S.
          Aggregate
          Float Adjusted
      Investor Shares Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2016   0.97% 2.60% 3.57% 3.31%
2017   1.02 -3.20 -2.18 -2.23
Note: For 2017, performance data reflect the six months ended March 31, 2017.      
 
 
Average Annual Total Returns: Periods Ended March 31, 2017    
 
          Since Inception
  Inception Date One Year Income Capital Total
Investor Shares 3/28/2016 0.90% 1.98% -0.68% 1.30%
Admiral Shares 3/28/2016 1.01 2.10 -0.68 1.42

 

See Financial Highlights for dividend and capital gains information.

10


 

Core Bond Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
U.S. Government and Agency Obligations (55.4%)        
U.S. Government Securities (20.8%)        
United States Treasury Inflation Indexed Bonds 1.625% 1/15/18 1,820 2,153
United States Treasury Inflation Indexed Bonds 0.125% 4/15/18 9,120 9,658
United States Treasury Inflation Indexed Bonds 0.375% 1/15/27 13,496 13,512
United States Treasury Inflation Indexed Bonds 1.000% 2/15/46 460 479
United States Treasury Inflation Indexed Bonds 0.875% 2/15/47 800 792
United States Treasury Note/Bond 0.875% 5/31/18 50 50
United States Treasury Note/Bond 2.250% 7/31/18 44 45
United States Treasury Note/Bond 1.250% 10/31/18 11,987 11,996
United States Treasury Note/Bond 1.125% 2/28/19 3,800 3,791
United States Treasury Note/Bond 0.875% 4/15/19 150 149
United States Treasury Note/Bond 1.000% 10/15/19 5,000 4,950
United States Treasury Note/Bond 1.000% 11/30/19 1,700 1,681
United States Treasury Note/Bond 1.375% 12/15/19 600 599
United States Treasury Note/Bond 1.375% 8/31/20 1,025 1,016
United States Treasury Note/Bond 1.375% 10/31/20 650 643
United States Treasury Note/Bond 1.750% 10/31/20 3,900 3,908
United States Treasury Note/Bond 1.625% 11/30/20 650 648
United States Treasury Note/Bond 2.000% 11/30/20 1,000 1,010
United States Treasury Note/Bond 1.750% 12/31/20 1,586 1,587
United States Treasury Note/Bond 1.375% 1/31/21 2,400 2,366
United States Treasury Note/Bond 2.125% 1/31/21 700 709
United States Treasury Note/Bond 1.125% 2/28/21 1,985 1,937
United States Treasury Note/Bond 1.250% 3/31/21 1,000 979
United States Treasury Note/Bond 1.375% 4/30/21 5,256 5,167
United States Treasury Note/Bond 2.250% 4/30/21 2,300 2,340
United States Treasury Note/Bond 2.125% 6/30/21 420 425
United States Treasury Note/Bond 1.125% 7/31/21 800 776
United States Treasury Note/Bond 2.125% 8/15/21 6,600 6,677
United States Treasury Note/Bond 1.250% 10/31/21 2,300 2,235
United States Treasury Note/Bond 1.750% 9/30/22 1,000 985
United States Treasury Note/Bond 1.750% 1/31/23 500 491
United States Treasury Note/Bond 1.500% 2/28/23 1,000 967
United States Treasury Note/Bond 1.500% 3/31/23 980 946
United States Treasury Note/Bond 1.750% 5/15/23 5,500 5,379
United States Treasury Note/Bond 1.625% 5/31/23 1,000 970
United States Treasury Note/Bond 2.500% 8/15/23 6,500 6,630
United States Treasury Note/Bond 2.750% 11/15/23 244 253

 

11


 

Core Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
United States Treasury Note/Bond 2.125% 5/15/25 1,650 1,625
United States Treasury Note/Bond 2.000% 8/15/25 500 487
United States Treasury Note/Bond 2.250% 11/15/25 3,060 3,033
United States Treasury Note/Bond 1.625% 2/15/26 2,468 2,320
United States Treasury Note/Bond 1.625% 5/15/26 3,435 3,222
United States Treasury Note/Bond 6.500% 11/15/26 200 271
United States Treasury Note/Bond 6.125% 8/15/29 1,000 1,385
United States Treasury Note/Bond 6.250% 5/15/30 400 567
United States Treasury Note/Bond 4.500% 2/15/36 1,450 1,839
1 United States Treasury Note/Bond 4.750% 2/15/37 2,850 3,720
United States Treasury Note/Bond 5.000% 5/15/37 608 818
United States Treasury Note/Bond 4.250% 5/15/39 600 733
United States Treasury Note/Bond 3.750% 8/15/41 650 737
United States Treasury Note/Bond 3.125% 11/15/41 600 614
United States Treasury Note/Bond 3.125% 2/15/42 650 665
United States Treasury Note/Bond 3.000% 5/15/42 6,600 6,598
United States Treasury Note/Bond 3.625% 8/15/43 200 223
United States Treasury Note/Bond 2.875% 8/15/45 1,550 1,503
United States Treasury Note/Bond 3.000% 11/15/45 2,742 2,724
2 United States Treasury Note/Bond 2.500% 2/15/46 4,150 3,718
United States Treasury Note/Bond 2.500% 5/15/46 2,800 2,506
United States Treasury Note/Bond 2.250% 8/15/46 2,150 1,818
        140,025
Agency Bonds and Notes (12.3%)        
3 AID-Iraq 2.149% 1/18/22 4,300 4,285
3 AID-Ukraine 1.471% 9/29/21 2,100 2,048
4 Fannie Mae Principal Strip 0.000% 2/1/19 800 779
5 Federal Home Loan Banks 0.875% 6/29/18 2,200 2,192
5 Federal Home Loan Banks 0.625% 8/7/18 100 99
5 Federal Home Loan Banks 0.875% 10/1/18 2,500 2,486
5 Federal Home Loan Banks 1.250% 1/16/19 2,300 2,296
5 Federal Home Loan Banks 1.375% 3/18/19 3,350 3,351
5 Federal Home Loan Banks 0.875% 8/5/19 3,800 3,748
5 Federal Home Loan Banks 1.000% 9/26/19 750 741
4 Federal Home Loan Mortgage Corp. 0.750% 4/9/18 300 299
4 Federal Home Loan Mortgage Corp. 0.875% 10/12/18 720 716
4 Federal Home Loan Mortgage Corp. 1.500% 1/17/20 2,000 1,996
4 Federal Home Loan Mortgage Corp. 1.125% 8/12/21 800 772
4 Federal National Mortgage Assn. 1.000% 2/26/19 1,550 1,540
4 Federal National Mortgage Assn. 0.875% 8/2/19 450 444
4 Federal National Mortgage Assn. 1.000% 8/28/19 1,900 1,879
4 Federal National Mortgage Assn. 0.000% 10/9/19 9,600 9,175
4 Federal National Mortgage Assn. 1.000% 10/24/19 8,750 8,642
4 Federal National Mortgage Assn. 1.500% 2/28/20 2,250 2,244
4 Federal National Mortgage Assn. 1.250% 8/17/21 100 97
4 Federal National Mortgage Assn. 1.875% 9/24/26 5,600 5,209
5 Financing Corp. 0.000% 11/11/17 3,000 2,982
5 Financing Corp. 0.000% 5/11/18 1,500 1,480
Private Export Funding Corp. 5.450% 9/15/17 500 510
Private Export Funding Corp. 2.250% 12/15/17 3,600 3,628
Private Export Funding Corp. 1.875% 7/15/18 250 252
Private Export Funding Corp. 4.375% 3/15/19 128 135
Private Export Funding Corp. 1.450% 8/15/19 2,715 2,710
Private Export Funding Corp. 2.300% 9/15/20 150 152
Private Export Funding Corp. 3.550% 1/15/24 1,300 1,379

 

12


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Residual Funding Corp. Principal Strip 0.000% 7/15/20 5,500 5,187
  Residual Funding Corp. Principal Strip 0.000% 10/15/20 2,000 1,875
  Resolution Funding Corp. Interest Strip 0.000% 1/15/27 600 448
  Resolution Funding Corp. Interest Strip 0.000% 4/15/27 1,800 1,330
  Resolution Funding Corp. Interest Strip 0.000% 7/15/27 794 581
  Resolution Funding Corp. Interest Strip 0.000% 10/15/27 794 576
  Resolution Funding Corp. Interest Strip 0.000% 4/15/28 3,000 2,130
5 Tennessee Valley Authority Principal Strip 0.000% 11/1/25 3,000 2,309
          82,702
Conventional Mortgage-Backed Securities (21.0%)        
4,6 Fannie Mae Pool 2.000% 1/1/32 2,453 2,389
4,6 Fannie Mae Pool 2.500% 2/1/28–10/1/31 12,228 12,248
4,6,7 Fannie Mae Pool 3.000% 2/1/27–5/1/47 14,745 14,841
4,6 Fannie Mae Pool 3.500% 3/1/27–4/1/47 21,411 22,035
4,6 Fannie Mae Pool 4.000% 8/1/39–4/1/47 18,587 19,579
4,6,7 Fannie Mae Pool 4.500% 1/1/41–5/1/47 5,966 6,439
4,6,7 Fannie Mae Pool 5.000% 3/1/38–4/1/47 7,776 8,589
4,6 Fannie Mae Pool 6.000% 5/1/37 993 1,133
4,6 Freddie Mac Gold Pool 2.500% 8/1/31–11/1/31 1,935 1,941
4,6,7 Freddie Mac Gold Pool 3.000% 9/1/46–5/1/47 9,060 8,980
4,6,7 Freddie Mac Gold Pool 3.500% 3/1/47–5/1/47 150 153
4,6 Freddie Mac Gold Pool 4.000% 1/1/46 180 189
6 Ginnie Mae I Pool 4.000% 7/15/45–8/15/45 319 337
6 Ginnie Mae I Pool 4.500% 2/15/39–9/15/46 3,413 3,683
6 Ginnie Mae I Pool 5.000% 3/15/38–2/15/40 3,635 4,023
6,7 Ginnie Mae II Pool 3.000% 1/20/45–5/1/47 10,979 11,086
6 Ginnie Mae II Pool 3.500% 10/20/43–10/20/46 14,219 14,802
6,7 Ginnie Mae II Pool 4.000% 11/20/42–5/1/47 7,131 7,530
6 Ginnie Mae II Pool 4.500% 11/20/44 1,502 1,639
          141,616
Nonconventional Mortgage-Backed Securities (1.3%)        
4,6 Fannie Mae Pool 2.849% 12/1/40 211 223
4,6 Fannie Mae Pool 2.939% 8/1/36 402 425
4,6 Fannie Mae Pool 3.082% 8/1/35 344 363
4,6,8 Fannie Mae REMICS 1.232% 9/25/46 779 776
4,6,8 Fannie Mae REMICS 1.282% 9/25/41–4/25/45 426 425
4,6,8 Fannie Mae REMICS 1.302% 6/25/36 463 463
4,6,8 Fannie Mae REMICS 1.332% 5/25/43–12/25/46 1,773 1,774
4,6,8 Fannie Mae REMICS 1.352% 6/25/35 125 126
4,6,8 Fannie Mae REMICS 1.382% 11/25/42–9/25/46 923 926
4,6,8 Fannie Mae REMICS 1.392% 11/25/35 165 165
4,6,8 Fannie Mae REMICS 1.427% 2/25/37 74 75
4,6,8 Fannie Mae REMICS 1.482% 8/25/46 362 365
4,6 Freddie Mac Non Gold Pool 2.746% 7/1/35 888 936
4,6 Freddie Mac Non Gold Pool 2.818% 9/1/37 737 781
4,6 Freddie Mac Non Gold Pool 3.017% 7/1/33 112 118
4,6,8 Freddie Mac REMICS 1.262% 11/15/36–8/15/43 369 369
4,6,8 Freddie Mac REMICS 1.272% 11/15/36 128 128
4,6,8 Freddie Mac REMICS 1.362% 6/15/42 71 71
          8,509
Total U.S. Government and Agency Obligations (Cost $380,594)   372,852

 

13


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
Asset-Backed/Commercial Mortgage-Backed Securities (8.8%)      
6,9 American Homes 4 Rent 2014-SFR3 3.678% 12/17/36 96 99
6 AmeriCredit Automobile Receivables Trust 2014-1 2.150% 3/9/20 90 90
6 AmeriCredit Automobile Receivables Trust 2014-2 2.180% 6/8/20 60 60
6 AmeriCredit Automobile Receivables Trust 2015-3 3.340% 8/8/21 285 290
6 AmeriCredit Automobile Receivables Trust 2016-2 2.210% 5/10/21 30 30
6 AmeriCredit Automobile Receivables Trust 2016-2 2.870% 11/8/21 20 20
6 AmeriCredit Automobile Receivables Trust 2016-2 3.650% 5/9/22 125 128
6 AmeriCredit Automobile Receivables Trust 2016-3 2.710% 9/8/22 200 199
6 AmeriCredit Automobile Receivables Trust 2016-4 2.410% 7/8/22 225 223
6,9 Applebee’s Funding LLC/IHOP Funding LLC 4.277% 9/5/44 60 59
6,9 ARL Second LLC 2014-1A 2.920% 6/15/44 71 69
6,9 Aventura Mall Trust 2013-AVM 3.743% 12/5/32 800 840
6,9 Avis Budget Rental Car Funding AESOP LLC        
  2013-2A 2.970% 2/20/20 575 583
6,9 Avis Budget Rental Car Funding AESOP LLC        
  2015-2A 2.630% 12/20/21 380 380
6,9 Avis Budget Rental Car Funding AESOP LLC        
  2016-1A 2.990% 6/20/22 200 202
6,9 Avis Budget Rental Car Funding AESOP LLC        
  2016-2A 2.720% 11/20/22 420 416
9 Bank of Montreal 1.750% 6/15/21 305 297
  Bank of Nova Scotia 1.875% 4/26/21 330 324
9 Bank of Nova Scotia 1.875% 9/20/21 110 107
6 California Republic Auto Receivables Trust 2016-2 2.520% 5/16/22 210 206
6 California Republic Auto Receivables Trust 2016-2 3.510% 3/15/23 210 210
6 Capital Auto Receivables Asset Trust 2013-4 2.670% 2/20/19 360 361
6 Capital Auto Receivables Asset Trust 2016-2 3.160% 11/20/23 220 221
6 Capital Auto Receivables Asset Trust 2016-3 2.350% 9/20/21 50 49
6 Capital Auto Receivables Asset Trust 2016-3 2.650% 1/20/24 40 39
6 CarMax Auto Owner Trust 2013-3 2.850% 2/18/20 750 752
6 CarMax Auto Owner Trust 2016-2 2.160% 12/15/21 100 99
6 CarMax Auto Owner Trust 2016-2 3.250% 11/15/22 100 101
6 CarMax Auto Owner Trust 2016-3 1.900% 4/15/22 200 197
6 CarMax Auto Owner Trust 2016-3 2.200% 6/15/22 190 186
6 CarMax Auto Owner Trust 2016-3 2.940% 1/17/23 190 188
6 CD 2017-CD3 Commercial Mortgage Trust 3.631% 2/10/50 160 165
6 CFCRE Commercial Mortgage Trust 2016-C4 3.283% 5/10/58 61 60
6,9 Chesapeake Funding II LLC 2016-2A 1.880% 6/15/28 610 608
6,9 Chrysler Capital Auto Receivables Trust 2014-BA 3.440% 8/16/21 200 202
6,9 Chrysler Capital Auto Receivables Trust 2016-AA 2.880% 2/15/22 90 91
6,9 Chrysler Capital Auto Receivables Trust 2016-AA 4.220% 2/15/23 90 92
6,9 Chrysler Capital Auto Receivables Trust 2016-BA 1.870% 2/15/22 20 20
6 Citigroup Commercial Mortgage Trust 2013-GC15 4.371% 9/10/46 30 33
6 Citigroup Commercial Mortgage Trust 2014-GC19 4.023% 3/10/47 350 371
6 Citigroup Commercial Mortgage Trust 2014-GC21 3.575% 5/10/47 350 361
6 Citigroup Commercial Mortgage Trust 2014-GC23 3.622% 7/10/47 350 362
6 Citigroup Commercial Mortgage Trust 2014-GC23 4.175% 7/10/47 230 242
6 Citigroup Commercial Mortgage Trust 2014-GC25 3.635% 10/10/47 350 360
6 Citigroup Commercial Mortgage Trust 2014-GC25 4.345% 10/10/47 140 146
6 Citigroup Commercial Mortgage Trust 2014-GC25 4.532% 10/10/47 175 175
6 Citigroup Commercial Mortgage Trust 2015-GC27 3.137% 2/10/48 228 226
6 Citigroup Commercial Mortgage Trust 2016-C1 3.209% 5/10/49 61 60
6,9 CKE Restaurant Holdings Inc. 2013-1A 4.474% 3/20/43 81 80
6,8,9 Colony American Homes 2015-1 2.443% 7/17/32 70 70

 

14


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6,8,9 Colony American Homes 2015-1A 2.143% 7/17/32 183 184
6,8,9 Colony Starwood Homes 2016-1A Trust 2.443% 7/17/33 494 495
6,8,9 Colony Starwood Homes 2016-1A Trust 3.093% 7/17/33 185 186
6,9 COMM 2012-CCRE3 Mortgage Trust 3.416% 10/15/45 40 41
6 COMM 2012-CCRE4 Mortgage Trust 3.251% 10/15/45 500 508
6 COMM 2013-CCRE12 Mortgage Trust 3.765% 10/10/46 60 63
6 COMM 2013-CCRE12 Mortgage Trust 4.046% 10/10/46 500 533
6,9 COMM 2013-CCRE6 Mortgage Trust 3.147% 3/10/46 150 150
6,9 COMM 2013-CCRE6 Mortgage Trust 3.397% 3/10/46 210 209
6,9 COMM 2013-CCRE9 Mortgage Trust 4.256% 7/10/45 230 238
6,9 COMM 2014-277P Mortgage Trust 3.611% 8/10/49 100 104
6 COMM 2014-CCRE14 Mortgage Trust 4.236% 2/10/47 20 21
6 COMM 2014-CCRE15 Mortgage Trust 4.074% 2/10/47 350 372
6 COMM 2014-CCRE17 Mortgage Trust 3.700% 5/10/47 20 21
6 COMM 2014-CCRE17 Mortgage Trust 3.977% 5/10/47 350 369
6 COMM 2014-CCRE17 Mortgage Trust 4.895% 5/10/47 190 202
6 COMM 2014-CCRE20 Mortgage Trust 3.326% 11/10/47 20 20
6 COMM 2014-CCRE20 Mortgage Trust 3.590% 11/10/47 350 360
6 COMM 2015-CCRE22 Mortgage Trust 3.309% 3/10/48 228 229
6 COMM 2015-LC19 Mortgage Trust 3.183% 2/10/48 228 228
6 CSAIL 2015-C1 Commercial Mortgage Trust 3.505% 4/15/50 228 233
6 CSAIL 2015-C4 Commercial Mortgage Trust 3.808% 11/15/48 228 237
6 CSAIL 2016-C7 Commercial Mortgage Trust 3.502% 11/15/49 60 61
6,9 DB Master Finance LLC 2015-1A 3.980% 2/20/45 59 60
6 DBJPM 16-C1 Mortgage Trust 3.352% 5/10/49 140 131
6,9 Drive Auto Receivables Trust 2015-AA 3.060% 5/17/21 500 503
6,9 Drive Auto Receivables Trust 2015-DA 4.590% 1/17/23 132 137
6,9 Drive Auto Receivables Trust 2016-BA 2.560% 6/15/20 420 422
6,9 Drive Auto Receivables Trust 2016-BA 3.190% 7/15/22 270 274
6,9 Drive Auto Receivables Trust 2016-BA 4.530% 8/15/23 200 205
6,9 Drive Auto Receivables Trust 2016-C 1.670% 11/15/19 120 120
6,9 Drive Auto Receivables Trust 2016-C 2.370% 11/16/20 80 80
6,9 Drive Auto Receivables Trust 2016-C 4.180% 3/15/24 90 92
6,9 Enterprise Fleet Financing LLC Series 2016-2 2.040% 2/22/22 450 446
6,8,9 Evergreen Credit Card Trust Series 2016-1 1.632% 4/15/20 1,175 1,180
6,8,9 Evergreen Credit Card Trust Series 2016-3 1.412% 11/16/20 110 110
4,6,8 Fannie Mae Connecticut Avenue Securities        
  2016-C04 2.432% 1/25/29 178 180
4,6,8 Fannie Mae Connecticut Avenue Securities        
  2016-C05 2.332% 1/25/29 477 480
4,6 FHLMC Multifamily Structured Pass Through        
  Certificates K054 2.745% 1/25/26 1,000 990
4,6 FHLMC Multifamily Structured Pass Through        
  Certificates K056 2.525% 5/25/26 1,000 970
4,6 FHLMC Multifamily Structured Pass Through        
  Certificates K057 2.570% 7/25/26 1,000 971
4,6 FHLMC Multifamily Structured Pass Through        
  Certificates K061 3.347% 11/25/26 1,000 1,032
4,6 FHLMC Multifamily Structured Pass Through        
  Certificates K062 3.413% 12/25/26 1,000 1,036
6,9 Flagship Credit Auto Trust 2016-4 1.960% 2/16/21 120 120
6,9 Ford Credit Auto Owner Trust 2014-REV1 2.410% 11/15/25 250 251
6,9 Ford Credit Auto Owner Trust 2014-REV2 2.510% 4/15/26 200 201
6 Ford Credit Auto Owner Trust 2016-B 1.850% 9/15/21 200 198

 

15


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 Ford Credit Floorplan Master Owner Trust A        
  Series 2012-5 2.730% 9/15/19 600 602
6 Ford Credit Floorplan Master Owner Trust A        
  Series 2014-2 2.310% 2/15/21 200 201
4,6,8 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2016-DNA2 2.232% 10/25/28 130 131
4,6,8 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2016-DNA3 2.082% 12/25/28 179 179
4,6,8 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2016-DNA3 2.982% 12/25/28 250 255
6,9 FRS I LLC 2013-1A 3.080% 4/15/43 184 180
6 GM Financial Automobile Leasing Trust 2015-2 2.420% 7/22/19 420 421
6 GM Financial Automobile Leasing Trust 2015-2 2.990% 7/22/19 50 50
6 GM Financial Automobile Leasing Trust 2016-2 2.580% 3/20/20 190 190
6,9 GMF Floorplan Owner Revolving Trust 2015-1 1.970% 5/15/20 450 449
6,9 GMF Floorplan Owner Revolving Trust 2016-1 2.410% 5/17/21 330 331
6,9 GMF Floorplan Owner Revolving Trust 2016-1 2.850% 5/17/21 330 328
6 GS Mortgage Securities Corporation II 2015-GC30 3.382% 5/10/50 228 231
6 GS Mortgage Securities Trust 2013-GCJ12 3.135% 6/10/46 350 356
6 GS Mortgage Securities Trust 2014-GC20 3.998% 4/10/47 350 370
6 GS Mortgage Securities Trust 2014-GC24 3.931% 9/10/47 350 368
6 GS Mortgage Securities Trust 2014-GC24 4.508% 9/10/47 170 181
6 GS Mortgage Securities Trust 2014-GC24 4.529% 9/10/47 150 154
6 GS Mortgage Securities Trust 2015-GC28 3.136% 2/10/48 30 30
6 GS Mortgage Securities Trust 2015-GC28 3.396% 2/10/48 228 230
6,9 Hertz Vehicle Financing II LP 2015-1A 2.730% 3/25/21 850 848
6,9 Hertz Vehicle Financing LLC 2013-1A 1.830% 8/25/19 680 678
6,9 Hertz Vehicle Financing LLC 2016-3A 2.270% 7/25/20 120 119
6,9 Hertz Vehicle Financing LLC 2016-4A 2.650% 7/25/22 290 280
6,9 Hilton USA Trust 2016-HHV 3.719% 11/5/38 20 20
6,8,9 Invitation Homes 2014-SFR1 Trust 2.443% 6/17/31 119 119
6,8,9 Invitation Homes 2015-SFR2 Trust 2.593% 6/17/32 70 70
6,8,9 Invitation Homes 2015-SFR3 Trust 2.693% 8/17/32 70 70
6,9 JP Morgan Chase Commercial Mortgage        
  Securities Trust 2011-C3 4.717% 2/15/46 1,700 1,835
6,9 JP Morgan Chase Commercial Mortgage        
  Securities Trust 2011-C5 5.409% 8/15/46 550 605
6,9 JP Morgan Chase Commercial Mortgage        
  Securities Trust 2012-C8 3.424% 10/15/45 90 91
6 JP Morgan Chase Commercial Mortgage        
  Securities Trust 2013-C13 4.053% 1/15/46 230 229
6 JP Morgan Chase Commercial Mortgage        
  Securities Trust 2016-JP4 3.648% 12/15/49 90 92
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 3.363% 7/15/45 1,600 1,640
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C14 4.133% 8/15/46 30 32
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C15 5.047% 11/15/45 30 32
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C18 4.079% 2/15/47 380 403
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C26 3.231% 1/15/48 350 353
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C26 3.494% 1/15/48 350 358

 

16


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 JPMBB Commercial Mortgage Securities Trust        
  2015-C27 3.179% 2/15/48 258 257
6 JPMCC Commercial Mortgage Securities Trust        
  2017-JP5 3.723% 3/15/50 160 166
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C5 3.792% 8/15/45 100 104
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C10 4.084% 7/15/46 200 202
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C12 4.259% 10/15/46 400 434
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 3.773% 4/15/47 350 367
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 4.894% 4/15/47 150 157
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C17 3.741% 8/15/47 350 365
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C18 3.923% 10/15/47 350 368
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C19 3.526% 12/15/47 450 462
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C20 3.249% 2/15/48 228 228
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C22 3.306% 4/15/48 228 230
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C24 3.732% 5/15/48 228 235
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2016-C29 4.753% 5/15/49 160 169
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2016-C32 3.720% 12/15/49 60 62
6 Morgan Stanley Capital I Trust 2015-UBS8 3.809% 12/15/48 189 196
6,9 MSBAM Commercial Mortgage Securities Trust        
  2012-CKSV 3.277% 10/15/30 1,700 1,687
9 National Australia Bank Ltd. 2.250% 3/16/21 50 50
6,8,9 Navient Student Loan Trust 2016-2 2.032% 6/25/65 200 202
6,8,9 Navient Student Loan Trust 2016-3 1.832% 6/25/65 60 60
6,8,9 Navient Student Loan Trust 2016-6A 1.732% 3/25/66 100 100
6,8,9 Navistar Financial Dealer Note Master Trust II        
  2016-1A 2.332% 9/27/21 220 220
6,9 NextGear Floorplan Master Owner Trust 2016-1A 2.740% 4/15/21 580 585
6,9 Palisades Center Trust 2016-PLSD 2.713% 4/13/33 700 697
6,8,9 Pepper Residential Securities Trust 2017A-A1UA 1.958% 3/10/58 269 269
6,8,9 PHEAA Student Loan Trust 2016-2A 1.932% 11/25/65 238 239
6,9 Progress Residential 2015-SFR3 Trust 3.067% 11/12/32 414 414
6,8,9 Resimac Premier Series 2016-1A 2.248% 10/10/47 679 680
  Royal Bank of Canada 2.100% 10/14/20 390 389
  Royal Bank of Canada 2.300% 3/22/21 600 600
6 Santander Drive Auto Receivables Trust 2016-2 2.080% 2/16/21 215 215
6 Santander Drive Auto Receivables Trust 2016-2 2.660% 11/15/21 170 171
6 Santander Drive Auto Receivables Trust 2016-2 3.390% 4/15/22 140 142
6 Santander Drive Auto Receivables Trust 2016-3 1.890% 6/15/21 200 200
6 Santander Drive Auto Receivables Trust 2016-3 2.460% 3/15/22 260 260
6,9 Securitized Term Auto Receivables Trust 2016-1A 1.524% 3/25/20 50 50
6,9 Securitized Term Auto Receivables Trust 2016-1A 1.794% 2/25/21 40 40
6 SMART ABS Series 2016-2US Trust 2.050% 12/14/22 40 39

 

17


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6,9 SMB Private Education Loan Trust 2016-A 2.700% 5/15/31 440 439
6,8,9 SMB Private Education Loan Trust 2016-B 2.362% 2/17/32 280 286
6,8,9 SMB Private Education Loan Trust 2016-C 2.012% 9/15/34 100 100
6,8,9 SMB Private Education Loan Trust 2017-A 1.680% 9/15/34 120 119
6,9 SoFi Professional Loan Program 2016-B LLC 2.740% 10/25/32 470 471
6,9 SoFi Professional Loan Program 2016-C LLC 2.360% 12/27/32 500 492
6,9 SoFi Professional Loan Program 2016-D LLC 2.340% 4/25/33 100 98
6,8,9 SoFi Professional Loan Program 2016-D LLC 1.932% 1/25/39 88 89
6,9 SoFi Professional Loan Program 2017-B LLC 2.740% 5/25/40 10 10
6,9 SpareBank 1 Boligkreditt AS 1.750% 11/15/20 250 248
6 Synchrony Credit Card Master Note Trust 2016-1 2.390% 3/15/22 345 346
6 Synchrony Credit Card Master Note Trust 2016-3 1.910% 9/15/22 100 99
6,9 Taco Bell Funding LLC 2016-1A 3.832% 5/25/46 59 59
6,9 Taco Bell Funding LLC 2016-1A 4.377% 5/25/46 36 36
6,9 Taco Bell Funding LLC 2016-1A 4.970% 5/25/46 31 31
9 Toronto-Dominion Bank 2.250% 3/15/21 350 349
6,8,9 Trillium Credit Card Trust II 2016-1A 1.702% 5/26/21 760 763
6 UBS-Barclays Commercial Mortgage Trust        
  2013-C6 3.469% 4/10/46 10 10
6,9 Volkswagen Credit Auto Master Trust 2014-1A 1.400% 7/22/19 300 300
6 Wells Fargo Commercial Mortgage Trust        
  2012-LC5 3.539% 10/15/45 40 41
6 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 4.218% 7/15/46 350 376
6 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 4.296% 7/15/46 450 482
6 Wells Fargo Commercial Mortgage Trust        
  2015-C26 3.166% 2/15/48 110 110
6 Wells Fargo Commercial Mortgage Trust        
  2015-C27 3.190% 2/15/48 388 387
6 Wells Fargo Commercial Mortgage Trust        
  2015-C27 3.451% 2/15/48 30 30
6 Wells Fargo Commercial Mortgage Trust        
  2015-C30 4.496% 9/15/58 200 204
6 Wells Fargo Commercial Mortgage Trust        
  2015-LC22 4.541% 9/15/58 160 159
6 Wells Fargo Commercial Mortgage Trust        
  2016-C37 3.794% 12/15/49 70 73
6 Wells Fargo Commercial Mortgage Trust        
  2017-RC1 3.631% 1/15/60 80 82
6,9 Wendys Funding LLC 2015-1A 3.371% 6/15/45 227 227
6,9 Wendys Funding LLC 2015-1A 4.080% 6/15/45 56 57
6,9 Wendys Funding LLC 2015-1A 4.497% 6/15/45 49 48
9 Westpac Banking Corp. 2.250% 11/9/20 365 365
6 WFRBS Commercial Mortgage Trust 2013-C15 4.153% 8/15/46 100 107
6 WFRBS Commercial Mortgage Trust 2013-C18 4.162% 12/15/46 20 21
6 WFRBS Commercial Mortgage Trust 2014-C20 3.995% 5/15/47 20 21
6 WFRBS Commercial Mortgage Trust 2014-C21 3.410% 8/15/47 10 10
6 WFRBS Commercial Mortgage Trust 2014-C21 3.678% 8/15/47 360 374
6 WFRBS Commercial Mortgage Trust 2014-C24 3.607% 11/15/47 380 392
6 WFRBS Commercial Mortgage Trust 2014-LC14 4.045% 3/15/47 360 382
6 World Omni Auto Receivables Trust 2015-B 2.150% 8/15/22 175 174
Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $59,341)   58,891

 

18


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
Corporate Bonds (27.4%)        
Finance (11.4%)        
  Banking (5.9%)        
  Bank of America Corp. 3.300% 1/11/23 546 549
6 Bank of America Corp. 3.124% 1/20/23 565 567
  Bank of America Corp. 4.000% 4/1/24 500 518
  Bank of America Corp. 3.875% 8/1/25 400 407
6 Bank of America Corp. 3.824% 1/20/28 540 541
9 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.300% 3/5/20 650 647
  Barclays plc 3.684% 1/10/23 360 362
9 BNP Paribas SA 3.800% 1/10/24 275 274
10 BPCE SA 3.500% 4/24/20 400 307
  Citigroup Inc. 1.800% 2/5/18 300 300
8,10 Citigroup Inc. 3.020% 8/7/19 500 384
  Citigroup Inc. 2.900% 12/8/21 2,610 2,615
  Citigroup Inc. 3.200% 10/21/26 800 766
  Commonwealth Bank of Australia 2.400% 11/2/20 500 499
8,10 Commonwealth Bank of Australia 2.990% 7/12/21 400 310
9 Commonwealth Bank of Australia 4.500% 12/9/25 200 209
  Cooperatieve Rabobank UA 4.375% 8/4/25 450 460
9 Credit Agricole SA 4.125% 1/10/27 670 664
11 Credit Agricole SA 2.625% 3/17/27 405 439
9 Credit Suisse Group AG 3.574% 1/9/23 445 444
9 Credit Suisse Group AG 4.282% 1/9/28 720 717
  Credit Suisse Group Funding Guernsey Ltd. 3.800% 6/9/23 410 410
9 Deutsche Bank AG 4.250% 10/14/21 945 969
  Discover Financial Services 5.200% 4/27/22 370 399
  First Republic Bank 2.375% 6/17/19 510 510
12 Goldman Sachs Group Inc. 6.125% 5/14/17 100 126
8,10 Goldman Sachs Group Inc. 3.470% 8/8/18 50 39
10 Goldman Sachs Group Inc. 5.000% 8/21/19 660 529
  Goldman Sachs Group Inc. 3.000% 4/26/22 510 511
11 Goldman Sachs Group Inc. 1.250% 5/1/25 122 129
  Goldman Sachs Group Inc. 3.750% 5/22/25 1,050 1,064
  Goldman Sachs Group Inc. 3.850% 1/26/27 405 407
  Goldman Sachs Group Inc. 6.125% 2/15/33 480 579
  Goldman Sachs Group Inc. 5.150% 5/22/45 550 577
  HSBC Holdings plc 2.950% 5/25/21 185 185
  HSBC Holdings plc 2.650% 1/5/22 1,860 1,834
6 HSBC Holdings plc 3.262% 3/13/23 385 387
6 HSBC Holdings plc 4.041% 3/13/28 1,185 1,197
  JPMorgan Chase & Co. 2.295% 8/15/21 1,495 1,479
  JPMorgan Chase & Co. 2.972% 1/15/23 945 944
  JPMorgan Chase & Co. 2.700% 5/18/23 182 178
6 JPMorgan Chase & Co. 3.782% 2/1/28 480 485
  JPMorgan Chase & Co. 5.500% 10/15/40 216 252
6 JPMorgan Chase & Co. 4.260% 2/22/48 115 115
10 Lloyds Bank plc 3.250% 4/1/20 600 460
  Lloyds Banking Group plc 3.750% 1/11/27 250 245
8,10 Macquarie Bank Ltd. 2.820% 10/26/18 200 154
9 Macquarie Bank Ltd. 2.600% 6/24/19 78 79
9 Mitsubishi UFJ Trust & Banking Corp. 2.450% 10/16/19 285 286
  Morgan Stanley 2.625% 11/17/21 2,365 2,350
  Morgan Stanley 3.875% 1/27/26 525 532
12 Morgan Stanley 2.625% 3/9/27 555 695

 

19


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  PNC Bank NA 2.550% 12/9/21 340 340
  PNC Bank NA 2.625% 2/17/22 780 780
  Royal Bank of Canada 1.500% 7/29/19 340 337
  Royal Bank of Canada 2.125% 3/2/20 1,650 1,651
  Santander UK Group Holdings plc 3.571% 1/10/23 275 275
  Synchrony Financial 4.500% 7/23/25 1,650 1,695
  Synchrony Financial 3.700% 8/4/26 394 381
9 UBS Group Funding Jersey Ltd. 2.650% 2/1/22 500 489
11 UBS Group Funding Jersey Ltd. 1.500% 11/30/24 246 265
9 UBS Group Funding Switzerland AG 4.253% 3/23/28 565 573
10 Wells Fargo & Co. 4.000% 8/8/19 1,000 784
8,10 Westpac Banking Corp. 2.850% 10/28/20 100 77
8,10 Westpac Banking Corp. 2.955% 6/3/21 100 77
  Westpac Banking Corp. 3.350% 3/8/27 565 561
6 Westpac Banking Corp. 4.322% 11/23/31 885 894
 
  Brokerage (0.2%)        
9 Apollo Management Holdings LP 4.400% 5/27/26 295 300
  BlackRock Inc. 3.200% 3/15/27 425 425
  Invesco Finance plc 4.000% 1/30/24 180 189
  Jefferies Group LLC 4.850% 1/15/27 285 292
  Stifel Financial Corp. 4.250% 7/18/24 215 216
 
  Finance Companies (0.7%)        
  AerCap Ireland Capital Ltd. / AerCap Global        
  Aviation Trust 3.750% 5/15/19 150 154
  Air Lease Corp. 2.125% 1/15/18 2,110 2,113
  Air Lease Corp. 3.625% 4/1/27 495 482
  GE Capital International Funding Co. 4.418% 11/15/35 350 369
  International Lease Finance Corp. 4.625% 4/15/21 1,000 1,050
9 SMBC Aviation Capital Finance DAC 2.650% 7/15/21 260 253
 
  Insurance (2.5%)        
9 AIA Group Ltd. 3.200% 3/11/25 1,650 1,615
  American Financial Group Inc. 3.500% 8/15/26 275 267
  American International Group Inc. 4.875% 6/1/22 132 143
  American International Group Inc. 3.750% 7/10/25 350 348
  American International Group Inc. 3.900% 4/1/26 360 362
  Aon plc 3.500% 6/14/24 500 500
  Aon plc 4.750% 5/15/45 300 301
  Arch Capital Finance LLC 4.011% 12/15/26 265 272
6,11 AXA SA 3.375% 7/6/47 135 149
6,12 AXA SA 5.625% 1/16/54 100 133
  Berkshire Hathaway Inc. 2.750% 3/15/23 1,000 1,000
  Chubb INA Holdings Inc. 2.700% 3/13/23 225 223
6,11 Credit Agricole Assurances SA 4.750% 9/27/48 100 111
  Enstar Group Ltd. 4.500% 3/10/22 500 504
  First American Financial Corp. 4.600% 11/15/24 290 292
9 Five Corners Funding Trust 4.419% 11/15/23 828 881
  Hanover Insurance Group Inc. 4.500% 4/15/26 100 104
  Humana Inc. 3.950% 3/15/27 225 230
  Infinity Property & Casualty Corp. 5.000% 9/19/22 520 549
9,11 Liberty Mutual Finance Europe DAC 1.750% 3/27/24 200 217
11 Liberty Mutual Group Inc. 2.750% 5/4/26 100 114
  Marsh & McLennan Cos. Inc. 2.350% 9/10/19 180 181

 

20


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Marsh & McLennan Cos. Inc. 2.750% 1/30/22 125 126
  Marsh & McLennan Cos. Inc. 3.500% 3/10/25 1,650 1,678
  Marsh & McLennan Cos. Inc. 4.350% 1/30/47 400 405
11 NN Group NV 1.000% 3/18/22 232 252
6,11 NN Group NV 4.625% 4/8/44 281 321
12 Phoenix Group Holdings 4.125% 7/20/22 145 184
  Principal Financial Group Inc. 3.100% 11/15/26 225 219
6 Progressive Corp. 6.700% 6/15/67 380 377
  Prudential Financial Inc. 4.500% 11/15/20 20 21
  Reinsurance Group of America Inc. 4.700% 9/15/23 170 183
  Reinsurance Group of America Inc. 3.950% 9/15/26 2,095 2,120
9 Reliance Standard Life Global Funding II 2.375% 5/4/20 240 236
9 Swiss Re Treasury US Corp. 2.875% 12/6/22 130 130
9 TIAA Asset Management Finance Co. LLC 4.125% 11/1/24 246 251
  Trinity Acquisition plc 4.625% 8/15/23 350 370
  Trinity Acquisition plc 6.125% 8/15/43 102 109
  UnitedHealth Group Inc. 4.250% 4/15/47 295 301
  XLIT Ltd. 6.375% 11/15/24 998 1,165
 
  Real Estate Investment Trusts (2.1%)        
  Alexandria Real Estate Equities Inc. 3.950% 1/15/27 345 346
11 ATF Netherlands BV 2.125% 3/13/23 200 216
11 ATF Netherlands BV 1.500% 7/15/24 400 410
  Brandywine Operating Partnership LP 3.950% 2/15/23 182 182
  Brandywine Operating Partnership LP 4.100% 10/1/24 374 373
  Brandywine Operating Partnership LP 4.550% 10/1/29 1,488 1,479
  Brixmor Operating Partnership LP 3.850% 2/1/25 60 59
  Brixmor Operating Partnership LP 4.125% 6/15/26 810 812
  Brixmor Operating Partnership LP 3.900% 3/15/27 220 216
  Camden Property Trust 4.875% 6/15/23 25 27
  Camden Property Trust 4.250% 1/15/24 65 68
  Camden Property Trust 3.500% 9/15/24 20 20
  Columbia Property Trust Operating Partnership LP 3.650% 8/15/26 213 204
9 Goodman Australia Industrial Fund 3.400% 9/30/26 500 485
  HCP Inc. 3.400% 2/1/25 145 140
  HCP Inc. 4.000% 6/1/25 200 201
  Healthcare Trust of America Holdings LP 3.700% 4/15/23 759 761
  Healthcare Trust of America Holdings LP 3.500% 8/1/26 200 192
  Highwoods Realty LP 3.875% 3/1/27 500 495
  Kilroy Realty LP 4.375% 10/1/25 1,925 2,007
  Kilroy Realty LP 4.250% 8/15/29 105 106
  Kimco Realty Corp. 3.800% 4/1/27 220 219
  Liberty Property LP 4.400% 2/15/24 1,250 1,321
  Mid-America Apartments LP 4.000% 11/15/25 380 388
  Omega Healthcare Investors Inc. 5.250% 1/15/26 1,025 1,066
  Omega Healthcare Investors Inc. 4.500% 4/1/27 490 480
  Omega Healthcare Investors Inc. 4.750% 1/15/28 1,085 1,071
9 Scentre Group Trust 1 / Scentre Group Trust 2 3.750% 3/23/27 315 317
  Tanger Properties LP 3.125% 9/1/26 455 424
  Ventas Realty LP 3.850% 4/1/27 220 218
          76,354
Industrial (13.8%)        
  Basic Industry (0.6%)        
  Agrium Inc. 3.375% 3/15/25 1,215 1,200
  Agrium Inc. 5.250% 1/15/45 400 437

 

21


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
9 Air Liquide Finance SA 1.750% 9/27/21 200 191
9 CF Industries Inc. 3.400% 12/1/21 110 110
  CF Industries Inc. 3.450% 6/1/23 75 71
9 CF Industries Inc. 4.500% 12/1/26 230 233
  CF Industries Inc. 4.950% 6/1/43 300 255
10 Glencore Australia Holdings Pty Ltd. 4.500% 9/19/19 50 39
  Potash Corp. of Saskatchewan Inc. 3.250% 12/1/17 100 101
  Potash Corp. of Saskatchewan Inc. 6.500% 5/15/19 100 108
  Potash Corp. of Saskatchewan Inc. 3.625% 3/15/24 230 230
  Potash Corp. of Saskatchewan Inc. 3.000% 4/1/25 10 9
  Potash Corp. of Saskatchewan Inc. 4.000% 12/15/26 300 306
  Syngenta Finance NV 4.375% 3/28/42 75 69
  Vale Overseas Ltd. 5.625% 9/15/19 30 32
  Vale Overseas Ltd. 5.875% 6/10/21 95 102
  Vale Overseas Ltd. 6.875% 11/21/36 400 429
  Valspar Corp. 3.300% 2/1/25 100 97
 
  Capital Goods (0.8%)        
  Embraer Netherlands Finance BV 5.050% 6/15/25 1,600 1,646
  Embraer Netherlands Finance BV 5.400% 2/1/27 325 334
9 LafargeHolcim Finance US LLC 3.500% 9/22/26 2,500 2,422
9,11 Parker-Hannifin Corp. 1.125% 3/1/25 200 213
  Spirit AeroSystems Inc. 3.850% 6/15/26 235 232
  United Rentals North America Inc. 4.625% 7/15/23 285 293
  United Rentals North America Inc. 5.500% 5/15/27 105 106
 
  Communication (2.4%)        
  America Movil SAB de CV 5.000% 3/30/20 500 537
  America Movil SAB de CV 6.375% 3/1/35 300 354
11 American Tower Corp. 1.375% 4/4/25 540 571
12 AT&T Inc. 5.875% 4/28/17 100 126
  AT&T Inc. 5.250% 3/1/37 300 306
  AT&T Inc. 5.350% 9/1/40 200 204
  AT&T Inc. 4.800% 6/15/44 600 561
  Charter Communications Operating LLC /        
  Charter Communications Operating Capital 4.908% 7/23/25 120 127
  Charter Communications Operating LLC /        
  Charter Communications Operating Capital 6.384% 10/23/35 200 227
  Comcast Corp. 3.000% 2/1/24 675 674
  Comcast Corp. 3.375% 8/15/25 200 202
  Comcast Corp. 5.650% 6/15/35 700 824
  Crown Castle International Corp. 2.250% 9/1/21 1,000 972
  Crown Castle International Corp. 5.250% 1/15/23 600 655
  Crown Castle International Corp. 4.000% 3/1/27 270 272
  Deutsche Telekom International Finance BV 8.750% 6/15/30 250 365
  Grupo Televisa SAB 6.125% 1/31/46 600 623
  Moody’s Corp. 5.250% 7/15/44 460 514
  NBCUniversal Media LLC 2.875% 1/15/23 1,760 1,761
  Qwest Corp. 7.250% 9/15/25 200 219
10 Telstra Corp. Ltd. 4.000% 9/16/22 190 151
9 Telstra Corp. Ltd. 3.125% 4/7/25 75 75
  Time Warner Cable LLC 5.500% 9/1/41 120 123
  Verizon Communications Inc. 5.150% 9/15/23 1,155 1,268
  Verizon Communications Inc. 4.125% 3/16/27 1,000 1,017
  Verizon Communications Inc. 5.050% 3/15/34 450 458

 

22


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Verizon Communications Inc. 4.400% 11/1/34 450 424
  Verizon Communications Inc. 5.250% 3/16/37 500 516
  Verizon Communications Inc. 3.850% 11/1/42 950 792
  Verizon Communications Inc. 4.522% 9/15/48 400 364
  Verizon Communications Inc. 5.012% 8/21/54 525 496
  Viacom Inc. 4.375% 3/15/43 500 433
 
  Consumer Cyclical (1.2%)        
11 Accor SA 1.250% 1/25/24 100 105
9 BMW US Capital LLC 2.000% 4/11/21 330 323
9 BMW US Capital LLC 1.850% 9/15/21 125 121
9 BMW US Capital LLC 2.800% 4/11/26 15 14
  DR Horton Inc. 4.375% 9/15/22 75 79
  Ford Motor Co. 4.750% 1/15/43 420 392
  Ford Motor Credit Co. LLC 3.336% 3/18/21 1,520 1,538
  General Motors Co. 4.000% 4/1/25 240 240
  General Motors Co. 6.600% 4/1/36 300 344
  General Motors Financial Co. Inc. 4.200% 3/1/21 300 313
  General Motors Financial Co. Inc. 4.375% 9/25/21 510 536
  General Motors Financial Co. Inc. 5.250% 3/1/26 650 696
9 Harley-Davidson Financial Services Inc. 2.150% 2/26/20 300 298
9 Hyundai Capital America 3.100% 4/5/22 220 219
9 Hyundai Capital Services Inc. 3.000% 3/6/22 200 200
  Kohl’s Corp. 5.550% 7/17/45 100 90
  Lowe’s Cos. Inc. 5.800% 10/15/36 200 243
  Lowe’s Cos. Inc. 5.800% 4/15/40 100 123
  Lowe’s Cos. Inc. 4.375% 9/15/45 150 155
  NVR Inc. 3.950% 9/15/22 75 78
11 Priceline Group Inc. 0.800% 3/10/22 500 532
10 Toyota Motor Credit Corp. 2.750% 7/26/21 30 23
10 Volkswagen Financial Services Australia Pty Ltd. 3.250% 8/13/19 40 31
  Walgreens Boots Alliance Inc. 2.600% 6/1/21 180 180
  Walgreens Boots Alliance Inc. 3.800% 11/18/24 440 449
  Walgreens Boots Alliance Inc. 4.650% 6/1/46 500 498
 
  Consumer Noncyclical (2.7%)        
  Abbott Laboratories 4.750% 11/30/36 500 515
  Abbott Laboratories 4.900% 11/30/46 600 621
  Anheuser-Busch InBev Finance Inc. 3.650% 2/1/26 300 303
  Anheuser-Busch InBev Finance Inc. 4.700% 2/1/36 1,050 1,107
  Anheuser-Busch InBev Finance Inc. 4.900% 2/1/46 650 702
11 Anheuser-Busch InBev SA/NV 2.750% 3/17/36 173 197
11 Bunge Finance Europe BV 1.850% 6/16/23 700 774
11 Coca-Cola Co. 0.500% 3/8/24 360 379
  Constellation Brands Inc. 3.750% 5/1/21 800 829
  Constellation Brands Inc. 4.750% 11/15/24 140 151
  Constellation Brands Inc. 4.750% 12/1/25 500 537
  Express Scripts Holding Co. 3.900% 2/15/22 200 208
  Express Scripts Holding Co. 4.500% 2/25/26 910 928
  Express Scripts Holding Co. 4.800% 7/15/46 300 285
10 Fonterra Co-operative Group Ltd. 4.500% 6/30/21 100 80
11 Fresenius SE & Co. KGaA 4.000% 2/1/24 300 375
  Gilead Sciences Inc. 5.650% 12/1/41 610 701
9 Grupo Bimbo SAB de CV 3.875% 6/27/24 1,000 1,001
9 Grupo Bimbo SAB de CV 4.875% 6/27/44 400 378

 

23


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
11 Kraft Heinz Foods Co. 2.250% 5/25/28 200 214
12 McKesson Corp. 3.125% 2/17/29 200 259
  Mead Johnson Nutrition Co. 3.000% 11/15/20 450 459
  Medtronic Inc. 4.375% 3/15/35 150 157
  Medtronic Inc. 5.550% 3/15/40 240 278
  Newell Brands Inc. 5.500% 4/1/46 180 204
  Perrigo Co. plc 5.300% 11/15/43 200 204
  Perrigo Finance Unlimited Co. 4.900% 12/15/44 1,400 1,361
  Quest Diagnostics Inc. 3.450% 6/1/26 100 99
  Reynolds American Inc. 5.700% 8/15/35 400 456
  Reynolds American Inc. 7.250% 6/15/37 300 396
  Reynolds American Inc. 5.850% 8/15/45 150 176
  Teva Pharmaceutical Finance Co. LLC 6.150% 2/1/36 442 489
  Teva Pharmaceutical Finance Netherlands III BV 2.800% 7/21/23 2,810 2,675
  Teva Pharmaceutical Finance Netherlands III BV 3.150% 10/1/26 395 364
  Tyson Foods Inc. 4.875% 8/15/34 150 154
  Tyson Foods Inc. 5.150% 8/15/44 400 420
 
  Energy (3.0%)        
  Anadarko Petroleum Corp. 3.450% 7/15/24 550 536
  Anadarko Petroleum Corp. 5.550% 3/15/26 250 277
  Anadarko Petroleum Corp. 6.600% 3/15/46 600 725
  Apache Corp. 5.100% 9/1/40 100 103
9 APT Pipelines Ltd. 4.250% 7/15/27 160 161
  Boardwalk Pipelines LP 4.450% 7/15/27 225 226
  BP Capital Markets plc 2.521% 1/15/20 110 111
  BP Capital Markets plc 2.112% 9/16/21 100 98
  BP Capital Markets plc 3.245% 5/6/22 300 306
  BP Capital Markets plc 2.750% 5/10/23 450 445
  BP Capital Markets plc 3.506% 3/17/25 300 301
  Columbia Pipeline Group Inc. 4.500% 6/1/25 240 252
  ConocoPhillips Co. 4.200% 3/15/21 300 319
  ConocoPhillips Co. 4.950% 3/15/26 975 1,084
  ConocoPhillips Co. 5.950% 3/15/46 180 223
  Devon Energy Corp. 4.000% 7/15/21 200 207
  Devon Energy Corp. 3.250% 5/15/22 300 297
  Devon Energy Corp. 5.600% 7/15/41 500 527
  Devon Energy Corp. 5.000% 6/15/45 325 326
  Energy Transfer Partners LP 6.700% 7/1/18 230 243
  Energy Transfer Partners LP 9.700% 3/15/19 260 295
  Energy Transfer Partners LP 5.200% 2/1/22 642 688
  Energy Transfer Partners LP 4.750% 1/15/26 500 515
  EnLink Midstream Partners LP 4.850% 7/15/26 200 206
  Enterprise Products Operating LLC 6.650% 10/15/34 180 219
  Hess Corp. 4.300% 4/1/27 200 196
  Hess Corp. 5.800% 4/1/47 150 155
  Kinder Morgan Inc. 7.800% 8/1/31 70 88
  Kinder Morgan Inc. 7.750% 1/15/32 95 119
  Marathon Oil Corp. 2.800% 11/1/22 150 144
  Marathon Oil Corp. 3.850% 6/1/25 750 737
  Marathon Oil Corp. 5.200% 6/1/45 200 197
  MPLX LP 4.500% 7/15/23 360 374
  MPLX LP 4.875% 12/1/24 600 629
  National Oilwell Varco Inc. 3.950% 12/1/42 1,200 970

 

24


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Plains All American Pipeline LP /        
  PAA Finance Corp. 6.500% 5/1/18 150 157
  Sabine Pass Liquefaction LLC 5.625% 4/15/23 660 717
  Sabine Pass Liquefaction LLC 5.750% 5/15/24 640 698
9 Sabine Pass Liquefaction LLC 5.875% 6/30/26 330 364
  Shell International Finance BV 2.250% 1/6/23 210 204
  Shell International Finance BV 3.250% 5/11/25 350 352
  Shell International Finance BV 2.875% 5/10/26 500 486
  Shell International Finance BV 4.125% 5/11/35 500 502
  Shell International Finance BV 3.625% 8/21/42 150 135
  Shell International Finance BV 4.000% 5/10/46 300 289
  Spectra Energy Partners LP 4.750% 3/15/24 150 159
  Spectra Energy Partners LP 3.500% 3/15/25 180 175
  Sunoco Logistics Partners Operations LP 3.450% 1/15/23 350 347
  Tennessee Gas Pipeline Co. LLC 7.000% 10/15/28 700 836
  Tennessee Gas Pipeline Co. LLC 7.625% 4/1/37 90 109
  Transocean Inc. 4.250% 10/15/17 750 754
  Valero Energy Partners LP 4.375% 12/15/26 165 166
  Williams Partners LP 4.125% 11/15/20 180 188
  Williams Partners LP 3.900% 1/15/25 817 814
  Williams Partners LP 4.000% 9/15/25 270 271
 
  Other Industrial (0.3%)        
9 CK Hutchison International 16 Ltd. 2.750% 10/3/26 240 228
9 CK Hutchison International 17 Ltd. 3.500% 4/5/27 1,765 1,755
11 Fluor Corp. 1.750% 3/21/23 100 111
11 Kennedy Wilson Europe Real Estate plc 3.250% 11/12/25 100 111
 
  Technology (1.7%)        
  Apple Inc. 3.850% 5/4/43 860 822
  Apple Inc. 3.450% 2/9/45 170 151
  Avnet Inc. 3.750% 12/1/21 35 35
9 Broadcom Corp. / Broadcom Cayman Finance Ltd. 3.000% 1/15/22 1,000 997
9 Broadcom Corp. / Broadcom Cayman Finance Ltd. 3.625% 1/15/24 250 252
9 Broadcom Corp. / Broadcom Cayman Finance Ltd. 3.875% 1/15/27 250 251
9 Diamond 1 Finance Corp. / Diamond 2 Finance        
  Corp. 4.420% 6/15/21 590 617
9 Diamond 1 Finance Corp. / Diamond 2 Finance        
  Corp. 5.450% 6/15/23 570 613
9 Diamond 1 Finance Corp. / Diamond 2 Finance        
  Corp. 6.020% 6/15/26 910 994
9 Diamond 1 Finance Corp. / Diamond 2 Finance        
  Corp. 8.100% 7/15/36 450 565
9 Diamond 1 Finance Corp. / Diamond 2 Finance        
  Corp. 8.350% 7/15/46 50 65
9 Everett Spinco Inc. 4.750% 4/15/27 225 230
  Fidelity National Information Services Inc. 1.450% 6/5/17 75 75
  Fidelity National Information Services Inc. 4.500% 10/15/22 500 533
  Fidelity National Information Services Inc. 5.000% 10/15/25 980 1,067
  Hewlett Packard Enterprise Co. 4.900% 10/15/25 500 519
  Hewlett Packard Enterprise Co. 6.350% 10/15/45 700 721
9 Seagate HDD Cayman 4.875% 3/1/24 335 328
  Seagate HDD Cayman 4.750% 1/1/25 120 116
  Seagate HDD Cayman 4.875% 6/1/27 30 28
  Tech Data Corp. 3.700% 2/15/22 850 853

 

25


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Tyco Electronics Group SA 4.875% 1/15/21 65 70
  Tyco Electronics Group SA 3.500% 2/3/22 90 93
  Tyco Electronics Group SA 3.450% 8/1/24 15 15
  Tyco Electronics Group SA 7.125% 10/1/37 120 157
  Verisk Analytics Inc. 5.800% 5/1/21 84 93
  Verisk Analytics Inc. 4.000% 6/15/25 300 305
  Verisk Analytics Inc. 5.500% 6/15/45 750 816
 
  Transportation (1.1%)        
9 Air Canada 7.750% 4/15/21 548 617
10 Asciano Finance Ltd. 5.250% 5/19/25 110 85
6 Continental Airlines 2005-ERJ1 Pass Through Trust 9.798% 10/1/22 258 284
  Continental Airlines 2012-3 Class C Pass Thru        
  Certificates 6.125% 4/29/18 110 114
6,13 Delta Air Lines 2002-1 Class G-1 Pass Through        
  Trust 6.718% 7/2/24 40 45
6 Delta Air Lines 2007-1 Class A Pass Through Trust 6.821% 2/10/24 923 1,061
6 Delta Air Lines 2007-1 Class B Pass Through Trust 8.021% 8/10/22 63 72
  Delta Air Lines Inc. 2.875% 3/13/20 795 801
  Delta Air Lines Inc. 3.625% 3/15/22 990 1,007
  Kansas City Southern 3.125% 6/1/26 230 216
  Kansas City Southern 4.300% 5/15/43 650 600
  Kansas City Southern 4.950% 8/15/45 200 202
6 UAL 2007-1 Pass Through Trust 6.636% 7/2/22 1,618 1,743
6 US Airways 2001-1C Pass Through Trust 7.346% 9/20/23 48 52
9 WestJet Airlines Ltd. 3.500% 6/16/21 320 321
          92,560
Utilities (2.2%)        
  Electric (2.0%)        
9 AEP Transmission Co. LLC 3.100% 12/1/26 165 163
10 AusNet Services Holdings Pty Ltd. 4.400% 8/16/27 400 309
  Baltimore Gas & Electric Co. 6.350% 10/1/36 150 193
9 Cleco Corporate Holdings LLC 4.973% 5/1/46 250 258
  Commonwealth Edison Co. 6.450% 1/15/38 223 297
  Dynegy Inc. 6.750% 11/1/19 15 15
  Dynegy Inc. 7.375% 11/1/22 155 154
9 EDP Finance BV 4.125% 1/15/20 1,200 1,228
9 EDP Finance BV 5.250% 1/14/21 1,800 1,920
12 EDP Finance BV 8.625% 1/4/24 50 83
  Emera US Finance LP 3.550% 6/15/26 240 236
  Emera US Finance LP 4.750% 6/15/46 700 707
  Entergy Louisiana LLC 4.950% 1/15/45 300 308
  Exelon Corp. 3.950% 6/15/25 225 231
9 FirstEnergy Transmission LLC 4.350% 1/15/25 550 572
9 Fortis Inc. 3.055% 10/4/26 725 681
  Georgia Power Co. 3.250% 3/30/27 815 790
  Georgia Power Co. 5.950% 2/1/39 400 466
  Great Plains Energy Inc. 3.900% 4/1/27 340 341
  Great Plains Energy Inc. 4.850% 4/1/47 545 556
  MidAmerican Energy Co. 5.800% 10/15/36 230 281
  Pacific Gas & Electric Co. 6.050% 3/1/34 200 250
  Pacific Gas & Electric Co. 6.250% 3/1/39 300 390
  Pacific Gas & Electric Co. 4.450% 4/15/42 20 21
  PacifiCorp 5.250% 6/15/35 275 316
  PacifiCorp 6.100% 8/1/36 200 254

 

26


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  PPL Capital Funding Inc. 3.100% 5/15/26 850 816
  Puget Energy Inc. 3.650% 5/15/25 350 346
  Puget Sound Energy Inc. 6.274% 3/15/37 100 127
  Puget Sound Energy Inc. 5.795% 3/15/40 120 147
  South Carolina Electric & Gas Co. 6.050% 1/15/38 100 117
  South Carolina Electric & Gas Co. 4.350% 2/1/42 150 149
6 Southern Co. 5.500% 3/15/57 140 144
11 Southern Power Co. 1.000% 6/20/22 145 154
  Southwestern Electric Power Co. 2.750% 10/1/26 445 420
  Southwestern Public Service Co. 4.500% 8/15/41 210 223
 
  Natural Gas (0.2%)        
  CenterPoint Energy Resources Corp. 5.850% 1/15/41 435 517
9 Engie SA 2.875% 10/10/22 75 74
  Southwest Gas Corp. 3.800% 9/29/46 885 827
          15,081
Total Corporate Bonds (Cost $184,460)       183,995
Sovereign Bonds (4.7%)        
  Arab Republic of Egypt 8.500% 1/31/47 200 215
  Argentine Republic 5.625% 1/26/22 350 358
  Argentine Republic 6.875% 1/26/27 50 51
11 Banque Centrale de Tunisie International Bond 5.625% 2/17/24 220 234
  Bermuda 4.854% 2/6/24 320 335
  BOC Aviation Ltd. 3.875% 5/9/19 200 205
9 CDP Financial Inc. 4.400% 11/25/19 600 637
  Corp. Andina de Fomento 2.125% 9/27/21 750 733
  Corp. Nacional del Cobre de Chile 3.875% 11/3/21 625 654
9 CPPIB Capital Inc. 1.250% 9/20/19 200 198
  Electricite de France SA 3.625% 10/13/25 600 602
  Export-Import Bank of Korea 2.250% 1/21/20 1,200 1,198
  Export-Import Bank of Korea 5.125% 6/29/20 500 542
11 French Republic 0.000% 5/25/22 600 636
  Gazprom OAO Via Gaz Capital SA 4.950% 7/19/22 200 208
9 ICBCIL Finance Co. Ltd. 2.375% 5/19/19 300 298
14 Japan 0.000% 5/12/17 330,000 2,966
  Kingdom of Saudi Arabia 2.375% 10/26/21 350 344
15 Mexican Bonos 5.750% 3/5/26 12,700 622
  Nexen Energy ULC 6.400% 5/15/37 300 372
9 NongHyup Bank 1.875% 9/12/21 500 479
9 Ontario Teachers’ Cadillac Fairview Properties        
  Trust 3.125% 3/20/22 200 202
9 Ontario Teachers’ Cadillac Fairview Properties        
  Trust 3.875% 3/20/27 200 203
6 Oriental Republic of Uruguay 5.100% 6/18/50 200 193
  Petrobras Global Finance BV 7.375% 1/17/27 245 260
  Petroleos Mexicanos 5.500% 2/4/19 470 493
  Petroleos Mexicanos 5.500% 1/21/21 250 265
9 Petroleos Mexicanos 5.375% 3/13/22 210 221
  Petroleos Mexicanos 5.375% 3/13/22 1,700 1,787
9 Province of Alberta Canada 2.050% 8/17/26 500 464
  Province of Ontario 1.625% 1/18/19 1,000 997
  Province of Ontario 2.000% 1/30/19 500 502
  Province of Ontario 2.500% 4/27/26 50 48
  Province of Quebec 7.125% 2/9/24 200 248

 

27


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Province of Quebec 7.500% 9/15/29 75 105
  Republic of Chile 3.125% 3/27/25 500 508
  Republic of Colombia 4.375% 7/12/21 600 634
6 Republic of Colombia 3.875% 4/25/27 750 749
  Republic of Honduras 6.250% 1/19/27 300 304
  Republic of Hungary 6.250% 1/29/20 1,200 1,315
  Republic of Hungary 5.750% 11/22/23 150 170
11 Republic of Indonesia 3.750% 6/14/28 200 228
  Republic of Kazakhstan 4.875% 10/14/44 200 196
9 Republic of Lithuania 7.375% 2/11/20 300 342
  Republic of Lithuania 7.375% 2/11/20 300 341
  Republic of Lithuania 6.125% 3/9/21 365 412
  Republic of Namibia 5.250% 10/29/25 300 302
6 Republic of Panama 4.000% 9/22/24 600 625
  Republic of Panama 8.125% 4/28/34 150 200
  Republic of Poland 5.125% 4/21/21 615 673
  Republic of Poland 5.000% 3/23/22 70 77
  Republic of South Africa 5.875% 9/16/25 220 236
  Republic of Turkey 4.875% 4/16/43 750 642
  State of Israel 4.500% 1/30/43 200 206
  State of Kuwait 2.750% 3/20/22 281 282
  Statoil ASA 2.450% 1/17/23 600 589
  Sultanate of Oman 5.375% 3/8/27 200 209
  United Mexican States 4.000% 10/2/23 2,528 2,609
15 United Mexican States 7.500% 6/3/27 2,300 126
  United Mexican States 6.050% 1/11/40 500 572
  United Mexican States 4.350% 1/15/47 200 184
  YPF SA 8.875% 12/19/18 600 653
Total Sovereign Bonds (Cost $31,265)       31,259
Taxable Municipal Bonds (0.3%)        
  California GO 7.550% 4/1/39 500 732
  Georgia Municipal Electric Power Authority        
  Revenue 6.655% 4/1/57 200 225
  Illinois GO 5.100% 6/1/33 900 820
  Wisconsin Annual Appropriation Revenue 3.954% 5/1/36 500 505
Total Taxable Municipal Bonds (Cost $2,376)       2,282
 
        Shares  
Temporary Cash Investment (9.6%)        
Money Market Fund (9.6%)        
16 Vanguard Market Liquidity Fund (Cost $64,777) 0.965%   647,715 64,784
 
      Expiration Date Contracts  
Options on Futures Purchased (0.0%)        
  Put Options on 10-year U.S. Treasury Note Futures Contracts,      
  Strike Price $122.00 (Cost $6)   4/21/17 43 1
Total Investments (106.2%) (Cost $722,819)       714,064

 

28


 

Core Bond Fund        
 
 
 
        Market
        Value
  Expiration Date Contracts ($000)
Liability for Options Written (0.0%)        
Written Options on Futures (0.0%)        
Call Options on 10-year-U.S. Treasury Note        
Futures Contracts, Strike Price $125.50   4/21/17 5 (1)
Call Options on 10-year-U.S. Treasury Note        
Futures Contracts, Strike Price $126.50   5/26/17 12 (4)
Call Options on 10-year-U.S. Treasury Note        
Futures Contracts, Strike Price $127.00   5/26/17 98 (21)
Put Options on 10-year-U.S. Treasury Note        
Futures Contracts, Strike Price $122.50   4/21/17 5
Put Options on 10-year-U.S. Treasury Note        
Futures Contracts, Strike Price $121.50   5/26/17 43 (5)
Total Options on Futures Written (Premiums received $55)     (31)
 
      Notional  
      Amount  
  Counterparty   ($000)  
Written Swaptions on Credit Default Index (0.0%)      
Call Swaptions on CDX.NA.IG.28.V1 5-Year        
Index, Strike: 62.5% GSCM 5/17/17 720
Call Swaptions on CDX.NA.IG.28.V1 5-Year        
Index, Strike: 67.5% GSCM 5/17/17 1,445 (2)
Put Swaptions on CDX.NA.IG.28.V1 5-Year        
Index, Strike: 72.5% GSCM 5/17/17 1,445 (2)
Total Credit Default Swaptions Written (Premiums received $4)     (4)
Total Liability on Options Written (0.0%) (Premiums received $59)     (35)
Other Assets and Liabilities (-6.2%)        
Other Assets       49,410
Liabilities       (90,854)
        (41,444)
Net Assets (100%)       672,585

 

29


 

Core Bond Fund  
 
 
 
 
  Amount
  ($000)
Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 649,279
Affiliated Vanguard Funds 64,784
Options Purchased 1
Total Investments in Securities 714,064
Investment in Vanguard 46
Receivables for Investment Securities Sold 41,201
Receivables for Accrued Income 3,474
Receivables for Capital Shares Issued 3,895
Other Assets 794
Total Assets 763,474
Liabilities  
Payables for Investment Securities Purchased 88,690
Payables for Capital Shares Redeemed 1,181
Payables for Distributions 170
Payables to Vanguard 119
Options Written 35
Other Liabilities 694
Total Liabilities 90,889
Net Assets 672,585
 
 
At March 31, 2017, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 685,811
Undistributed Net Investment Income 266
Accumulated Net Realized Losses (4,961)
Unrealized Appreciation (Depreciation)  
Investment Securities (8,750)
Futures Contracts 180
Options 19
Swap Contracts (38)
Forward Currency Contracts 58
Foreign Currencies
Net Assets 672,585

 

30


 

Core Bond Fund

  Amount
  ($000)
Investor Shares—Net Assets  
Applicable to 7,072,930 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 69,834
Net Asset Value Per Share—Investor Shares $9.87
 
Admiral Shares—Net Assets  
Applicable to 30,529,123 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 602,751
Net Asset Value Per Share—Admiral Shares $19.74

 

• See Note A in Notes to Financial Statements.
1 Securities with a value of $581,000 have been segregated as initial margin for open cleared swap contracts.
2 Securities with a value of $1,062,000 have been segregated as initial margin for open futures contracts.
3 U.S. government-guaranteed.
4 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed
by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth,
in exchange for senior preferred stock.
5 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed
by the full faith and credit of the U.S. government.
6 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
7 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of
March 31, 2017.
8 Adjustable-rate security.
9 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 March 31, 2017, the aggregate value of these securities was
$58,058,000, representing 8.6% of net assets.
10 Face amount denominated in Australian dollars.
11 Face amount denominated in euro.
12 Face amount denominated in British pounds.
13 Scheduled principal and interest payments are guaranteed by Municipal Bond Insurance Association.
14 Face amount denominated in Japanese yen.
15 Face amount denominated in Mexican peso.
16 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is
the 7-day yield.
GO—General Obligation Bond.
See accompanying Notes, which are an integral part of the Financial Statements.

31


 

Core Bond Fund  
 
 
Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Interest1 7,737
Total Income 7,737
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 42
Management and Administrative—Investor Shares 66
Management and Administrative—Admiral Shares 348
Marketing and Distribution—Investor Shares 7
Marketing and Distribution—Admiral Shares 29
Custodian Fees 13
Shareholders’ Reports—Investor Shares 3
Shareholders’ Reports—Admiral Shares 3
Total Expenses 511
Net Investment Income 7,226
Realized Net Gain (Loss)  
Investment Securities Sold1 (3,479)
Futures Contracts (1,397)
Options 115
Swap Contracts (607)
Foreign Currencies and Forward Currency Contracts 558
Realized Net Gain (Loss) (4,810)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (16,796)
Futures Contracts 347
Options 18
Swap Contracts (28)
Foreign Currencies and Forward Currency Contracts (35)
Change in Unrealized Appreciation (Depreciation) (16,494)
Net Increase (Decrease) in Net Assets Resulting from Operations (14,078)

 

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $93,000 and $2,000, respectively.

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

32


 


Core Bond Fund    
 
 
Statement of Changes in Net Assets    
 
    March 10,
  Six Months Ended 20161 to
  March 31, September, 30
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 7,226 5,500
Realized Net Gain (Loss) (4,810) 3,923
Change in Unrealized Appreciation (Depreciation) (16,494) 7,963
Net Increase (Decrease) in Net Assets Resulting from Operations (14,078) 17,386
Distributions    
Net Investment Income    
Investor Shares (678) (546)
Admiral Shares (6,385) (4,920)
Realized Capital Gain 2    
Investor Shares (378)
Admiral Shares (3,414)
Total Distributions (10,855) (5,466)
Capital Share Transactions    
Investor Shares 7,532 63,514
Admiral Shares 47,092 567,460
Net Increase (Decrease) from Capital Share Transactions 54,624 630,974
Total Increase (Decrease) 29,691 642,894
Net Assets    
Beginning of Period 642,894
End of Period3 672,585 642,894

 

1 Commencement of subscription period for the fund.

2 Includes fiscal 2017 and 2016 short-term gain distributions totaling $3,792,000 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

3 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $266,000 and $66,000.

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

33


Core Bond Fund

Financial Highlights    
 
 
Investor Shares    
  Six Months March 10,
  Ended 20161 to
  March 31, Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016
Net Asset Value, Beginning of Period $10.26 $10.00
Investment Operations    
Net Investment Income .107 . 097
Net Realized and Unrealized Gain (Loss) on Investments (.332) .259
Total from Investment Operations (.225) .356
Distributions    
Dividends from Net Investment Income (.104) (.096)
Distributions from Realized Capital Gains (.061)
Total Distributions (.165) (.096)
Net Asset Value, End of Period $9.87 $10.26
 
Total Return2 -2.18% 3.57%
 
Ratios/Supplemental Data    
Net Assets, End of Period (Millions) $70 $65
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%3
Ratio of Net Investment Income to Average Net Assets 2.17% 2.00%3
Portfolio Turnover Rate 4 226% 229%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Subscription period for the fund was March 10, 2016 to March 24, 2016, during which time all assets were held in money market
instruments. Performance measurement began March 28, 2016, the first business day after the subscription period, at a net asset value
of $10.00
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 Annualized.
4 Includes 44% and 58% attributable to mortgage-dollar-roll activity.

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

34


 

Core Bond Fund

Financial Highlights    
 
 
Admiral Shares    
  Six Months March 10,
  Ended 20161 to
  March 31, Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016
Net Asset Value, Beginning of Period $20.53 $20.00
Investment Operations    
Net Investment Income . 225 . 205
Net Realized and Unrealized Gain (Loss) on Investments (.673) .528
Total from Investment Operations (.448) .733
Distributions    
Dividends from Net Investment Income (.220) (.203)
Distributions from Realized Capital Gains (.122)
Total Distributions (. 342) (. 203)
Net Asset Value, End of Period $19.74 $20.53
 
Total Return2 -2.17% 3.67%
 
Ratios/Supplemental Data    
Net Assets, End of Period (Millions) $603 $578
Ratio of Total Expenses to Average Net Assets 0.15% 0.15%3
Ratio of Net Investment Income to Average Net Assets 2.27% 2.10%3
Portfolio Turnover Rate 4 226% 229%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Subscription period for the fund was March 10, 2016 to March 24, 2016, during which time all assets were held in money market
instruments. Performance measurement began March 28, 2016, the first business day after the subscription period, at a net asset value
of $10.00
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 Annualized.
4 Includes 44% and 58% attributable to mortgage-dollar-roll activity.

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

35


 

Core Bond Fund

Notes to Financial Statements

Vanguard Core Bond Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries. 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. To minimize the currency risk associated with investment in bonds denominated in currencies other than the U.S. dollar, the fund attempts to hedge its currency exposures. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.

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

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Bonds and 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. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. 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.

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

3. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds 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

36


 

Core Bond Fund

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.

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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 futures gains (losses).

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts represented 10% and 8% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

4. Forward Currency Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified 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. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The 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 forward currency contract gains (losses).

During the six months ended March 31, 2017, the fund’s average investment in forward currency contracts represented 4% of net assets, based on the average of notional amounts at each quarter-end during the period.

5. Swap Contracts: The fund invests in credit default swaps to adjust the overall credit risk of the fund or to actively overweight or underweight credit risk to a specific issuer or group of issuers. The fund may sell credit protection through credit default swaps to simulate investments in long positions that are either unavailable or considered to be less attractively priced in the bond market. The fund may purchase credit protection through credit default swaps to reduce credit exposure to a given issuer

37


 

Core Bond Fund

or issuers. Under the terms of the swaps, an up-front payment may be exchanged between the seller and buyer. In addition, the seller of the credit protection receives a periodic payment of premium from the buyer that is a fixed percentage applied to a notional amount. If, for example, the reference entity is subject to a credit event (such as bankruptcy, failure to pay, or obligation acceleration) during the term of the swap, the seller agrees to either physically settle or cash settle the swap contract. If the swap is physically settled, the seller agrees to pay the buyer an amount equal to the notional amount and take delivery of a debt instrument of the reference issuer with a par amount equal to such notional amount. If the swap is cash settled, the seller agrees to pay the buyer the difference between the notional amount and the final price for the relevant debt instrument, as determined either in a market auction or pursuant to a pre-agreed-upon valuation procedure.

The fund enters into interest rate swap transactions to adjust the fund’s sensitivity to changes in interest rates and maintain the ability to generate income at prevailing market rates. Under the terms of the swaps, one party pays the other an amount that is a fixed percentage rate applied to a notional amount. In return, the counterparty agrees to pay a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount.

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 the seller of credit protection is required to take delivery (or, in a cash settled swap, pay the settlement amount determined) upon occurrence of a credit event, periodic payments are made, or the swap terminates, at which time realized gain (loss) is recorded. The net premium to be received or paid by the fund under swap contracts is accrued daily and recorded as realized gain (loss) over the life of the contract.

The primary risk associated with selling credit protection is that, upon the occurrence of a defined credit event, the market value of the debt instrument received by the fund (or, in a cash settled swap, the debt instruments used to determine the settlement payment by the fund) will be significantly less than the amount paid by the fund and, in a physically settled swap, the fund may receive an illiquid debt instrument. 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 rehypoth-ecated. 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 Statement of Net Assets. 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.

38


 

Core Bond Fund

The fund enters into centrally cleared interest rate and credit default swaps to achieve the same objectives specified with respect to the equivalent over-the-counter swaps but with less counterparty risk because a regulated clearinghouse is the counterparty instead of the clearing broker or executing broker. 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. To further mitigate counterparty risk, the fund trades with a diverse group of prequalified executing brokers; monitors the financial strength of its clearing brokers, executing brokers, and clearinghouse; and has entered into agreements with its clearing brokers and executing brokers.

During the six months ended March 31, 2017, the fund’s average amounts of investments in credit protection sold and credit protection purchased represented 1% and 3% of net assets, respectively, based on the average of notional amounts at each quarter-end during the period. The average amount of investments in interest rate swaps represented 3% of net assets, based on the average of notional amounts at each quarter-end during the period.

6. Options: The fund invests in options contracts on futures and swaps to adjust its exposure to the underlying investments. The primary risk associated with purchasing options is that the value of the underlying investments may move in such a way that the option is out-of-the-money (the exercise price of the option exceeds the value of the underlying investment), the position is worthless at expiration, and the fund loses the premium paid. The primary risk associated with selling options is that the value of the underlying investments may move in such a way that the option is in-the-money (the exercise price of the option exceeds the value of the underlying investment), the counterparty exercises the option, and the fund loses an amount equal to the market value of the option written less the premium received.

The fund invests in options on futures, which are exchange-traded. Counterparty risk involving exchange-traded options on futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades options on futures on an exchange, monitors the financial strength of its clearing brokers and clearinghouses, and has entered into clearing agreements with its clearing brokers.

The fund invests in options on swaps (swaptions), which are transacted over-the-counter (OTC) and not on an exchange. A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options generally are established through negotiation with the other party to the option contract. Although this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options. Credit risk involves the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund mitigates its counterparty risk by entering into swaptions with a diverse group of prequalified counterparties and monitoring their financial strength.

Options on futures contracts are valued at their quoted daily settlement prices. Swaptions are valued daily based on market quotations received from independent pricing services or recognized dealers. The premium paid for a purchased option is recorded in the Statement of Assets and Liabilities as an asset that is subsequently adjusted daily to the current market value of the option purchased. The premium received for a written option is recorded in the Statement of Assets and Liabilities as an asset with an equal liability that is subsequently adjusted daily to the current market value of the

39


 

Core Bond Fund

option written. Fluctuations in the value of the options are recorded in the Statement of Operations as unrealized appreciation (depreciation) until expired, closed, or exercised, at which time realized gains (losses) are recognized.

During the six months ended March 31, 2017, the fund’s average value of options purchased and options written each represented less than 1% of net assets, based on the average market values at each quarter-end during the period.

7. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them 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. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions 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.

8. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future.

The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund’s portfolio turnover rate. Amounts to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities Purchased in the Statement of Assets and Liabilities.

9. Federal Income Taxes: The fund intends to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for its open federal income tax year ended September 30, 2016, and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

40


 

Core Bond Fund

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

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

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $46,000, representing 0.01% of the fund’s net assets and 0.02% of Vanguard’s capitalization. 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. 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).

41


 

Core Bond Fund

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 372,852
Asset-Backed/Commercial Mortgage-Backed Securities 58,891
Corporate Bonds 183,995
Sovereign Bonds 31,259
Taxable Municipal Bonds 2,282
Temporary Cash Investments 64,784
Options Purchased 1
Liability for Option Written (31) (4)
Futures Contracts—Assets1 109
Futures Contracts—Liabilities1 (108)
Forward Currency Contracts—Assets 173
Forward Currency Contracts—Liabilities (115)
Swap Contracts—Assets 71 17
Swap Contracts—Liabilities (3)1 (87)
Total 64,759 649,263
1 Represents variation margin on the last day of the reporting period.      

 

D. At March 31, 2017, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:

  Interest Rate Currency Credit  
Statement of Assets and Liabilities Contracts Contracts Contracts Total
Caption ($000) ($000) ($000) ($000)
Options Purchased 1 1
Other Assets 116 173 17 306
Liability for Options Written (31) (4) (35)
Other Liabilities (108) (115) (90) (313)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended March 31, 2017, were:

  Interest Rate Currency Credit  
  Contracts Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000) ($000)
Futures Contracts (1,397) (1,397)
Options 118 (3) 115
Swap Contracts (400) (207) (607)
Forward Currency Contracts 394 394
Realized Net Gain (Loss) on Derivatives (1,679) 394 (210) (1,495)

 

42


 

Core Bond Fund        
 
 
 
 
  Interest Rate Currency Credit  
Change in Unrealized Appreciation Contracts Contracts Contracts Total
(Depreciation) on Derivatives ($000) ($000) ($000) ($000)
Futures Contracts 347 347
Options 18 18
Swap Contracts 22 (50) (28)
Forward Currency Contracts (36) (36)
Change in Unrealized Appreciation        
(Depreciation) on Derivatives 387 (36) (50) 301

 

At March 31, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
Ultra 10-Year U.S. Treasury Note June 2017 (282) (37,757) (137)
5-Year U.S. Treasury Note June 2017 204 24,016 109
Ultra Long U.S. Treasury Bond June 2017 149 23,933 143
2-Year U.S. Treasury Note June 2017 32 6,927 19
30-Year U.S. Treasury Bond June 2017 42 6,335 80
AUD 90-Day Bank Bill June 2017 (7) (5,325) (1)
Euro-Bund June 2017 (23) (3,961) (9)
Euro-Bobl June 2017 (18) (2,531) 3
10-Year U.S. Treasury Note June 2017 (16) (1,993) (1)
AUD 3-Year Treasury Bond June 2017 (21) (1,793) (10)
Long Gilt June 2017 (8) (1,279) (12)
AUD 10-Year Treasury Bond June 2017 (5) (491) (3)
Euro-Buxl June 2017 (1) (180) (1)
        180

 

Unrealized appreciation (depreciation) on open futures contracts, except for AUD 90-Day Bank Bill, AUD 3-Year Treasury Bond, and AUD 10-Year Treasury Bond futures contracts, is required to be treated as realized gain (loss) for tax purposes.

At March 31, 2017, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as ordinary income for tax purposes.

43


 

Core Bond Fund

           
          Unrealized
   Contract      Appreciation
  Settlement        Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Goldman Sachs Bank AG 4/13/17 EUR 350 USD 373 1
Goldman Sachs Bank AG 4/13/17 EUR 303 USD 330 (7)
Citibank, N.A. 4/13/17 EUR 180 USD 192
Morgan Stanley Capital Services LLC 4/13/17 AUD 110 USD 84
Barclays Capital 4/13/17 EUR 40 USD 42
JPMorgan Chase Bank N.A. 4/12/17 MXN 369 USD 19 1
JPMorgan Chase Bank N.A. 5/12/17 USD 3,121 JPY 330,000 152
Goldman Sachs Bank AG 4/12/17 USD 715 MXN 14,083 (36)
Credit Suisse International 4/13/17 USD 6,462 EUR 6,042 12
Citibank, N.A. 4/13/17 USD 3,568 AUD 4,710 (31)
Barclays Capital 4/13/17 USD 1,442 GBP 1,178 (34)
Barclays Capital 4/13/17 USD 548 EUR 510 4
JPMorgan Chase Bank N.A. 4/13/17 USD 508 EUR 480 (4)
Barclays Capital 4/13/17 USD 329 AUD 430 1
Citibank, N.A. 4/13/17 USD 216 EUR 200 2
Goldman Sachs Bank AG 4/13/17 USD 199 GBP 160 (2)
Bank of America N.A 4/13/17 USD 101 EUR 95
Citibank, N.A. 4/13/17 USD 101 EUR 95
JPMorgan Chase Bank N.A. 4/13/17 USD 57 AUD 75
Goldman Sachs Bank AG 4/13/17 USD 64 EUR 60 (1)
Barclays Capital 4/13/17 USD 20 AUD 26
Morgan Stanley Capital Services LLC 4/13/17 USD 21 EUR 20
            58

 

AUD—Australian dollar.
EUR—Euro.
GBP—British pound.
JPY—Japanese yen.
MXN—Mexican peso.
USD—U.S. dollar.

44


 

Core Bond Fund            
 
 
 
 

At March 31, 2017, the fund had the following open swap contracts:

 

 

   
Centrally Cleared Credit Default Swaps          
          Periodic  
          Premium Unrealized
        Notional Received Appreciation
  Termination     Amount (Paid) (Depreciation)
Reference Entity Date Clearinghouse ($000) (%) ($000)
Credit Protection Purchased            
CDX-NA-IG-S28-V1 6/20/22   ICE USD 725 (1.000)
iTraxx Europe Crossover            
Index-S27-V1 6/20/22   ICE EUR 600 (5.000) (2)
iTraxx Europe Senior            
Financials-S27-V1 6/20/22   ICE EUR 5,330 (1.000) (12)
iTraxx Europe-S27-V1 6/20/22   ICE EUR 2,075 (1.000) (4)
            (18)
EUR—Euro.            
ICE—Intercontinental Exchange.            
USD—U.S. dollar.            
 
Over-the-Counter Credit Default Swaps          
        Remaining    
        Up-Front Periodic  
        Premium Premium Unrealized
      Notional Received Received Appreciation
  Termination   Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Credit Protection Sold/            
Moody’s Rating            
Berkshire Hathaway Inc./Aa2 6/20/21 GSI 55 1.000 1
Berkshire Hathaway Inc./Aa2 6/20/21 JPMC 70 1.000 1
Berkshire Hathaway Inc./Aa2 6/20/22 BARC 450 (8) 1.000 (1)
Kohls Corp./Baa2 6/20/21 GSI 70 2 1.000
Kohls Corp./Baa2 6/20/21 GSI 35 1 1.000
Kohls Corp./Baa2 6/20/21 GSI 35 1 1.000
Metlife Inc./A3 12/20/21 BARC 100 1.000 1
Republic of Peru/A3 6/20/22 CITNA 1,400 10 1.000 8
            10

 

45


 

Core Bond Fund            
 
 
 
 
Over-the-Counter Credit Default Swaps (continued)        
        Remaining    
        Up-Front Periodic  
        Premium Premium Unrealized
      Notional Received Received Appreciation
  Termination   Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Credit Protection Purchased            
Avnet Inc. 12/20/21 GSI 35 (1.000) (1)
Banco Bilbao Vizcaya            
Argentaria SA 6/20/21 BOANA 505 (13) (1.000) (14)
Bank of China Ltd. 12/20/21 BNPSW 100 (1.000) (1)
CMBX-NA-AAA-9 9/17/58 CSFBI 2,000 (46) (0.500) (2)
CMBX-NA-AAA-9 9/17/58 MSCS 90 (5) (0.500) (2)
CMBX-NA-AAA-9 9/17/58 JPM 90 (3) (0.500) (1)
CMBX-NA-AAA-9 9/17/58 GSI 80 (5) (0.500) (3)
CMBX-NA-AAA-9 9/17/58 JPM 90 (5) (0.500) (3)
CMBX-NA-AAA-9 9/17/58 MSCS 100 (4) (0.500) (2)
CMBX-NA-AAA-9 9/17/58 GSI 20 (1) (0.500)
CMBX-NA-AAA-9 9/17/58 GSI 170 (6) (0.500) (3)
Commerzbank AG 6/20/21 BOANA 505 (8) (1.000) (10)
Deutsche Bank AG 12/20/21 BARC 600 (8) (1.000) (4)
Engie SA 12/20/21 BNPSW 1801 (4) (1.000) (1)
Federation of Malaysia 6/20/22 BARC 200 (2) (1.000) (1)
Federative Republic of Brazil 6/20/22 DBAG 150 (9) (1.000) (1)
Federative Republic of Brazil 6/20/22 BOANA 374 (23) (1.000) (1)
Federative Republic of Brazil 6/20/22 BOANA 200 (12) (1.000) (1)
Federative Republic of Brazil 6/20/22 JPMC 200 (13) (1.000) (1)
Lincoln National Corp. 6/20/21 BARC 25 (1) (1.000) (1)
Lincoln National Corp. 6/20/21 BARC 35 (1.000)
Lincoln National Corp. 12/20/21 BARC 100 (1.000) (1)
People’s Republic of China 6/20/22 GSI 300 2 (1.000) (1)
People’s Republic of China 6/20/22 GSI 1,200 8 (1.000) (4)
Republic of Colombia 6/20/22 BARC 200 (4) (1.000) (1)
Republic of Colombia 6/20/22 GSI 812 (15) (1.000) (2)
Republic of Indonesia 6/20/22 BARC 200 (4) (1.000) (1)
Republic of Korea 6/20/22 BNPSW 1,100 29 (1.000) 2
Republic of Korea 6/20/22 GSI 200 6 (1.000) 1
Republic of South Africa 6/20/22 BOANA 400 (18) (1.000) 3
Republic of Turkey 12/20/19 GSCM 1,250 (18) (1.000) (9)
Republic of Turkey 12/20/19 GSCM 735 (10) (1.000) (5)
Republic of Turkey 6/20/22 BNPSW 400 (26) (1.000) (1)
Republic of Turkey 6/20/22 BNPSW 840 (54) (1.000) (1)

 

46


 

Core Bond Fund

Over-the-Counter Credit Default Swaps (continued)        
        Remaining    
        Up-Front Periodic  
        Premium Premium Unrealized
      Notional Received Received Appreciation
  Termination   Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Societe Generale SA 12/20/21 JPMC 325 2 (1.000) (1)
Standard Chartered Bank 12/20/21 JPMC 185 (1.000) (3)
United Mexican States 6/20/22 JPMC 400 (8) (1.000) (3)
            (80)
            (70)

 

The notional amount represents the maximum potential amount the fund could be required to pay as a seller of credit protection if the
reference entity was subject to a credit event.
1 Notional amount denominated in Euro.
BARC—Barclays Bank plc.
BNPSW—BNP Paribas.
BOANA—Bank of America, N.A.
CITNA—Citi Bank N.A.
CSFBI—Credit Suisse First Boston International.
GSCM—Goldman Sachs Bank USA.
GSI—Goldman Sachs International.
JPMC—JP Morgan Chase Bank.
MSCS—Morgan Stanley Capital Services LLC.

Centrally Cleared Interest Rate Swaps        
        Fixed Floating  
        Interest Rate Interest Rate Unrealized
  Future   Notional Received Received Appreciation
  Effective   Amount (Paid) (Paid) (Depreciation)
Termination Date Date Clearinghouse ($000) (%) (%) ($000)
6/21/18 6/21/20171 CME 1,348 1.000 (0.000)2 1
6/21/19 6/21/20171 CME 5,612 1.250 (0.000)2 13
6/21/20 6/21/20171 CME 4,476 1.250 (0.000)2 20
6/21/21 6/21/20171 CME 787 1.250 (0.000)2 5
6/21/22 6/21/20171 CME 1,386 1.250 (0.000)2 11
            50

 

1 Forward interest rate swap. In a forward interest rate swap, the fund and the counterparty agree to make periodic net payments beginning
on a specified future effective date.
2 Based on 3-month London Interbank Offered Rate (LIBOR) as of the most recent payment date.
CME—Chicago Mercantile Exchange.

47


 

Core Bond Fund

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

During the six months ended March 31, 2017, the fund realized net foreign currency gains of $201,000 (including gains and losses on forward currency contracts and the foreign currency component on sales of foreign currency denominated bonds), which increased distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income.

Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes; the effect on the fund’s income dividends to shareholders is offset by a change in principal return. Realized losses of $164,000 on swap contracts have been reclassified from accumulated net realized losses to undistributed net investment income.

At March 31, 2017, the cost of investment securities for tax purposes was $722,927,000. Net unrealized depreciation of investment securities for tax purposes was $8,864,000, consisting of unrealized gains of $2,516,000 on securities that had risen in value since their purchase and $11,380,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2017, the fund purchased $173,319,000 of investment securities and sold $159,998,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $545,364,000 and $524,102,000, respectively.

The following table summarizes the fund’s options written during the six months ended March 31, 2017.

    Options on    
  Futures Contracts   Swaptions
    Premiums Notional Premiums
  Number of Received Amount Received
Options Written Contracts ($000) ($000) ($000)
Balance at September 30, 2016 30 9
Options Written 983 318 17,270 17
Options Expired (20) (4) (6,855) (3)
Options Closed (830) (268) (6,805) (10)
Options Exercised
Balance at March 31, 2017 163 55 3,610 4

 

48


 

Core Bond Fund

G. Capital share transactions for each class of shares were:      
  Six Months Ended March 10, 20161 to
  March 31, 2017 September 30, 2016
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 36,359 3,661 89,670 8,892
Issued in Lieu of Cash Distributions 947 96 482 47
Redeemed (29,774) (3,000) (26,638) (2,623)
Net Increase (Decrease)—Investor Shares 7,532 757 63,514 6,316
Admiral Shares        
Issued 187,204 9,441 614,186 30,451
Issued in Lieu of Cash Distributions 8,241 419 4,207 206
Redeemed (148,353) (7,490) (50,933) (2,498)
Net Increase (Decrease)—Admiral Shares 47,092 2,370 567,460 28,159
1 Commencement of subscription period for the fund.        

 

At March 31, 2017, one shareholder was the record or beneficial owner of 25% of the fund’s net assets. If the shareholder were to redeem its investment in the fund, the redemption might result in an increase in the fund’s expense ratio, cause the fund to incur higher transaction costs, or lead to the realization of taxable capital gains.

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

49


 

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.

50


 

Six Months Ended March 31, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Core Bond Fund 9/30/2016 3/31/2017 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $978.19 $1.23
Admiral Shares 1,000.00 978.31 0.74
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,023.68 $1.26
Admiral Shares 1,000.00 1,024.18 0.76

 

The calculations are based on expenses incurred in the current period. The fund’s annualized expense ratios for that period are 0.25% for Investor Shares and 0.15% 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 current period, then divided by the number of days in the most recent 12-month period (182/365).

51


 

Trustees Approve Advisory Arrangement

The board of trustees of Vanguard Core Bond Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Fixed Income 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 monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the 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 its inception in 2016 and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Fixed Income 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 fund’s performance since its inception in 2016, including any periods of outperformance or underperformance compared with a relevant benchmark and peer group. The board concluded that the performance was such that the advisory arrangement should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

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

52


 

The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.

The benefit of economies of scale

The board concluded that the fund’s at-cost 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.

53


 

Glossary

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

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. ”Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts.

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

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

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

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

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The People Who Govern Your Fund

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

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

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

InterestedTrustee1

F. William McNabb III

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

IndependentTrustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior Management Team

Mortimer J. Buckley

John James

Martha G. King

John T. Marcante

Chris D. McIsaac

James M. Norris

Thomas M. Rampulla

Glenn W. Reed

Karin A. Risi

 

Chairman Emeritus and Senior Advisor

John J. Brennan

Chairman, 1996–2009

Chief Executive Officer and President, 1996–2008

Founder John C. Bogle

Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.


 

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  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q13202 052017

 



Semiannual Report | March 31, 2017

Vanguard Emerging Markets Bond Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents    
Your Fund’s Performance at a Glance . . 1 .
Chairman’s Perspective 2  
Advisor’s Report. . 6  
Fund Profile. . 9  
Performance Summary. . 11  
Financial Statements. . 12  
About Your Fund’s Expenses. . 29  
Trustees Approve Advisory Arrangement. . 31  
Glossary 33  

 

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

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

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


 

Your Fund’s Performance at a Glance

• Vanguard Emerging Markets Bond Fund returned 0.66% for the six months ended March 31, 2017. It outpaced its benchmark index by almost one percentage point but lagged the average return of its peers by roughly the same amount.

• Emerging-market bonds initially slumped in the wake of the U.S. election. They then reversed course in the new year, gaining back almost all the ground they had lost. The outlook for global growth brightened as the U.S. dollar weakened a bit and fears of a significant disruption in global trade from protectionist trade policies lessened.

• Holdings in Brazil, Mexico, and South Africa helped the fund surpass its benchmark.

Avoiding some poor performers like the Philippines contributed as well.

• Our allocation to U.S. Treasuries dampened relative results, however, as did our positioning in some Asian and Middle Eastern markets.

Total Returns: Period Ended March 31, 2017        
30-Day SEC Income Capital Total
Yield Returns Returns Returns
Vanguard Emerging Markets Bond Fund 4.76% 2.55% -1.89% 0.66%
J.P. Morgan EMBI Global Diversified Index -0.31
Emerging Markets Hard Currency Debt Funds Average 1.62
Emerging Markets Hard Currency Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  

 

Expense Ratios    
Your Fund Compared With Its Peer Group    
Peer Group
Fund Average
Emerging Markets Bond Fund 0.60% 1.16%

 

The fund expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the fund’s annualized expense ratio was 0.60%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.

Peer group: Emerging Markets Hard Currency Debt Funds.

1


 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

2


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
    Total Returns
  Periods Ended March 31, 2017
Six One Five Years
Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

3


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


4


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.


F. William McNabb III

Chairman and Chief Executive Officer

April 14, 2017

5


 

Advisor’s Report

For the six months ended March 31, 2017, Vanguard Emerging Markets Bond Fund returned 0.66%. Its benchmark, the J.P. Morgan EMBI Global Diversified Index, returned –0.31%. The average return of its peer group of emerging-market hard currency debt funds was 1.62%. (A “hard currency” is one that is issued by an economically and politically stable country and is widely used around the world as payment for goods and services.)

The investment environment

As turmoil from Britain’s surprise vote to leave the European Union subsided, global markets began anticipating faster growth and higher inflation. In the United States, that view was bolstered post-election by the new administration’s pro-growth, pro-business agenda.

Emerging-market stocks and bonds initially reacted negatively amid concerns about the potential for a significant jump in inflation, further appreciation in the U.S. dollar, and the implementation of protectionist trade policies. The last point was particularly important for emerging markets. Not all of them are dependent to the same extent on global trade, but as a whole they have been some of the biggest beneficiaries of its rapid expansion in recent decades.

Investor sentiment improved, however, as the new year progressed. Economic data continued to point to solid global growth. Inflation rose across many developed markets but remained

moderate. The U.S. dollar edged down even though the Federal Reserve raised rates again in March and signaled that more hikes were to come this year. And the United States’ limited progress toward renegotiating trade agreements or imposing tariffs helped ease fears of a sharp slowdown in global trade. With regard to commodities, oil prices gave back the gains made toward the end of 2016 when oil producers agreed to production cuts, but prices for industrial metals rose.

As appetite for risk revived, emerging-market stocks posted a double-digit return in U.S. dollars for the period. Emerging-market bonds didn’t rally as much, but they recouped essentially all of the losses they posted in October and November to finish more or less flat.

Management of the fund

We remained focused on seeking out relative value opportunities offering meaningful upside while closely monitoring the overall level of risk in the portfolio.

We found some of those opportunities in security selection, country selection, yield-curve positioning, and arbitraging sovereign/quasi-sovereign debt.

By country, Brazil made the largest contribution to the fund’s outperformance versus its benchmark. We preferred Petrobras bonds to sovereign debt—the spread on those securities tightened significantly as the company’s balance sheet continued to improve.

6


 

Another good relative value call was an investment in local-currency South African bonds. (The exposure was hedged.) Those securities are affected to an extent by the same political developments that have led to some credit rating agency downgrades of external debt to junk status. However, they don’t experience the same forced selling by investment-grade bond investors. We don’t see short- or medium-term default risk, but the longer-term outlook for South African debt is challenging.

Currency exposure was positive. Before the U.S. presidential election, we were long options to buy U.S. dollars against the Mexican peso as we thought that currency could be among the hardest-hit in the event of a Trump win. Reversing our position later on, when the peso was pricing a lot of risk, also worked out well.

We were able to add value with new issues when we felt a deal was coming with an attractive concession or that the bonds would have room to run in the secondary market. During the half year, we made good calls on a number of new issues in Central America. Some of the smaller issuers in this region are not well-covered by analysts, which can result in significant upside if we get the trajectories right.

Avoiding the Philippines based on what we saw as an unattractive risk/reward profile also helped as the country’s bonds underperformed emerging markets as a whole.

We felt it was prudent to adopt a slightly more conservative position after the U.S. presidential election because some of the trade policies being floated would have disproportionately affected emerging markets. As few policy changes materialized, however, that stance restrained the fund’s performance. Our allocation to U.S. Treasuries detracted. To a lesser extent, so did a lack of exposure to some of the riskier outperforming markets in the Middle East and Africa.

Outlook

The environment is likely to remain challenging, in part because of valuations. Emerging markets as a whole have priced in a significant improvement in global growth but not much of the give-back we are likely to see if rates continue rising. Those that depend heavily on foreign capital would be most at risk from higher U.S. rates.

Another risk is protectionism. It seems that trade policies under the new U.S. administration are not going to be as extreme as had been feared. However, it remains to be seen what will change and how it will affect global trade.

Emerging-market debt should continue to hold allure for investors. The risks mentioned above are prevalent in developed equity and credit markets as well. Moreover, emerging markets still offer good fundamentals for the most part as well as attractive yields.

7


 

Given current valuation levels, our focus will be on trying to add relative value through trades that we believe will produce outperformance on a risk-adjusted basis at the country and security levels. We will also continue to seek opportunities in other segments of the market, such as local currency debt.

Daniel Shaykevich,

Portfolio Manager

Vanguard Fixed Income Group

April 24, 2017

8


 

Emerging Markets Bond Fund

Fund Profile
As of March 31, 2017

Financial Attributes    
    J.P. Morgan
    EMBI Global
    Diversified
  Fund Index
Number of Bonds 57 579
Yield to Maturity    
(before expenses) 5.7% 5.5%
Average Coupon 8.3% 6.1%
Average Duration 6.6 years 6.7 years
Average Effective Maturity 9.2 years 10.1 years
Ticker Symbol VEMBX
Expense Ratio1 0.60%
30-Day SEC Yield 4.76%
Short-Term Reserves 1.9%

 

Distribution by Credit Quality (% of portfolio)

Aa 3.2%
A 10.6
Baa 30.9
Ba 25.7
Less than Ba 29.6

Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

 

 

 

Sector Diversification (% of portfolio)  
 
Foreign 98.1%
Other 1.9

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

 

 

Distribution by Effective Maturity  
(% of portfolio)  
 
Under 1 Year 1.2%
1–3 Years 11.1
3–5 Years 29.6
5–7 Years 12.2
7–10 Years 20.3
10–20 Years 12.7
20–30 Years 11.0
Over 30 Years 1.9

 

1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the annualized expense ratio was 0.60%.

9


 

Emerging Markets Bond Fund

Market Diversification (% of portfolio)  
 
Fund
Emerging Markets  
Argentina 7 3%
Mexico 6 9
Indonesia 6 5
Hungary 5 6
Ukraine 4 8
Turkey 4 6
Brazil 4 4
Lithuania 4 4
Peru 3 7
South Africa 3.7
Serbia 3 7
China 3 3
Costa Rica 3.3
Russia 2 9
El Salvador 2.8
Supranational 2 8
Dominican Republic 2.7
Panama 2 4
Ecuador 2.4
Venezuela 2 2
Romania 2 1
Kazakhstan 2 0
Armenia 1 9
Oman 1 9
Egypt 1 9
Sri Lanka 1.8
Tunisia 1 7
Ivory Coast 1.6
Croatia 1 5
Honduras 1 4
Uruguay 0 9
Lebanon 0 9

 

10


 

Emerging Markets Bond Fund

Performance Summary

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

Fiscal-Period Total Returns (%): March 10, 2016, Through March 31, 2017

J.P. Morgan
EMBI Global
Diversified
Investor Shares Index
Income Capital Total Total
Fiscal Year Returns Returns Returns Returns
2016 2 81% 10 70% 13 51% 11 36%
2017 2 55% -1 89% 0 66% -0 31%
Note: For 2017, performance data reflect the six months ended March 31, 2017.      

 

Total Returns: Period Ended March 31, 2017        
 
    Since Inception
Inception Date One Year Income Capital Total
Emerging Markets Bond Fund 3/10/2016 12.54% 5.33% 8.14% 13.47%

 

See Financial Highlights for dividend and capital gains information.

11


 

Emerging Markets Bond Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

Face Market
Maturity Amount Value
  Coupon Date ($000) ($000)
Argentina (7.1%)        
Sovereign Bonds (7.1%)        
Argentine Republic 6.875% 4/22/21 200 214
Argentine Republic 5.625% 1/26/22 450 460
Argentine Republic 8.280% 12/31/33 126 135
Total Argentina (Cost $799)       809
Armenia (1.9%)        
Sovereign Bond (1.9%)        
Republic of Armenia 7.150% 3/26/25 200 215
Total Armenia (Cost $217)       215
Brazil (4.3%)        
Sovereign Bonds (4.3%)        
Federative Republic of Brazil 6.000% 4/7/26 260 282
Petrobras Global Finance BV 7.375% 1/17/27 200 213
Total Brazil (Cost $479)       495
China (3.2%)        
Sovereign Bonds (3.2%)        
Nexen Energy ULC 6.400% 5/15/37 100 124
Sinopec Group Overseas Development 2013 Ltd. 4.375% 10/17/23 225 238
Total China (Cost $352)       362
Costa Rica (3.2%)        
Sovereign Bonds (3.2%)        
Republic of Costa Rica 4.250% 1/26/23 200 193
Republic of Costa Rica 5.625% 4/30/43 200 175
Total Costa Rica (Cost $348)       368
Cote d’Ivoire (1.6%)        
Sovereign Bond (1.6%)        
1 Republic of Cote d’Ivoire 5.750% 12/31/32 196 182
Total Cote d’Ivoire (Cost $176)       182
Croatia (1.4%)        
Sovereign Bond (1.4%)        
Republic of Croatia 6.750% 11/5/19 150 163
Total Croatia (Cost $160)       163

 

12


 

Emerging Markets Bond Fund

Face Market
Maturity Amount Value
  Coupon Date ($000) ($000)
Dominican Republic (2.6%)        
Sovereign Bonds (2.6%)        
1 Dominican Republic 7.500% 5/6/21 125 138
1 Dominican Republic 5.875% 4/18/24 150 158
Total Dominican Republic (Cost $292)       296
Ecuador (2.3%)        
Sovereign Bond (2.3%)        
Republic of Ecuador 7.950% 6/20/24 280 264
Total Ecuador (Cost $265)       264
Egypt (1.9%)        
Sovereign Bond (1.9%)        
Arab Republic of Egypt 8.500% 1/31/47 200 215
Total Egypt (Cost $200)       215
El Salvador (2.7%)        
Sovereign Bond (2.7%)        
Republic of El Salvador 8.625% 2/28/29 300 310
Total El Salvador (Cost $300)       310
Honduras (1.3%)        
Sovereign Bond (1.3%)        
Republic of Honduras 6.250% 1/19/27 150 152
Total Honduras (Cost $150)       152
Hungary (5.5%)        
Sovereign Bonds (5.5%)        
Republic of Hungary 6.375% 3/29/21 150 169
Republic of Hungary 5.375% 2/21/23 260 286
Republic of Hungary 5.750% 11/22/23 150 170
Total Hungary (Cost $613)       625
Indonesia (6.3%)        
Sovereign Bonds (6.3%)        
Republic of Indonesia 4.875% 5/5/21 300 321
2 Republic of Indonesia 8.375% 9/15/26 930,000 76
Republic of Indonesia 5.250% 1/17/42 300 322
Total Indonesia (Cost $704)       719
Kazakhstan (2.0%)        
Sovereign Bond (2.0%)        
Republic of Kazakhstan 3.875% 10/14/24 225 227
Total Kazakhstan (Cost $219)       227
Lebanon (0.9%)        
Sovereign Bond (0.9%)        
Republic of Lebanon 6.100% 10/4/22 100 102
Total Lebanon (Cost $99)       102
Lithuania (4.3%)        
Sovereign Bonds (4.3%)        
Republic of Lithuania 7.375% 2/11/20 100 114
3 Republic of Lithuania 7.375% 2/11/20 165 188
Republic of Lithuania 6.125% 3/9/21 170 192
Total Lithuania (Cost $494)       494

 

13


 

Emerging Markets Bond Fund

Face Market
Maturity Amount Value
  Coupon Date ($000) ($000)
Mexico (6.8%)        
Sovereign Bonds (6.8%)        
Petroleos Mexicanos 5.500% 1/21/21 230 244
United Mexican States 4.000% 10/2/23 84 87
4 United Mexican States 7.500% 6/3/27 4,700 258
United Mexican States 4.350% 1/15/47 200 184
Total Mexico (Cost $716)       773
Oman (1.8%)        
Sovereign Bond (1.8%)        
Sultanate of Oman 5.375% 3/8/27 200 209
Total Oman (Cost $199)       209
Panama (2.4%)        
Sovereign Bond (2.4%)        
Republic of Panama 9.375% 4/1/29 185 272
Total Panama (Cost $284)       272
Peru (3.6%)        
Sovereign Bonds (3.6%)        
Corp. Financiera de Desarrollo SA 4.750% 2/8/22 200 212
Republic of Peru 8.750% 11/21/33 50 76
Republic of Peru 5.625% 11/18/50 100 119
Total Peru (Cost $392)       407
Romania (2.0%)        
Sovereign Bond (2.0%)        
Republic of Romania 6.750% 2/7/22 200 232
Total Romania (Cost $228)       232
Russia (2.8%)        
Sovereign Bond (2.8%)        
Russian Federation 5.000% 4/29/20 300 320
Total Russia (Cost $314)       320
Serbia, Republic Of (3.7%)        
Sovereign Bonds (3.7%)        
Republic of Serbia 5.875% 12/3/18 200 210
Republic of Serbia 4.875% 2/25/20 200 207
Total Serbia, Republic Of (Cost $411)       417
South Africa (3.6%)        
Sovereign Bonds (3.6%)        
Republic of South Africa 4.665% 1/17/24 150 152
5 Republic of South Africa 6.250% 3/31/36 5,000 265
Total South Africa (Cost $396)       417
Sri Lanka (1.8%)        
Sovereign Bond (1.8%)        
Democratic Socialist Republic of Sri Lanka 6.125% 6/3/25 200 200
Total Sri Lanka (Cost $202)       200
Supranational (2.7%)        
Sovereign Bond (2.7%)        
3 Banque Ouest Africaine de Developpement 5.500% 5/6/21 300 314
Total Supranational (Cost $298)       314

 

14


 

Emerging Markets Bond Fund

Face Market
Maturity Amount Value
  Coupon Date ($000) ($000)
Tunisia (1.7%)        
Sovereign Bond (1.7%)        
Banque Centrale de Tunisie SA 5.750% 1/30/25 200 192
Total Tunisia (Cost $179)       192
Turkey (4.5%)        
Sovereign Bonds (4.5%)        
Republic of Turkey 5.625% 3/30/21 135 141
Republic of Turkey 4.875% 4/16/43 200 171
3 Turkiye Vakiflar Bankasi TAO 5.500% 10/27/21 200 198
Total Turkey (Cost $517)       510
Ukraine (4.6%)        
Sovereign Bonds (4.6%)        
1 Oschadbank Via SSB #1 plc 9.625% 3/20/25 200 195
Ukraine 7.750% 9/1/19 330 336
Total Ukraine (Cost $528)       531
Uruguay (0.8%)        
Sovereign Bond (0.8%)        
1 Oriental Republic of Uruguay 5.100% 6/18/50 100 96
Total Uruguay (Cost $102)       96
Venezuela (2.2%)        
Sovereign Bonds (2.2%)        
Bolivarian Republic of Venezuela 7.750% 10/13/19 50 28
Bolivarian Republic of Venezuela 7.650% 4/21/25 180 75
Bolivarian Republic of Venezuela 7.000% 3/31/38 100 40
Petroleos de Venezuela SA 5.375% 4/12/27 312 107
Total Venezuela (Cost $237)       250
 
Shares  
Temporary Cash Investments (1.8%)        
Money Market Fund (1.8%)        
6 Vanguard Market Liquidity Fund (Cost $210) 0 965% 2,113 211
 
Notional  
Expiration Amount  
  Counterparty Date (000)  
Options on Foreign Currency (0.0%)        
Put options on AUD, Strike Price:        
  USD 0.7478 (Cost $5) JPMC 4/28/17 AUD 700 1
 
Total Investments (99.3%) (Cost $11,085)       11,350
Other Assets and Liabilities (0.7%)        
Other Assets7       549
Liabilities       (474)
75
Net Assets (100%) 11,425

 

15


 

Emerging Markets Bond Fund

Amount
($000)
Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 11,138
Affiliated Vanguard Funds 211
Options Purchased 1
Total Investments in Securities 11,350
Investment in Vanguard 1
Receivables for Investment Securities Sold 306
Receivables for Accrued Income 179
Other Assets7 63
Total Assets 11,899
Liabilities  
Payables for Investment Securities Purchased 400
Payables to Vanguard 3
Other Liabilities 71
Total Liabilities 474
Net Assets 11,425

 

At March 31, 2017, net assets consisted of:

Amount
($000)
Paid-in Capital 11,055
Undistributed Net Investment Income 12
Accumulated Net Realized Gains 117
Unrealized Appreciation (Depreciation)  
Investment Securities 269
Futures Contracts 2
Options (4)
Swap Contracts (13)
Forward Currency Contracts (13)
Foreign Currencies
Net Assets 11,425
 
 
Net Assets  
Applicable to 1,102,980 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 11,425
Net Asset Value Per Share $10.36

 

• See Note A in Notes to Financial Statements.
1 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments and
prepayments or the possibility of the issue being called.
2 Face amount denominated in Indonesian rupiah.
3 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 March 31, 2017, the aggregate value of these securities was $700,000,
representing 6.1% of net assets.
4 Face amount denominated in Mexican peso.
5 Face amount denominated in South African rand.
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 Cash of $18,000 has been segregated as initial margin for open futures contracts.
See accompanying Notes, which are an integral part of the Financial Statements.

16


 

Emerging Markets Bond Fund

Statement of Operations  
 
Six Months Ended
March 31, 2017
($000)
Investment Income  
Income  
Interest1 303
Total Income 303
Expenses  
The Vanguard Group—Note B  
Management and Administrative 32
Marketing and Distribution
Custodian Fees 1
Total Expenses 33
Net Investment Income 270
Realized Net Gain (Loss)  
Investment Securities Sold1 169
Futures Contracts (42)
Options (9)
Swap Contracts 64
Foreign Currencies and Forward Currency Contracts (11)
Realized Net Gain (Loss) 171
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (324)
Futures Contracts (1)
Options (7)
Swap Contracts (40)
Foreign Currencies and Forward Currency Contracts 7
Change in Unrealized Appreciation (Depreciation) (365)
Net Increase (Decrease) in Net Assets Resulting from Operations 76

 

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $2,000 and $0, respectively.

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

17


 

Emerging Markets Bond Fund

Statement of Changes in Net Assets

March 10,
 Six Months Ended 20161 to
March 31, September 30,
2017 2016
($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 270 290
Realized Net Gain (Loss) 171 452
Change in Unrealized Appreciation (Depreciation) (365) 606
Net Increase (Decrease) in Net Assets Resulting from Operations 76 1,348
Distributions    
Net Investment Income (284) (269)
Realized Capital Gain2 (501)
Total Distributions (785) (269)
Capital Share Transactions    
Issued 2 10,000
Issued in Lieu of Cash Distributions 785 268
Redeemed
Net Increase (Decrease) from Capital Share Transactions 787 10,268
Total Increase (Decrease) 78 11,347
Net Assets    
Beginning of Period 11,347
End of Period3 11,425 11,347

 

1 Inception.
2 Includes fiscal 2017 and 2016 short-term gain distributions totaling $478,000 and $0, respectively. Short-term gain distributions are treated
as ordinary income dividends for tax purposes.
3 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $12,000 and $25,000.

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

18


 

Emerging Markets Bond Fund

Financial Highlights

 Six Months  March 10,
Ended 20161 to
March 31, Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016
Net Asset Value, Beginning of Period $11.07 $10.00
Investment Operations        
Net Investment Income .254 .286
Net Realized and Unrealized Gain (Loss) on Investments (.212) 1.050
Total from Investment Operations .042 1.336
Distributions        
Dividends from Net Investment Income (.268) (.266)
Distributions from Realized Capital Gains (.484)
Total Distributions ( 752) ( 266)
Net Asset Value, End of Period $10.36 $11.07
 
Total Return2 0.66% 13.51%
 
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $11 $11
Ratio of Total Expenses to Average Net Assets 0.60% 0.60%3
Ratio of Net Investment Income to Average Net Assets 4.88% 4.85%3
Portfolio Turnover Rate 228% 153%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Inception.
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 Annualized.

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

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Emerging Markets Bond Fund

Notes to Financial Statements

Vanguard Emerging Markets Bond 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. To minimize the currency risk associated with investment in bonds denominated in currencies other than the U.S. dollar, the fund attempts to hedge its currency exposures. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria. The fund has not issued any Admiral Shares through March 31, 2017.

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. Bonds and 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. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. 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.

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

3. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds 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

20


 

Emerging Markets Bond Fund

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.

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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 futures gains (losses).

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts represented 7% and 1% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

4. Forward Currency Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified 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. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The 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 forward currency contract gains (losses).

During the six months ended March 31, 2017, the fund’s average investment in forward currency contracts represented 15% of net assets, based on the average of notional amounts at each quarter-end during the period.

21


 

Emerging Markets Bond Fund

5. Swap Contracts: The fund invests in credit default swaps to adjust the overall credit risk of the fund or to actively overweight or underweight credit risk to a specific issuer or group of issuers. The fund may sell credit protection through credit default swaps to simulate investments in long positions that are either unavailable or considered to be less attractively priced in the bond market. The fund may purchase credit protection through credit default swaps to reduce credit exposure to a given issuer or issuers. Under the terms of the swaps, an up-front payment may be exchanged between the seller and buyer. In addition, the seller of the credit protection receives a periodic payment of premium from the buyer that is a fixed percentage applied to a notional amount. If, for example, the reference entity is subject to a credit event (such as bankruptcy, failure to pay, or obligation acceleration) during the term of the swap, the seller agrees to either physically settle or cash settle the swap contract. If the swap is physically settled, the seller agrees to pay the buyer an amount equal to the notional amount and take delivery of a debt instrument of the reference issuer with a par amount equal to such notional amount. If the swap is cash settled, the seller agrees to pay the buyer the difference between the notional amount and the final price for the relevant debt instrument, as determined either in a market auction or pursuant to a pre-agreed-upon valuation procedure.

The fund enters into interest rate swap transactions to adjust the fund’s sensitivity to changes in interest rates and maintain the ability to generate income at prevailing market rates. Under the terms of the swaps, one party pays the other an amount that is a fixed percentage rate applied to a notional amount. In return, the counterparty agrees to pay a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount.

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 the seller of credit protection is required to take delivery (or, in a cash settled swap, pay the settlement amount determined) upon occurrence of a credit event, periodic payments are made, or the swap terminates, at which time realized gain (loss) is recorded. The net premium to be received or paid by the fund under swap contracts is accrued daily and recorded as realized gain (loss) over the life of the contract.

The primary risk associated with selling credit protection is that, upon the occurrence of a defined credit event, the market value of the debt instrument received by the fund (or, in a cash settled swap, the debt instruments used to determine the settlement payment by the fund) will be significantly less than the amount paid by the fund and, in a physically settled swap, the fund may receive an illiquid debt instrument. 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

22


 

Emerging Markets Bond Fund

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 Statement of Net Assets. 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.

During the six months ended March 31, 2017, the fund’s average amounts of investments in credit protection sold and credit protection purchased represented 12% and 2% of net assets, respectively, based on the average of notional amounts at each quarter-end during the period. The average amount of interest rate swaps represented 1% of net assets, based on the average of notional amounts at each quarter-end during the period.

6. Options: The fund invests in options on foreign currency which are transacted over-the-counter (OTC) and not on an exchange. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options generally are established through negotiation with the other party to the option contract. Although this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options. Credit risk involves the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund mitigates its counterparty risk by entering into options with a diverse group of prequalified counterparties and monitoring their financial strength. The primary risk associated with purchasing options on foreign currency is that the value of the underlying foreign currencies may move in such a way that the option is out-of-the-money (the exercise price of the option exceeds the value of the underlying investment), the position is worthless at expiration, and the fund loses the premium paid. The primary risk associated with selling options on foreign currency is that the value of the underlying foreign currencies may move in such a way that the option is in-the-money (the exercise price of the option exceeds the value of the underlying investment), the counterparty exercises the option, and the fund loses an amount equal to the market value of the option written less the premium received. Options on foreign currency are valued daily based on market quotations received from independent pricing services or recognized dealers. The premium paid for a purchased option is recorded in the Statement of Assets and Liabilities as an asset that is subsequently adjusted daily to the current market value of the option purchased. The premium received for a written option is recorded in the Statement of Assets and Liabilities as an asset with an equal liability that is subsequently adjusted daily to the current market value of the option written. Fluctuations in the value of the options are recorded as unrealized appreciation (depreciation) until expired, closed, or exercised, at which time realized gains (losses) are recognized.

During the six months ended March 31, 2017, the fund’s average value of investments in options purchased and options written each represented less than 1% net assets based on the average market values at each quarter-end during the period.

7. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for its open federal income tax year ended September 30, 2016, and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

23


 

Emerging Markets Bond Fund

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

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $1,000, representing 0.01% of the fund’s net assets and 0.00% of Vanguard’s capitalization. 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. 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).

24


 

Emerging Markets Bond Fund

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Sovereign Bonds 11,138
Temporary Cash Investments 211
Options Purchased 1
Futures Contracts—Assets1 2
Futures Contracts—Liabilities1 (1)
Forward Currency Contracts—Assets 12
Forward Currency Contracts—Liabilities (25)
Swap Contracts—Assets 3
Swap Contracts—Liabilities (16)
Total 212 11,113
1 Represents variation margin on the last day of the reporting period.      

 

D. At March 31, 2017, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:

Interest Rate Currency Credit  
Statement of Assets Contracts Contracts Contracts Total
and Liabilities Caption ($000) ($000) ($000) ($000)
Options Purchased 1 1
Other Assets 2 12 3 17
Other Liabilities (16) (25) (1) (42)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended March 31, 2017, were:

Interest Rate Currency Credit  
Contracts Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000) ($000)
Futures Contracts (42) (42)
Options (9) (9)
Swap Contracts 3 61 64
Forward Currency Contracts (52) (52)
Realized Net Gain (Loss) on Derivatives (39) (61) 61 (39)
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts (1) (1)
Options (7) (7)
Swap Contracts (11) (29) (40)
Forward Currency Contracts 7 7
Change in Unrealized Appreciation        
(Depreciation) on Derivatives (12) (29) (41)

 

25


 

Emerging Markets Bond Fund

At March 31, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

      ($000)
Aggregate
Number of Settlement Unrealized
Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
10-Year U.S. Treasury Note June 2017 6 747 3
Euro-Bund June 2017 (2) (344) (1)
Ultra 10-Year U.S. Treasury Note June 2017 2 268 (1)
30-Year U.S. Treasury Bond June 2017 1 151 1
2

 

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

At March 31, 2017, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts, except for Indonesian rupiah, is treated as ordinary income for tax purposes.

Unrealized
Contract Appreciation
Settlement   Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
JPMorgan Chase Bank N.A. 5/2/17 AUD 185 USD 142 (1)
BNP Paribas 4/13/17 MXN 1,148 USD 60 1
JPMorgan Chase Bank N.A. 4/13/17 EUR 70 PLN 303 (2)
Citibank, N.A. 4/13/17 USD 392 ZAR 5,153 9
Goldman Sachs AG 4/12/17 USD 219 MXN 4,299 (10)
JPMorgan Chase Bank N.A. 4/13/17 USD 175 RUB 10,167 (5)
Barclays Capital 5/2/17 USD 115 AUD 150
JPMorgan Chase Bank N.A. 4/13/17 USD 110 KRW 127,292 (4)
JPMorgan Chase Bank N.A. 4/13/17 USD 70 IDR 939,050
BNP Paribas 4/13/17 USD 60 MXN 1,181 (3)
Morgan Stanley Capital Services LLC 4/13/17 USD 30 ZAR 380 2
          (13)
AUD—Australian dollar.            
EUR—euro.            
IDR—Indonesian rupiah.            
KRW—South Korean won.            
MXN—Mexican peso.            
PLN—Polish new zloty.            
RUB—Russian ruble.            
USD—U.S. dollar.            
ZAR—South African rand.            

 

26


 

Emerging Markets Bond Fund

At March 31, 2017, the fund had the following open swap contracts:

Over-the-Counter Credit Default Swaps          
Remaining    
Up-Front Periodic  
Premium Premium Unrealized
Notional Received Received Appreciation
Termination Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Credit Protection Sold/Moody’s Rating          
Federation of Malaysia/A3 6/20/22 GSI 75 1.000
Federative Republic of Brazil/Ba2 12/20/21 BNPSW 67 5 1.000 2
Republic of Colombia/Baa2 6/20/22 GSI 110 2 1.000
Russian Federation/Ba1 6/20/22 JPMC 350 12 1.000 1
602 3
Credit Protection Purchased            
Federative Republic of Brazil 12/20/21 BARC 67 (4) (1.000) (1)
Federative Republic of Brazil 6/20/22 BOANA 93 (6) (1.000)
160 (1)
2

The notional amount represents the maximum potential amount the fund could be required to pay as a seller of credit protection if the
reference entity was subject to a credit event.
BARC—Barclays Bank plc.
BNPSW—BNP Paribas.
BOANA—Bank of America, N.A.
GSI—Goldman Sachs International.
JPMC—JP Morgan Chase Bank.

 

 

Over-the-Counter Interest Rate Swaps        
Fixed Floating  
Interest Rate Interest Rate Unrealized
Notional Received Received Appreciation
Amount (Paid) (Paid) (Depreciation)
Termination Date Counterparty (000) (%) (%) ($000)
8/6/2026 DBAG MXN 3,000 6.075 (6.669)1 (15)

DBAG—Deutsche Bank AG.
MXN—Mexican peso.
1 Based on 28-day Mexican Interbank Rate (TIIE) as of the most recent reset date.

 

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

27


 

Emerging Markets Bond Fund

During the six months ended March 31, 2017, the fund realized net foreign currency losses of $10,000 (including gains and losses on forward currency contracts and the foreign currency component on sales of foreign currency denominated bonds), which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to undistributed net investment income.

Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes; the effect on the fund’s income dividends to shareholders is offset by a change in principal return. Realized gains of $11,000 on swap contracts have been reclassified from accumulated net realized gains to undistributed net investment income.

At March 31, 2017, the cost of investment securities for tax purposes was $11,080,000. Net unrealized appreciation of investment securities for tax purposes was $269,000, consisting of unrealized gains of $311,000 on securities that had risen in value since their purchase and $42,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2017, the fund purchased $11,907,000 of investment securities and sold $11,937,000 of investment securities, other than U.S. government securities and temporary cash investments.

G. Capital shares issued and redeemed were:        
Six Months Ended March 10, 20161 to
March 31, 2017 September 30, 2016
Shares Shares
(000) (000)
Issued 2 1,000
Issued in Lieu of Cash Distributions 76 25
Redeemed
Net Increase (Decrease) 78 1,025
1 Inception.        

 

At March 31, 2017, a subsidiary of Vanguard was the record or beneficial owner of 100% of the fund’s net assets. If the shareholder were to redeem its investment in the fund, the redemption might result in an increase in the fund’s expense ratio, cause the fund to incur higher transaction costs, or lead to the realization of taxable capital gains.

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

28


 

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.

29


 

Period Ended March 31, 2017      
Beginning Ending Expenses
Account Value Account Value Paid During
Emerging Markets Government Bond Fund 9/30/2016 3/31/2017 Period
Based on Actual Portfolio Return $1,000.00 $1,006.64 $3.00
Based on Hypothetical 5% Yearly Return $1,000.00 $1,021.94 $3.02

 

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 0.60%. 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 (182/365).

30


 

Trustees Approve Advisory Arrangement

The board of trustees of Vanguard Emerging Markets Bond Fund has renewed the investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Fixed Income 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 monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the 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 its inception in 2016 and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Fixed Income 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 fund’s performance since its inception in 2016, including any periods of outperformance or underperformance compared with a relevant benchmark and peer group. The board concluded that the performance was such that the advisory arrangement should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

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

31


 

The board does not conduct a profitability analysis of Vanguard, because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.

The benefit of economies of scale

The board concluded that the fund’s at-cost 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.

32


 

Glossary

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

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts.

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

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

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

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

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The People Who Govern Your Fund

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

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

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

Interested Trustee1

F. William McNabb III

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

Independent Trustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
John James Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac  

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.


 

 

  P.O. Box 2600
  Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® > vanguard.com  
 
 
 
Fund Information > 800-662-7447  
 
Direct Investor Account Services > 800-662-2739  
 
Institutional Investor Services > 800-523-1036  
 
Text Telephone for People  
Who Are Deaf or Hard of Hearing > 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
  Q14312 052017

 


 

Semiannual Report | March 31, 2017

Vanguard Institutional Bond Funds

Vanguard Institutional Short-Term Bond Fund

Vanguard Institutional Intermediate-Term Bond Fund


 

A new format, unwavering commitment

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

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

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

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

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

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Institutional Short-Term Bond Fund. 6
Institutional Intermediate-Term Bond Fund. 36
About Your Fund’s Expenses. 75
Trustees Approve Advisory Arrangements. 77
Glossary. 79

 

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

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

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


 

Your Fund’s Performance at a Glance

• Vanguard Institutional Short-Term Bond Fund returned 0.21% and Vanguard Institutional Intermediate-Term Bond Fund returned –1.37% for the six months ended March 31, 2017. Both funds outpaced their benchmarks. The Short-Term Fund performed in line with the average return of its peers.

• Demand for U.S. taxable bonds fell as the outlook for faster growth and higher inflation fueled a rally in riskier assets that carried into 2017. This decline pushed up yields on longer-term bonds; the two rate hikes by the Federal Reserve—one in December, one in March—lifted short-term yields as well.

• Relative to its benchmark, the Short-Term Fund benefited from an underweight allocation to Treasuries and an overweight allocation to securitized products.

• In the Intermediate-Term Fund, being underweight Treasuries and overweight corporate bonds helped, as did selection within corporates.

• Both funds benefited from a small allocation to Treasury Inflation-Protected Securities.

Total Returns: Six Months Ended March 31, 2017        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Institutional Short-Term Bond Fund        
Institutional Plus Shares 1.66% 0.78% -0.57% 0.21%
Bloomberg Barclays U.S. 1–3 Year        
Government/Credit ex Baa Index       -0.08
1–5 Year Investment-Grade Debt Funds Average       0.21
1–5 Year Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
Vanguard Institutional Intermediate-Term Bond Fund        
Institutional Plus Shares 1.94% 0.94% -2.31% -1.37%
Bloomberg Barclays U.S. Intermediate Aggregate        
ex Baa Index       -1.51

 

Institutional Plus Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria.

1


 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

For many people, including me, falling interest rates have been the general trend in the bond market throughout our working lives. At the beginning of 1983, the year I graduated from business school, the yield of the benchmark 10-year U.S. Treasury note stood at more than 10%. It was less than 2.5% at the beginning of 2017.

Because bond prices move in the opposite direction from rates, my career happens to have overlapped with the greatest bull market for bonds in history.

It appears that may be changing. And, of course, there’s no shortage of advice about how to prepare for the shift.

Rates may be headed higher (really)

This bond bull market has reminded us time and again just how hard it is to predict when rates will rise or fall and by how much. If you follow bonds, you might recall the markets bracing for a sustained rate increase back in 2010 as the economy pulled out of recession, or again in 2013 when the Federal Reserve said it would start tapering its bond purchases, or again at the end of 2015 when the Fed raised short-term rates for the first time in almost a decade. And yet, prognostications notwithstanding, interest rates remained anchored near historical lows.

That said, rates seem to be on an upswing. With economic activity picking up, wages starting to move higher, and inflation coming

2


 

off recent lows, the Fed has nudged short-term rates higher twice in recent months and has signaled that further gradual increases are likely through 2018. The perceived pro-growth stance of the new U.S. administration also has played a role in framing a case for higher rates.

Short-term pain, longer-term gain

Bond investors are understandably concerned. If interest rates shoot up, the market value of bonds will drop sharply, with prices falling to bring yields in line with the new, prevailing higher rates. That’s the potential short-term pain. But long-term investors should actually want rates to go up. If you like bonds that pay 2%, you should love bonds that pay 4%, right?

There’s a simple—though imperfect—rule of thumb that helps make clear this point. If the time frame of your investing goal exceeds the time frame of your bond portfolio (a medium-term goal matched with short-term bonds, or a long-term goal paired with bonds not quite as long-term), rising rates will work out in your favor, maybe decidedly so.

Think of it this way: If you have a big cash need in the near future—say, a tuition bill coming due in a few years—and you own bonds that are long-term in nature, this time-frame mismatch could spell trouble if rates rise sharply; you’d be selling bonds that would be worth less. But if you’re saving to retire ten or 15 years down the road and rates are steadily rising, over time you’ll be earning higher and higher yields.

Market Barometer      
      Total Returns
    Periods Ended March 31, 2017
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 10.09% 17.43% 13.26%
Russell 2000 Index (Small-caps) 11.52 26.22 12.35
Russell 3000 Index (Broad U.S. market) 10.19 18.07 13.18
FTSE All-World ex US Index (International) 6.74 13.50 4.82
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -2.18% 0.44% 2.34%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -2.10 0.15 3.24
Citigroup Three-Month U.S. Treasury Bill Index 0.21 0.34 0.10
 
CPI      
Consumer Price Index 0.98% 2.38% 1.23%

 

3


 

Josh Barrickman, our head of fixed income indexing for the Americas, calls it “the virtuous cycle of compounding interest at a higher rate.”

The bottom line is, you can end up better off than if rates haven’t risen because you’re earning more income, which over time more than washes away any price hit.

Beware of short-sighted, short-term moves

This logic can be difficult to grasp, tempting anxious bond investors to make drastic shifts to lessen the immediate pain of rising rates. Unfortunately, such moves can backfire.

Taking shelter in short-term bonds, for example, might seem like a good idea. Their prices generally hold up better than those of longer-term bonds in a rising-rate environment. But they also offer less income.

For example, when the market started worrying about rising rates in 2010, moving into short-term securities—and staying there—would have proved costly. Through 2016, those securities returned roughly half of what the broad U.S. bond market did.

Favoring high-yield bonds is another tack some investors take, expecting higher income to help cushion price declines.

What has driven long-term returns for Vanguard bond funds?


4


 

High-yield securities, however, typically perform best when stocks are rising, making them unlikely to zig when stocks zag.

We saw clear evidence of the correlation between stocks and high-yield bonds in the frantic markets following the United Kingdom’s vote to leave the European Union last year. From June 23 to June 27, both U.S. stocks and U.S. high-yield bonds lost ground. The broad U.S. bond market, meanwhile, climbed 1.2% as investors sought a safe haven.

Your portfolio is more than the sum of its parts

Different assets have different roles to play in a balanced and diversified portfolio. Stocks are valuable because they can produce higher returns over time, while bonds can provide a crucial counterweight to the volatility of stocks.

Perhaps the most important thing to keep in mind about bonds is that although their prices can fluctuate, they remain “fixed income” securities. Barring default, you can be certain of getting income until the bonds mature. It’s that income that drives returns for patient bond investors who resist the urge to jump in and out of the market, as you can see in the accompanying box.

A lot has changed since I first started following the bond market, but the important role that bonds can play in a balanced and diversified portfolio hasn’t.

As always, thank you for investing with Vanguard.


F. William McNabb III

Chairman and Chief Executive Officer

April 14, 2017

5


 

Institutional Short-Term Bond Fund

Fund Profile      
As of March 31, 2017      
 
Financial Attributes      
    Bloomberg Bloomberg
    Barclays Barclays
    U.S. 1-3 U.S.
      Year Aggregate
    Gov/Credit Float
    ex Baa Adjusted
  Fund Index Index
Number of Bonds 650 1,168 10,170
Yield to Maturity        
(before expenses) 1.8% 1.4% 2.6%
Average Coupon 1.9% 1.8% 3.0%
Average Duration 1.8 years 1.9 years 6.1 years
Average Effective        
Maturity 2.2 years 2.0 years 8.3 years
Ticker Symbol VISTX  
Expense Ratio1 0.02%  
30-Day SEC Yield 1.66%  
Short-Term        
Reserves 2.1%  
 

 

 

Volatility Measures

     
  Bloomberg    
  Barclays    
  U.S. 1-3 Year   Bloomberg
  Gov/Credit Barclays U.S.
    ex Baa Aggregate Float
    Index Adjusted Index
R-Squared   0.93   0.71
Beta   0.94   0.20

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

 

Sector Diversification (% of portfolio)  
Asset-Backed 30.0%
Commercial Mortgage-Backed 1.3
Finance 21.3
Foreign 12.4
Industrial 7.8
Treasury/Agency 25.3
Utilities 1.8
Other 0.1

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

 

Distribution by Credit Quality (% of portfolio)

U.S. Government 25.3%
Aaa 35.9
Aa 17.5
A 20.6
Not Rated 0.7

Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

 

 

 

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 18.0%
1 - 3 Years 64.1
3 - 5 Years 14.3
5 - 7 Years 1.8
7 - 10 Years 1.8

 

1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the annualized expense ratio was 0.02%.

6


 

Institutional Short-Term Bond Fund

Performance Summary

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

Fiscal-Year Total Returns (%): September 30, 2006, Through March 31, 2017

        Bloomberg
        Barclays
        U.S. 1–3 Year
        Gov/Credit
    Institutional Plus Shares ex Baa Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2007 0.00% 5.57% 5.57% 5.67%
2008 0.00 2.86 2.86 4.57
2009 0.00 8.70 8.70 5.70
2010 0.00 3.76 3.76 3.03
2011 0.00 1.31 1.31 1.23
2012 0.00 2.21 2.21 1.16
2013 0.00 0.67 0.67 0.50
2014 0.00 1.04 1.04 0.65
2015 0.35 0.95 1.30 1.24
2016 1.37 0.38 1.75 1.11
2017 0.78 -0.57 0.21 -0.08
Note: For 2017, performance data reflect the six months ended March 31, 2017.    

 

The fund is the successor to VFTC Short-Term Bond Trust (the predecessor trust), a collective trust managed by Vanguard Fiduciary Trust Company, an affiliate of The Vanguard Group, Inc. The predecessor trust transferred its assets to the fund in connection with the fund’s commencement of operations on or about June 19, 2015. The performance of the fund’s Institutional Plus Shares includes the performance of the predecessor trust prior to the commencement of the fund’s operations. The performance of the predecessor trust has not been adjusted to reflect the expenses of the fund’s Institutional Plus Shares. If the performance of the predecessor trust was adjusted to reflect the expenses of the fund’s Institutional Plus Shares, the predecessor trust’s performance would have been lower. The fund is managed with the same investment objective, strategies, policies, and risks as the predecessor trust. The predecessor trust was not an investment company and, therefore, was not subject to certain investment restrictions imposed on investment companies by the Investment Company Act of 1940. If the predecessor trust had been an investment company, its performance may have been different.

Average Annual Total Returns: Periods Ended March 31, 2017      
 
            Ten Years
  Inception Date One Year Five Years Income Capital Total
Institutional Plus Shares 12/7/2004 1.20% 1.24% 0.25% 2.39% 2.64%

 

See Financial Highlights for dividend and capital gains information.

7


 

Institutional Short-Term Bond Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
U.S. Government and Agency Obligations (25.0%)        
U.S. Government Securities (6.4%)        
  United States Treasury Inflation Indexed Bonds 1.625% 1/15/18 7,000 8,280
  United States Treasury Inflation Indexed Bonds 0.125% 4/15/18 40,000 42,362
  United States Treasury Inflation Indexed Bonds 0.375% 1/15/27 105,470 105,598
  United States Treasury Note/Bond 1.125% 2/28/19 50 50
  United States Treasury Note/Bond 1.625% 6/30/19 112,000 112,735
  United States Treasury Note/Bond 1.375% 12/15/19 51,000 50,896
  United States Treasury Note/Bond 1.125% 4/30/20 200 197
  United States Treasury Note/Bond 1.375% 4/30/20 30 30
  United States Treasury Note/Bond 2.125% 8/31/20 48,000 48,750
  United States Treasury Note/Bond 2.000% 9/30/20 30,000 30,347
  United States Treasury Note/Bond 1.125% 2/28/21 15,400 15,025
1 United States Treasury Note/Bond 1.125% 6/30/21 16,100 15,635
  United States Treasury Note/Bond 1.125% 7/31/21 12,200 11,832
  United States Treasury Note/Bond 2.125% 8/15/21 41,200 41,683
2 United States Treasury Note/Bond 1.250% 10/31/21 17,600 17,105
          500,525
Agency Bonds and Notes (18.6%)        
3 AID-Jordan 2.578% 6/30/22 13,750 14,011
4 Federal Farm Credit Banks 1.110% 2/20/18 26,000 26,015
4 Federal Home Loan Banks 1.125% 4/25/18 24,000 23,998
4 Federal Home Loan Banks 0.875% 6/29/18 87,150 86,849
4 Federal Home Loan Banks 0.625% 8/7/18 5,720 5,676
4 Federal Home Loan Banks 0.875% 10/1/18 34,500 34,301
4 Federal Home Loan Banks 1.750% 12/14/18 3,000 3,022
4 Federal Home Loan Banks 1.250% 1/16/19 112,100 111,930
4 Federal Home Loan Banks 1.375% 3/18/19 78,150 78,163
4 Federal Home Loan Banks 5.375% 5/15/19 23,000 24,892
4 Federal Home Loan Banks 0.875% 8/5/19 110,200 108,708
4 Federal Home Loan Banks 1.000% 9/26/19 49,050 48,472
5 Federal Home Loan Mortgage Corp. 0.750% 4/9/18 60,000 59,781
5 Federal Home Loan Mortgage Corp. 0.850% 7/27/18 41,800 41,612
5 Federal Home Loan Mortgage Corp. 0.875% 10/12/18 200,130 198,951
5 Federal Home Loan Mortgage Corp. 1.125% 4/15/19 114,850 114,251
5 Federal Home Loan Mortgage Corp. 1.250% 10/2/19 25,900 25,745
5 Federal Home Loan Mortgage Corp. 1.500% 1/17/20 6,300 6,289
5 Federal Home Loan Mortgage Corp. 1.125% 8/12/21 13,300 12,843
5 Federal National Mortgage Assn. 1.125% 10/19/18 28,700 28,638

 

8


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
5 Federal National Mortgage Assn. 1.125% 12/14/18 57,050 56,877
5 Federal National Mortgage Assn. 1.375% 1/28/19 17,000 17,009
5 Federal National Mortgage Assn. 1.000% 2/26/19 65,225 64,791
5 Federal National Mortgage Assn. 0.875% 8/2/19 8,100 7,991
5 Federal National Mortgage Assn. 1.000% 8/28/19 15,600 15,425
5 Federal National Mortgage Assn. 1.000% 10/24/19 195,000 192,584
5 Federal National Mortgage Assn. 1.500% 2/28/20 13,000 12,965
5 Federal National Mortgage Assn. 1.500% 11/30/20 14,750 14,617
5 Federal National Mortgage Assn. 1.250% 8/17/21 1,600 1,553
5 Federal National Mortgage Assn. 1.875% 9/24/26 13,750 12,789
4 Financing Corp. 0.000% 11/2/18 3,090 3,025
          1,453,773
Conventional Mortgage-Backed Securities (0.0%)        
5,6 Freddie Mac Gold Pool 6.000% 4/1/28 11 12
Total U.S. Government and Agency Obligations (Cost $1,964,764)     1,954,310
Asset-Backed/Commercial Mortgage-Backed Securities (32.1%)      
6 Ally Auto Receivables Trust 2015-1 1.750% 5/15/20 6,230 6,231
6 Ally Auto Receivables Trust 2015-2 1.840% 6/15/20 10,990 10,997
6 Ally Auto Receivables Trust 2016-1 1.730% 11/16/20 19,500 19,508
6 Ally Master Owner Trust Series 2015-3 1.630% 5/15/20 16,385 16,388
6,7 American Express Credit Account Master        
  Trust 2013-1 1.332% 2/16/21 12,751 12,793
6,7 American Express Credit Account Master        
  Trust 2013-2 1.332% 5/17/21 12,663 12,713
6,7 American Express Credit Account Master        
  Trust 2014-1 1.282% 12/15/21 38,834 39,018
6,8 Americold 2010 LLC Trust Series 2010-ARTA 4.954% 1/14/29 2,055 2,221
6,8 Aventura Mall Trust 2013-AVM 3.743% 12/5/32 447 470
6,8 Avis Budget Rental Car Funding AESOP        
  LLC 2017-1A 3.070% 9/20/23 16,560 16,681
6,7 BA Credit Card Trust 2014-A1 1.292% 6/15/21 77,298 77,598
6 Banc of America Commercial Mortgage        
  Trust 2015-UBS7 3.705% 9/15/48 344 356
6,7,8 Bank of America Student Loan Trust 2010-1A 1.838% 2/25/43 4,315 4,287
8 Bank of Montreal 1.750% 6/15/21 15,060 14,671
  Bank of Nova Scotia 1.875% 4/26/21 17,070 16,751
8 Bank of Nova Scotia 1.875% 9/20/21 27,900 27,179
6,7,8 BMW Floorplan Master Owner Trust 2015-1A 1.412% 7/15/20 28,865 28,908
6,7 Brazos Higher Education Authority Inc.        
  Series 2005-3 1.353% 6/25/26 3,225 3,133
6,7 Brazos Higher Education Authority Inc.        
  Series 2011-1 1.852% 2/25/30 4,157 4,134
6 Cabela’s Credit Card Master Note Trust 2015-1A 2.260% 3/15/23 5,500 5,506
6,7 Cabela’s Credit Card Master Note Trust 2015-2 1.582% 7/17/23 12,475 12,584
6,7 Cabela’s Credit Card Master Note Trust 2016-1 1.762% 6/15/22 55,030 55,601
6 Capital One Multi-Asset Execution Trust 2015-A4 2.750% 5/15/25 17,420 17,709
6,7 Capital One Multi-Asset Execution Trust 2016-A2 1.542% 2/15/24 10,720 10,850
6,7,8 CARDS II Trust 2016-1A 1.612% 7/15/21 19,670 19,736
6 CarMax Auto Owner Trust 2014-4 1.810% 7/15/20 8,300 8,303
6 CarMax Auto Owner Trust 2015-2 1.800% 3/15/21 6,530 6,537
6 CarMax Auto Owner Trust 2015-3 1.980% 2/16/21 5,075 5,086
6 CarMax Auto Owner Trust 2016-1 1.880% 6/15/21 11,970 11,959
6 CarMax Auto Owner Trust 2016-4 1.400% 8/15/21 23,320 23,120
6 CarMax Auto Owner Trust 2016-4 1.600% 6/15/22 11,090 10,916

 

9


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 CD 2017-CD3 Commercial Mortgage Trust 3.631% 2/10/50 580 597
6 CenterPoint Energy Transition Bond Co. IV LLC        
  2012-1 2.161% 10/15/21 11,516 11,560
6,8 CFCRE Commercial Mortgage Trust 2011-C2 5.755% 12/15/47 1,609 1,815
6,7 Chase Issuance Trust 2013-A9 1.332% 11/16/20 46,901 47,090
6 Chase Issuance Trust 2014-A2 2.770% 3/15/23 2,012 2,050
6,7 Chase Issuance Trust 2016-A1 1.322% 5/17/21 2,575 2,587
6,8 Chrysler Capital Auto Receivables Trust 2015-BA 2.260% 10/15/20 11,170 11,213
6,8 Chrysler Capital Auto Receivables Trust 2016-AA 1.960% 1/18/22 21,280 21,317
6,8 Chrysler Capital Auto Receivables Trust 2016-BA 1.640% 7/15/21 10,570 10,535
6,8 Chrysler Capital Auto Receivables Trust 2016-BA 1.870% 2/15/22 5,870 5,778
6,7 Citibank Credit Card Issuance Trust 2013-A7 1.288% 9/10/20 73,946 74,209
6 Citibank Credit Card Issuance Trust 2014-A6 2.150% 7/15/21 9,005 9,079
6 Citigroup Commercial Mortgage Trust 2012-GC8 3.024% 9/10/45 291 296
6,8 Citigroup Commercial Mortgage Trust 2012-GC8 3.683% 9/10/45 349 365
6 Citigroup Commercial Mortgage Trust 2013-GC11 1.987% 4/10/46 3,883 3,895
6 Citigroup Commercial Mortgage Trust 2013-GC11 3.093% 4/10/46 571 580
6 Citigroup Commercial Mortgage Trust 2013-GC15 3.942% 9/10/46 177 185
6 Citigroup Commercial Mortgage Trust 2014-GC19 4.023% 3/10/47 2,106 2,232
6 Citigroup Commercial Mortgage Trust 2014-GC21 3.477% 5/10/47 66 69
6 Citigroup Commercial Mortgage Trust 2014-GC21 3.575% 5/10/47 1,047 1,079
6 Citigroup Commercial Mortgage Trust 2014-GC21 3.855% 5/10/47 1,617 1,693
6 Citigroup Commercial Mortgage Trust 2014-GC23 3.622% 7/10/47 576 596
6 Citigroup Commercial Mortgage Trust 2014-GC23 3.863% 7/10/47 205 211
6 Citigroup Commercial Mortgage Trust 2014-GC25 3.372% 10/10/47 441 449
6 Citigroup Commercial Mortgage Trust 2014-GC25 3.635% 10/10/47 2,081 2,142
6 Citigroup Commercial Mortgage Trust 2016-C1 3.209% 5/10/49 1,076 1,072
6 CNH Equipment Trust 2014-A 1.500% 5/15/20 15,196 15,188
6 CNH Equipment Trust 2016-B 1.970% 11/15/21 8,340 8,297
6 COBALT CMBS Commercial Mortgage Trust        
  2007-C2 5.484% 4/15/47 182 182
6 COMM 2012-CCRE2 Mortgage Trust 3.147% 8/15/45 221 227
6 COMM 2012-CCRE2 Mortgage Trust 3.791% 8/15/45 700 731
6 COMM 2012-CCRE3 Mortgage Trust 2.822% 10/15/45 288 291
6 COMM 2012-CCRE4 Mortgage Trust 2.853% 10/15/45 241 244
6 COMM 2012-CCRE5 Mortgage Trust 2.771% 12/10/45 177 178
6 COMM 2013-CCRE11 Mortgage Trust 3.983% 8/10/50 684 726
6 COMM 2013-CCRE11 Mortgage Trust 4.258% 8/10/50 598 644
6 COMM 2013-CCRE12 Mortgage Trust 3.623% 10/10/46 336 352
6 COMM 2013-CCRE12 Mortgage Trust 4.046% 10/10/46 877 935
6 COMM 2013-CCRE13 Mortgage Trust 4.194% 11/10/23 461 496
6 COMM 2013-CCRE9 Mortgage Trust 4.232% 7/10/45 1,572 1,702
6,8 COMM 2013-CCRE9 Mortgage Trust 4.256% 7/10/45 2,461 2,618
6,8 COMM 2013-LC13 Mortgage Trust 3.774% 8/10/46 258 272
6 COMM 2013-LC13 Mortgage Trust 4.205% 8/10/46 130 140
6 COMM 2013-LC6 Mortgage Trust 2.941% 1/10/46 745 754
6,8 COMM 2013-SFS Mortgage Trust 2.987% 4/12/35 807 812
6 COMM 2014-CCRE14 Mortgage Trust 3.743% 2/10/47 174 183
6 COMM 2014-CCRE14 Mortgage Trust 4.236% 2/10/47 305 327
6 COMM 2014-CCRE17 Mortgage Trust 3.977% 5/10/47 766 808
6 COMM 2014-CCRE17 Mortgage Trust 4.174% 5/10/47 272 287
6 COMM 2014-CCRE18 Mortgage Trust 3.452% 7/15/47 100 104
6 COMM 2014-CCRE18 Mortgage Trust 3.550% 7/15/47 20 21
6 COMM 2014-CCRE18 Mortgage Trust 3.828% 7/15/47 1,964 2,054
6 COMM 2014-CCRE20 Mortgage Trust 3.590% 11/10/47 1,596 1,643

 

10


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 COMM 2014-CCRE21 Mortgage Trust 3.528% 12/10/47 978 1,002
6 COMM 2014-LC17 Mortgage Trust 3.917% 10/10/47 1,232 1,294
6 COMM 2015-CCRE22 Mortgage Trust 3.309% 3/10/48 440 442
6 COMM 2015-CCRE24 Mortgage Trust 3.445% 8/10/48 150 156
6 COMM 2015-CCRE25 Mortgage Trust 3.759% 8/10/48 341 354
6 COMM 2015-LC19 Mortgage Trust 3.040% 2/10/48 30 31
6 COMM 2015-LC19 Mortgage Trust 3.183% 2/10/48 30 30
8 Commonwealth Bank of Australia 2.000% 6/18/19 21,387 21,389
6 CSAIL 2015-C1 Commercial Mortgage Trust 3.505% 4/15/50 20 20
6 CSAIL 2015-C4 Commercial Mortgage Trust 3.808% 11/15/48 422 439
6 CSAIL 2016-C7 Commercial Mortgage Trust 3.502% 11/15/49 970 984
6 Discover Card Execution Note Trust 2012-A6 1.670% 1/18/22 28,110 28,059
6,7 Discover Card Execution Note Trust 2016-A2 1.452% 9/15/21 14,310 14,414
8 DNB Boligkreditt AS 1.450% 3/21/18 4,035 4,030
6,8 Enterprise Fleet Financing LLC Series 2015-2 2.090% 2/22/21 12,450 12,456
6,8 Enterprise Fleet Financing LLC Series 2016-2 2.040% 2/22/22 4,580 4,544
6,7,8 Evergreen Credit Card Trust Series 2016-1 1.632% 4/15/20 17,410 17,483
6,7,8 Evergreen Credit Card Trust Series 2016-3 1.412% 11/16/20 10,640 10,679
6,7 First National Master Note Trust 2015-1 1.682% 9/15/20 10,640 10,661
6,8 Ford Credit Auto Owner Trust 2014-REV1 2.260% 11/15/25 14,450 14,563
6,8 Ford Credit Auto Owner Trust 2014-REV2 2.310% 4/15/26 1,120 1,129
6 Ford Credit Auto Owner Trust 2015-C 1.740% 2/15/21 16,855 16,838
6,8 Ford Credit Auto Owner Trust 2015-REV2 2.440% 1/15/27 37,000 37,336
6 Ford Credit Auto Owner Trust 2016-A 1.600% 6/15/21 12,130 12,050
6 Ford Credit Auto Owner Trust 2016-B 1.520% 8/15/21 11,260 11,142
6,8 Ford Credit Auto Owner Trust 2016-REV1 2.310% 8/15/27 35,255 35,302
6,8 Ford Credit Auto Owner Trust 2016-REV2 2.030% 12/15/27 25,450 25,101
6,8 Ford Credit Auto Owner Trust 2017-1 2.620% 8/15/28 27,900 28,072
6,7 Ford Credit Floorplan Master Owner Trust A Series        
  2014-2 1.412% 2/15/21 42,840 43,046
6,7 Ford Credit Floorplan Master Owner Trust A Series        
  2016-3 1.532% 7/15/21 24,830 25,004
6,7 Ford Credit Floorplan Master Owner Trust A Series        
  2016-4 1.442% 7/15/20 19,200 19,253
6,7 GE Dealer Floorplan Master Note Trust Series        
  2015-2 1.628% 1/20/22 18,460 18,543
6 GM Financial Automobile Leasing Trust 2015-1 1.730% 6/20/19 3,120 3,128
6 GM Financial Automobile Leasing Trust 2015-3 1.690% 3/20/19 14,430 14,453
6 GM Financial Automobile Leasing Trust 2017-1 2.260% 8/20/20 9,200 9,215
6,7,8 GMF Floorplan Owner Revolving Trust 2016-1 1.762% 5/17/21 28,850 29,104
6,7,8 Golden Credit Card Trust 2014-2A 1.362% 3/15/21 25,433 25,425
6,7,8 Golden Credit Card Trust 2016-1A 1.512% 1/15/20 93,590 93,783
6,8 Golden Credit Card Trust 2016-5A 1.600% 9/15/21 72,300 71,609
6,7,8 Gosforth Funding 2016-1A plc 1.739% 2/15/58 32,176 32,260
6,8 GreatAmerica Leasing Receivables Funding LLC        
  Series 2014-1 1.470% 8/15/20 3,675 3,674
6,8 GS Mortgage Securities Trust 2012-GC6 4.948% 1/10/45 117 129
6 GS Mortgage Securities Trust 2013-GC13 4.033% 7/10/46 805 868
6 GS Mortgage Securities Trust 2013-GCJ12 3.135% 6/10/46 701 712
6 GS Mortgage Securities Trust 2014-GC20 3.998% 4/10/47 2,460 2,603
6 GS Mortgage Securities Trust 2014-GC26 3.629% 11/10/47 150 155
6,8 Hertz Vehicle Financing II LP 2015-3A 2.670% 9/25/21 21,050 20,869
6,8 Hertz Vehicle Financing LLC 2016-2A 2.950% 3/25/22 21,830 21,764
6,8 Hertz Vehicle Financing LLC 2016-3A 2.270% 7/25/20 13,460 13,361
6,8 Hertz Vehicle Financing LLC 2016-4A 2.650% 7/25/22 14,450 13,972

 

11


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 Honda Auto Receivables 2015-4 Owner Trust 1.440% 1/21/22 23,540 23,356
6 Hyundai Auto Receivables Trust 2015-C 1.780% 11/15/21 11,030 11,045
6,8 Hyundai Floorplan Master Owner Trust Series        
  2016-1A 1.810% 3/15/21 8,360 8,351
7 Illinois Student Assistance Commission Series        
  2010-1 2.088% 4/25/22 1,668 1,667
6,8 Irvine Core Office Trust 2013-IRV 3.174% 5/15/48 1,333 1,349
6 John Deere Owner Trust 2015-B 1.780% 6/15/22 1,845 1,847
6 John Deere Owner Trust 2016-B 1.490% 5/15/23 1,935 1,918
6 John Deere Owner Trust 2017-A 2.110% 12/15/23 10,750 10,776
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2010-C1 4.608% 6/15/43 89 93
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2010-C2 3.616% 11/15/43 193 195
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2010-C2 4.070% 11/15/43 239 252
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-C3 4.388% 2/15/46 1,861 1,898
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-C3 4.717% 2/15/46 400 432
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-C5 5.409% 8/15/46 673 741
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-RR1 4.717% 3/16/46 6,791 7,262
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-C8 2.829% 10/15/45 251 254
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-C8 3.424% 10/15/45 1,283 1,302
6,8 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-HSBC 3.093% 7/5/32 849 869
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C13 3.994% 1/15/46 1,353 1,438
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 3.674% 12/15/46 234 245
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 3.881% 12/15/46 184 194
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 4.166% 12/15/46 900 964
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-LC11 1.855% 4/15/46 726 726
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-LC11 2.960% 4/15/46 607 612
6 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2016-JP4 3.648% 12/15/49 60 62
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 3.664% 7/15/45 1,223 1,279
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 4.026% 7/15/45 1,425 1,492
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C14 3.761% 8/15/46 170 179
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C14 4.133% 8/15/46 252 270
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C15 3.659% 11/15/45 194 204
6 JPMBB Commercial Mortgage Securities Trust        
  2013-C17 4.199% 1/15/47 834 894

 

12


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C18 4.079% 2/15/47 1,085 1,151
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C18 4.439% 2/15/47 544 580
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C19 3.997% 4/15/47 100 106
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C21 3.428% 8/15/47 60 62
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C21 3.493% 8/15/47 190 196
6 JPMBB Commercial Mortgage Securities Trust        
  2014-C24 3.639% 11/15/47 853 880
6 JPMBB Commercial Mortgage Securities Trust        
  2015-C33 3.562% 12/15/48 150 156
6 JPMCC Commercial Mortgage Securities Trust        
  2017-JP5 3.723% 3/15/50 470 486
6 LB-UBS Commercial Mortgage Trust 2008-C1 6.126% 4/15/41 2,739 2,816
6,7,8 Master Credit Card Trust II Series 2016-1A 1.726% 9/23/19 43,020 43,205
6,7,8 Mercedes-Benz Master Owner Trust 2016-B 1.612% 5/17/21 9,730 9,789
6,8 MMAF Equipment Finance LLC 2011-AA 3.040% 8/15/28 3,152 3,161
6,8 MMAF Equipment Finance LLC 2012-AA 1.980% 6/10/32 3,988 4,000
6,8 MMAF Equipment Finance LLC 2013-AA 1.680% 5/11/20 5,631 5,634
6,8 MMAF Equipment Finance LLC 2013-AA 2.570% 6/9/33 7,037 7,102
6,8 MMAF Equipment Finance LLC 2016-AA 2.210% 12/15/32 7,480 7,403
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C5 3.176% 8/15/45 399 408
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C5 3.792% 8/15/45 387 403
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C6 2.858% 11/15/45 201 204
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C10 4.084% 7/15/46 1,810 1,944
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C11 3.960% 8/15/46 873 924
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C11 4.170% 8/15/46 130 141
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C12 3.824% 10/15/46 193 203
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C12 4.259% 10/15/46 50 54
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C13 4.039% 11/15/46 75 79
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C14 4.064% 2/15/47 194 207
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C14 4.384% 2/15/47 194 207
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 3.773% 4/15/47 1,214 1,274
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 4.051% 4/15/47 1,645 1,744
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C16 3.892% 6/15/47 1,295 1,365
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C16 4.094% 6/15/47 361 382
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C22 3.306% 4/15/48 659 665

 

13


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C23 3.451% 7/15/50 20 20
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C25 3.383% 10/15/48 1,005 1,036
6 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2016-C32 3.720% 12/15/49 130 134
6,8 Morgan Stanley Capital I Trust 2012-STAR 3.201% 8/5/34 883 884
8 National Australia Bank Ltd. 2.250% 3/16/21 21,700 21,593
6,7 Navient Student Loan Trust 2014-8 1.422% 4/25/23 27,118 27,130
6,7 Navient Student Loan Trust 2015-3 1.632% 6/26/56 16,600 16,531
6,7,8 Navient Student Loan Trust 2016-2 2.032% 6/25/65 5,810 5,859
6,7,8 Navient Student Loan Trust 2016-3 1.832% 6/25/65 5,140 5,164
6,7,8 Navient Student Loan Trust 2016-6A 1.732% 3/25/66 35,210 35,334
6,7,8 Navient Student Loan Trust 2017-1 1.520% 7/26/66 12,020 12,061
6,8 NextGear Floorplan Master Owner Trust 2016-1A 2.740% 4/15/21 8,250 8,328
6 Nissan Auto Receivables 2015-A Owner Trust 1.500% 9/15/21 27,560 27,423
6 Nissan Auto Receivables 2016-B Owner Trust 1.540% 10/17/22 14,030 13,829
6,7 Nissan Master Owner Trust Receivables Series        
  2016-A 1.552% 6/15/21 41,710 42,019
7 North Carolina State Education Assistance Authority        
  2011-1 1.938% 1/26/26 1,450 1,451
6,8 OBP Depositor LLC Trust 2010-OBP 4.646% 7/15/45 481 513
6,8 Palisades Center Trust 2016-PLSD 2.713% 4/13/33 250 249
6,7,8 PHEAA Student Loan Trust 2016-2A 1.932% 11/25/65 16,484 16,515
  Royal Bank of Canada 2.200% 9/23/19 14,165 14,228
  Royal Bank of Canada 2.100% 10/14/20 23,750 23,658
6 Royal Bank of Canada 1.875% 2/5/21 4,900 4,871
  Royal Bank of Canada 2.300% 3/22/21 12,175 12,184
6,8 Securitized Term Auto Receivables Trust 2016-1A 1.524% 3/25/20 14,660 14,582
6,8 Securitized Term Auto Receivables Trust 2016-1A 1.794% 2/25/21 13,660 13,539
6,8 Securitized Term Auto Receivables Trust 2017-1A 1.890% 8/25/20 26,230 26,165
6,8 Securitized Term Auto Receivables Trust 2017-1A 2.209% 6/25/21 7,900 7,893
6,7 SLM Student Loan Trust 2003-14 1.268% 1/25/23 5,732 5,731
6,7 SLM Student Loan Trust 2005-5 1.138% 4/25/25 5,821 5,815
6,7 SLM Student Loan Trust 2005-6 1.148% 7/27/26 1,543 1,542
6,7 SLM Student Loan Trust 2013-6 1.482% 2/25/21 5,828 5,830
6,7 SLM Student Loan Trust 2014-1 1.362% 7/26/21 6,859 6,852
6 SMART ABS Series 2014-1US Trust 1.680% 12/14/19 4,139 4,134
6 SMART ABS Series 2016-2US Trust 2.050% 12/14/22 2,160 2,104
8 SpareBank 1 Boligkreditt AS 1.250% 5/2/18 3,097 3,081
6,8 SpareBank 1 Boligkreditt AS 1.750% 11/15/20 8,341 8,259
8 Swedbank Hypotek AB 1.375% 3/28/18 3,868 3,853
6 Synchrony Credit Card Master Note Trust 2015-1 2.370% 3/15/23 13,760 13,889
6 Synchrony Credit Card Master Note Trust 2015-2 1.600% 4/15/21 14,360 14,371
6 Synchrony Credit Card Master Note Trust 2015-4 2.380% 9/15/23 22,600 22,806
6 Synchrony Credit Card Master Note Trust 2016-3 1.580% 9/15/22 19,410 19,248
6 Synchrony Credit Card Master Note Trust Series        
  2012-2 2.220% 1/15/22 16,577 16,712
6 Toyota Auto Receivables 2016-B Owner Trust 1.520% 8/16/21 3,520 3,487
6,7,8 Trillium Credit Card Trust II 2016-1A 1.702% 5/26/21 66,330 66,625
6 UBS Commercial Mortgage Trust 2012-C1 4.171% 5/10/45 192 204
6,8 UBS-BAMLL Trust 2012-WRM 3.663% 6/10/30 1,551 1,593
6 UBS-Barclays Commercial Mortgage Trust 2012-C4 2.850% 12/10/45 228 230
6 UBS-Barclays Commercial Mortgage Trust 2013-C6 3.244% 4/10/46 30 31
6,8 Verizon Owner Trust 2017-1A 2.060% 9/20/21 20,500 20,559

 

14


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6,8 VNDO 2012-6AVE Mortgage Trust 2.996% 11/15/30 1,428 1,449
6,8 Volkswagen Credit Auto Master Trust 2014-1A 1.400% 7/22/19 5,080 5,075
6,8 Volvo Financial Equipment LLC Series 2016-1A 1.890% 9/15/20 5,160 5,139
6,8 Volvo Financial Equipment LLC Series 2017-1A 2.210% 11/15/21 4,970 4,962
6 Wells Fargo Commercial Mortgage Trust        
  2012-LC5 2.918% 10/15/45 326 331
6 Wells Fargo Commercial Mortgage Trust        
  2012-LC5 3.539% 10/15/45 279 287
6 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 3.928% 7/15/46 203 215
6 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 4.218% 7/15/46 784 843
6 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 4.296% 7/15/46 272 291
6 Wells Fargo Commercial Mortgage Trust        
  2015-C26 2.991% 2/15/48 120 122
6 Wells Fargo Commercial Mortgage Trust        
  2015-C26 3.166% 2/15/48 290 289
6 Wells Fargo Commercial Mortgage Trust        
  2015-C29 3.400% 6/15/48 200 207
6 Wells Fargo Commercial Mortgage Trust        
  2015-SG1 3.556% 9/15/48 250 260
6 Wells Fargo Commercial Mortgage Trust        
  2015-SG1 3.789% 9/15/48 484 501
6 Wells Fargo Commercial Mortgage Trust        
  2016-C37 3.794% 12/15/49 50 52
6 Wells Fargo Commercial Mortgage Trust        
  2017-RC1 3.631% 1/15/60 240 246
6,7 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2012-2 1.728% 4/22/19 5,326 5,327
6,7 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2014-1 1.358% 7/20/19 38,600 38,616
6,7 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2014-2 1.428% 10/20/19 20,200 20,217
8 Westpac Banking Corp. 1.850% 11/26/18 13,270 13,286
8 Westpac Banking Corp. 2.250% 11/9/20 13,440 13,433
6,8 WFRBS Commercial Mortgage Trust 2011-C3 4.375% 3/15/44 269 288
6 WFRBS Commercial Mortgage Trust 2012-C7 3.431% 6/15/45 262 272
6 WFRBS Commercial Mortgage Trust 2012-C7 4.090% 6/15/45 584 614
6 WFRBS Commercial Mortgage Trust 2012-C8 3.001% 8/15/45 169 172
6 WFRBS Commercial Mortgage Trust 2012-C9 2.870% 11/15/45 400 405
6 WFRBS Commercial Mortgage Trust 2012-C9 3.388% 11/15/45 440 448
6 WFRBS Commercial Mortgage Trust 2013-C15 3.720% 8/15/46 231 242
6 WFRBS Commercial Mortgage Trust 2013-C15 4.153% 8/15/46 396 424
6 WFRBS Commercial Mortgage Trust 2013-C17 3.558% 12/15/46 167 174
6 WFRBS Commercial Mortgage Trust 2013-C18 3.676% 12/15/46 221 231
6 WFRBS Commercial Mortgage Trust 2013-C18 4.162% 12/15/46 790 846
6 WFRBS Commercial Mortgage Trust 2014-C19 3.829% 3/15/47 10 10
6 WFRBS Commercial Mortgage Trust 2014-C19 4.101% 3/15/47 80 85
6 WFRBS Commercial Mortgage Trust 2014-C23 3.917% 10/15/57 643 676
6 WFRBS Commercial Mortgage Trust 2014-C24 3.607% 11/15/47 1,521 1,568
6 WFRBS Commercial Mortgage Trust 2014-LC14 3.522% 3/15/47 20 21
6 WFRBS Commercial Mortgage Trust 2014-LC14 3.766% 3/15/47 40 42
6 WFRBS Commercial Mortgage Trust 2014-LC14 4.045% 3/15/47 617 654
6,8 Wheels SPV 2 LLC 2016-1A 1.870% 5/20/25 1,945 1,940

 

15


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 World Financial Network Credit Card Master Note        
  Trust Series 2012-D 2.150% 4/17/23 20,637 20,740
6 World Financial Network Credit Card Master Note        
  Trust Series 2013-A 1.610% 12/15/21 6,191 6,199
6,7 World Financial Network Credit Card Master Note        
  Trust Series 2015-A 1.392% 2/15/22 11,160 11,191
6 World Financial Network Credit Card Master Note        
  Trust Series 2015-B 2.550% 6/17/24 3,030 3,061
6 World Omni Auto Receivables Trust 2014-B 1.680% 12/15/20 12,760 12,773
6 World Omni Auto Receivables Trust 2016-A 1.770% 9/15/21 13,950 13,967
6 World Omni Auto Receivables Trust 2016-B 1.300% 2/15/22 26,830 26,554
6 World Omni Automobile Lease Securitization        
  Trust 2017-A 2.320% 8/15/22 8,800 8,827
Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $2,507,350)   2,510,602
Corporate Bonds (27.8%)        
Finance (18.9%)        
  Banking (18.1%)        
8 ABN AMRO Bank NV 2.500% 10/30/18 2,750 2,771
  American Express Credit Corp. 2.200% 3/3/20 9,190 9,219
8 ANZ New Zealand International Ltd. 2.250% 2/1/19 13,630 13,687
  Australia & New Zealand Banking Group Ltd. 2.550% 11/23/21 8,115 8,069
  Bank of America NA 1.650% 3/26/18 15,965 15,971
  Bank of America NA 1.750% 6/5/18 1,221 1,224
  Bank of America NA 2.050% 12/7/18 16,080 16,167
  Bank of Montreal 1.800% 7/31/18 6,855 6,867
  Bank of Nova Scotia 1.700% 6/11/18 11,630 11,643
  Bank of Nova Scotia 1.650% 6/14/19 8,170 8,123
  Bank of Nova Scotia 2.350% 10/21/20 3,890 3,900
  Bank of Nova Scotia 2.700% 3/7/22 2,765 2,776
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 1.700% 3/5/18 2,270 2,270
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.700% 9/9/18 300 303
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.150% 9/14/18 6,240 6,249
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.300% 3/10/19 4,860 4,868
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.300% 3/5/20 3,355 3,340
8 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.750% 9/14/20 7,487 7,530
8 Banque Federative du Credit Mutuel SA 2.000% 4/12/19 17,540 17,435
8 Banque Federative du Credit Mutuel SA 2.500% 4/13/21 3,995 3,944
  Canadian Imperial Bank of Commerce 1.550% 1/23/18 1,255 1,254
  Commonwealth Bank of Australia 1.900% 9/18/17 7,680 7,693
  Commonwealth Bank of Australia 1.625% 3/12/18 5,310 5,310
  Commonwealth Bank of Australia 2.500% 9/20/18 7,220 7,294
  Commonwealth Bank of Australia 1.750% 11/2/18 6,137 6,123
  Commonwealth Bank of Australia 2.300% 9/6/19 19,150 19,269
  Commonwealth Bank of Australia 2.400% 11/2/20 2,790 2,786
  Commonwealth Bank of Australia 2.550% 3/15/21 4,780 4,773
8 Commonwealth Bank of Australia 2.000% 9/6/21 5,010 4,889
8 Commonwealth Bank of Australia 2.750% 3/10/22 6,095 6,095
  Cooperatieve Rabobank UA 1.700% 3/19/18 5,500 5,506
  Cooperatieve Rabobank UA 2.250% 1/14/19 11,020 11,078
  Cooperatieve Rabobank UA 2.500% 1/19/21 1,795 1,794
  Credit Suisse AG 1.700% 4/27/18 13,685 13,671
8 Danske Bank A/S 1.650% 9/6/19 8,227 8,124
8 Danske Bank A/S 2.750% 9/17/20 7,260 7,314
8 Danske Bank A/S 2.700% 3/2/22 4,705 4,690

 

16


 

Institutional Short-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
Fifth Third Bank 2.150% 8/20/18 6,448 6,483
Fifth Third Bank 1.625% 9/27/19 8,940 8,838
Goldman Sachs Group Inc. 5.950% 1/18/18 21,905 22,620
Goldman Sachs Group Inc. 2.375% 1/22/18 39,705 39,929
Goldman Sachs Group Inc. 6.150% 4/1/18 15,680 16,361
Goldman Sachs Group Inc. 2.900% 7/19/18 34,109 34,541
Goldman Sachs Group Inc. 2.625% 1/31/19 11,570 11,694
Goldman Sachs Group Inc. 2.550% 10/23/19 15,009 15,142
Goldman Sachs Group Inc. 2.300% 12/13/19 7,685 7,681
Goldman Sachs Group Inc. 2.600% 12/27/20 6,605 6,604
HSBC Bank USA NA 6.000% 8/9/17 4,605 4,676
HSBC Holdings plc 2.650% 1/5/22 11,630 11,470
HSBC USA Inc. 1.500% 11/13/17 9,630 9,627
HSBC USA Inc. 1.625% 1/16/18 25,090 25,081
HSBC USA Inc. 1.700% 3/5/18 4,343 4,346
Huntington National Bank 2.200% 11/6/18 5,527 5,545
Huntington National Bank 2.375% 3/10/20 4,670 4,690
8 ING Bank NV 2.000% 11/26/18 5,810 5,810
8 ING Bank NV 2.300% 3/22/19 8,511 8,543
JPMorgan Chase & Co. 6.000% 1/15/18 46,352 47,928
JPMorgan Chase & Co. 1.800% 1/25/18 12,966 12,989
JPMorgan Chase & Co. 1.700% 3/1/18 38,317 38,324
JPMorgan Chase & Co. 2.200% 10/22/19 11,741 11,796
JPMorgan Chase & Co. 2.250% 1/23/20 5,730 5,749
JPMorgan Chase & Co. 2.750% 6/23/20 4,950 5,010
JPMorgan Chase & Co. 2.550% 10/29/20 26,887 26,973
JPMorgan Chase & Co. 2.550% 3/1/21 10,241 10,240
JPMorgan Chase Bank NA 6.000% 10/1/17 11,790 12,046
Mitsubishi UFJ Financial Group Inc. 2.950% 3/1/21 8,395 8,466
Mitsubishi UFJ Financial Group Inc. 2.190% 9/13/21 5,430 5,308
8 Mitsubishi UFJ Trust & Banking Corp. 2.450% 10/16/19 2,625 2,634
8 Mitsubishi UFJ Trust & Banking Corp. 2.650% 10/19/20 16,860 16,874
Morgan Stanley 1.875% 1/5/18 6,400 6,413
Morgan Stanley 2.125% 4/25/18 41,310 41,484
Morgan Stanley 2.200% 12/7/18 1,088 1,092
Morgan Stanley 2.500% 1/24/19 10,235 10,334
Morgan Stanley 2.450% 2/1/19 3,976 4,011
Morgan Stanley 2.375% 7/23/19 8,621 8,668
Morgan Stanley 2.500% 4/21/21 17,180 17,100
Morgan Stanley 2.625% 11/17/21 11,125 11,054
MUFG Americas Holdings Corp. 1.625% 2/9/18 4,800 4,799
MUFG Union Bank NA 2.625% 9/26/18 5,970 6,029
MUFG Union Bank NA 2.250% 5/6/19 4,580 4,599
National Australia Bank Ltd. 1.875% 7/23/18 9,070 9,084
National Australia Bank Ltd. 2.300% 7/25/18 3,860 3,890
National Australia Bank Ltd. 2.000% 1/14/19 6,293 6,303
National Australia Bank Ltd. 1.375% 7/12/19 13,000 12,810
National Australia Bank Ltd. 2.250% 1/10/20 6,000 6,004
National Bank of Canada 2.100% 12/14/18 6,815 6,845
8 Nordea Bank AB 1.625% 9/30/19 3,750 3,710
PNC Bank NA 1.500% 2/23/18 11,800 11,792
PNC Bank NA 1.600% 6/1/18 15,200 15,191
PNC Bank NA 1.800% 11/5/18 15,736 15,751
PNC Bank NA 1.950% 3/4/19 22,720 22,784
PNC Bank NA 1.450% 7/29/19 8,535 8,448

 

17


 

Institutional Short-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
PNC Bank NA 2.550% 12/9/21 5,630 5,625
Royal Bank of Canada 2.200% 7/27/18 10,136 10,206
Royal Bank of Canada 1.800% 7/30/18 2,411 2,416
Royal Bank of Canada 2.000% 12/10/18 5,235 5,253
Royal Bank of Canada 2.150% 3/15/19 17,304 17,404
Royal Bank of Canada 1.500% 7/29/19 13,015 12,884
Royal Bank of Canada 2.125% 3/2/20 19,235 19,250
Royal Bank of Canada 2.350% 10/30/20 8,389 8,416
Santander UK plc 1.650% 9/29/17 15,910 15,911
Santander UK plc 3.050% 8/23/18 11,250 11,422
Santander UK plc 2.000% 8/24/18 7,787 7,833
Santander UK plc 2.500% 3/14/19 10,220 10,300
Santander UK plc 2.350% 9/10/19 2,328 2,341
8 Skandinaviska Enskilda Banken AB 1.750% 3/19/18 9,085 9,087
8 Skandinaviska Enskilda Banken AB 2.375% 3/25/19 7,040 7,087
Skandinaviska Enskilda Banken AB 1.875% 9/13/21 4,895 4,749
Sumitomo Mitsui Banking Corp. 1.950% 7/23/18 2,153 2,156
Sumitomo Mitsui Banking Corp. 2.450% 1/10/19 5,765 5,803
Sumitomo Mitsui Banking Corp. 2.250% 7/11/19 1,250 1,251
Svenska Handelsbanken AB 2.500% 1/25/19 7,835 7,916
Svenska Handelsbanken AB 2.250% 6/17/19 5,500 5,527
Svenska Handelsbanken AB 1.500% 9/6/19 13,625 13,444
Svenska Handelsbanken AB 1.875% 9/7/21 3,015 2,930
8 Swedbank AB 1.750% 3/12/18 17,350 17,354
8 Swedbank AB 2.800% 3/14/22 4,535 4,543
Toronto-Dominion Bank 1.625% 3/13/18 31,935 31,982
Toronto-Dominion Bank 1.450% 8/13/19 22,525 22,284
UBS AG 1.800% 3/26/18 23,725 23,736
Wachovia Corp. 5.750% 2/1/18 12,660 13,074
Wells Fargo & Co. 5.625% 12/11/17 3,210 3,297
Wells Fargo & Co. 1.500% 1/16/18 21,106 21,075
Wells Fargo Bank NA 1.650% 1/22/18 21,087 21,087
Wells Fargo Bank NA 1.800% 11/28/18 8,845 8,866
Wells Fargo Bank NA 2.150% 12/6/19 11,830 11,873
Westpac Banking Corp. 1.600% 1/12/18 3,390 3,391
Westpac Banking Corp. 2.250% 7/30/18 9,010 9,069
Westpac Banking Corp. 2.250% 1/17/19 13,390 13,461
Westpac Banking Corp. 1.600% 8/19/19 28,105 27,797
Westpac Banking Corp. 4.875% 11/19/19 25,460 27,208
Westpac Banking Corp. 2.000% 8/19/21 4,540 4,428
 
Brokerage (0.1%)        
Charles Schwab Corp. 1.500% 3/10/18 9,125 9,122
 
Finance Companies (0.2%)        
GE Capital International Funding Co. 2.342% 11/15/20 16,440 16,505
 
Insurance (0.5%)        
8 AIG Global Funding 2.700% 12/15/21 2,335 2,325
MetLife Inc. 1.903% 12/15/17 18,000 18,060
8 Metropolitan Life Global Funding I 3.000% 1/10/23 1,000 1,005
8 Reliance Standard Life Global Funding II 2.150% 10/15/18 15,550 15,606
8 Reliance Standard Life Global Funding II 3.050% 1/20/21 1,610 1,623
        1,474,214

 

18


 

Institutional Short-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
Industrial (7.7%)        
Basic Industry (0.1%)        
8 Air Liquide Finance SA 1.375% 9/27/19 3,835 3,772
Airgas Inc. 2.375% 2/15/20 7,185 7,229
 
Capital Goods (2.2%)        
Caterpillar Financial Services Corp. 7.150% 2/15/19 10,575 11,582
Caterpillar Financial Services Corp. 1.900% 3/22/19 17,625 17,636
Caterpillar Financial Services Corp. 2.250% 12/1/19 13,660 13,749
Caterpillar Financial Services Corp. 2.100% 1/10/20 6,015 6,019
Caterpillar Financial Services Corp. 2.500% 11/13/20 4,410 4,435
Caterpillar Financial Services Corp. 1.931% 10/1/21 5,785 5,621
Caterpillar Inc. 7.900% 12/15/18 9,000 9,886
General Electric Capital Corp. 5.625% 9/15/17 10,423 10,623
General Electric Capital Corp. 5.550% 5/4/20 3,480 3,851
General Electric Capital Corp. 4.375% 9/16/20 10,650 11,456
General Electric Co. 5.250% 12/6/17 13,586 13,933
John Deere Capital Corp. 5.350% 4/3/18 3,660 3,801
John Deere Capital Corp. 5.750% 9/10/18 12,315 13,035
John Deere Capital Corp. 1.950% 1/8/19 15,070 15,146
John Deere Capital Corp. 2.200% 3/13/20 8,815 8,856
John Deere Capital Corp. 2.375% 7/14/20 6,140 6,182
Precision Castparts Corp. 1.250% 1/15/18 12,225 12,208
8 Siemens Financieringsmaatschappij NV 2.200% 3/16/20 8,430 8,465
 
Communication (0.6%)        
America Movil SAB de CV 5.625% 11/15/17 32,700 33,508
America Movil SAB de CV 5.000% 3/30/20 1,265 1,359
8 NBCUniversal Enterprise Inc. 1.974% 4/15/19 8,785 8,801
 
Consumer Cyclical (0.9%)        
Alibaba Group Holding Ltd. 1.625% 11/28/17 2,500 2,497
American Honda Finance Corp. 1.500% 3/13/18 4,560 4,563
American Honda Finance Corp. 1.600% 7/13/18 2,910 2,915
American Honda Finance Corp. 2.125% 10/10/18 11,670 11,758
8 BMW US Capital LLC 2.150% 4/6/20 6,170 6,164
8 Harley-Davidson Financial Services Inc. 2.250% 1/15/19 1,097 1,103
8 Harley-Davidson Financial Services Inc. 2.400% 9/15/19 6,360 6,399
8 Harley-Davidson Financial Services Inc. 2.150% 2/26/20 5,467 5,431
8 Harley-Davidson Funding Corp. 6.800% 6/15/18 4,760 5,037
Lowe’s Cos. Inc. 1.150% 4/15/19 2,320 2,292
8 Nissan Motor Acceptance Corp. 2.000% 3/8/19 6,090 6,085
PACCAR Financial Corp. 1.750% 8/14/18 910 912
Toyota Motor Credit Corp. 1.200% 4/6/18 8,180 8,157
Toyota Motor Credit Corp. 1.550% 7/13/18 3,900 3,902
 
Consumer Noncyclical (0.7%)        
Anheuser-Busch InBev Finance Inc. 1.250% 1/17/18 240 240
Anheuser-Busch InBev Finance Inc. 1.900% 2/1/19 12,238 12,251
Anheuser-Busch InBev Worldwide Inc. 7.750% 1/15/19 4,475 4,923
Gilead Sciences Inc. 1.850% 9/4/18 4,115 4,127
Gilead Sciences Inc. 2.350% 2/1/20 12,985 13,082
Gilead Sciences Inc. 2.550% 9/1/20 11,180 11,280
Medtronic Inc. 1.375% 4/1/18 6,700 6,688

 

19


 

Institutional Short-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
Energy (1.9%)        
BP Capital Markets plc 1.674% 2/13/18 18,727 18,749
BP Capital Markets plc 1.375% 5/10/18 9,000 8,977
BP Capital Markets plc 2.241% 9/26/18 13,800 13,887
BP Capital Markets plc 4.750% 3/10/19 8,700 9,166
BP Capital Markets plc 1.676% 5/3/19 17,700 17,613
BP Capital Markets plc 4.500% 10/1/20 2,750 2,959
Shell International Finance BV 2.000% 11/15/18 9,200 9,237
Shell International Finance BV 1.375% 5/10/19 44,000 43,576
Total Capital International SA 2.125% 1/10/19 4,150 4,171
Total Capital SA 2.125% 8/10/18 17,254 17,362
Total Capital SA 4.450% 6/24/20 5,000 5,350
 
Other Industrial (0.3%)        
8 CK Hutchison International 17 Ltd. 2.875% 4/5/22 7,250 7,251
8 Hutchison Whampoa International 09 Ltd. 7.625% 4/9/19 14,665 16,206
 
Technology (0.7%)        
Apple Inc. 1.000% 5/3/18 21,008 20,937
Apple Inc. 1.700% 2/22/19 23,845 23,933
Baidu Inc. 3.250% 8/6/18 10,100 10,239
 
Transportation (0.3%)        
Burlington Northern Santa Fe LLC 4.700% 10/1/19 7,727 8,270
6 Delta Air Lines 2012-1 Class A Pass Through Trust 4.750% 11/7/21 8,294 8,740
6 Northwest Airlines 2007-1 Class A Pass        
Through Trust 7.027% 5/1/21 4,143 4,568
        602,150
Utilities (1.2%)        
Electric (1.1%)        
Arizona Public Service Co. 8.750% 3/1/19 760 856
Commonwealth Edison Co. 6.150% 9/15/17 860 878
Commonwealth Edison Co. 5.800% 3/15/18 5,390 5,604
Connecticut Light & Power Co. 5.500% 2/1/19 3,610 3,836
Duke Energy Florida LLC 4.550% 4/1/20 200 215
MidAmerican Energy Co. 2.400% 3/15/19 2,785 2,817
National Rural Utilities Cooperative Finance Corp. 10.375% 11/1/18 39,312 44,515
Oklahoma Gas & Electric Co. 6.350% 9/1/18 13,400 14,234
Oncor Electric Delivery Co. LLC 6.800% 9/1/18 1,000 1,069
Pacific Gas & Electric Co. 8.250% 10/15/18 2,280 2,497
Pacific Gas & Electric Co. 3.500% 10/1/20 7,305 7,586
Public Service Electric & Gas Co. 3.500% 8/15/20 1,182 1,229
South Carolina Electric & Gas Co. 6.500% 11/1/18 1,240 1,328
 
Natural Gas (0.1%)        
Atmos Energy Corp. 8.500% 3/15/19 8,720 9,797
        96,461
Total Corporate Bonds (Cost $2,174,981)       2,172,825
Sovereign Bonds (11.9%)        
African Development Bank 1.000% 11/2/18 36,330 36,053
8 Avi Funding Co. Ltd. 2.850% 9/16/20 6,700 6,702
8 Banco del Estado de Chile 2.000% 11/9/17 7,095 7,095
8 Bank Nederlandse Gemeenten NV 1.125% 5/25/18 36,700 36,572

 

20


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
8 Bank Nederlandse Gemeenten NV 1.000% 9/20/18 10,000 9,926
8 Caisse d’Amortissement de la Dette Sociale 1.375% 1/29/18 1,825 1,822
  CNOOC Finance 2013 Ltd. 1.750% 5/9/18 16,820 16,757
  CNOOC Finance 2015 Australia Pty Ltd. 2.625% 5/5/20 1,050 1,048
  CNOOC Nexen Finance 2014 ULC 1.625% 4/30/17 16,425 16,425
  Corp. Andina de Fomento 1.500% 8/8/17 14,590 14,572
8 Corp. Nacional del Cobre de Chile 3.875% 11/3/21 7,275 7,612
  Corp. Nacional del Cobre de Chile 3.875% 11/3/21 1,800 1,884
8 Corp. Nacional del Cobre de Chile 4.500% 8/13/23 6,875 7,374
8 CPPIB Capital Inc. 1.250% 9/20/19 20,000 19,767
8 Dexia Credit Local SA 1.875% 9/15/21 9,080 8,775
8 Electricite de France SA 6.500% 1/26/19 1,825 1,965
  European Investment Bank 1.625% 6/15/17 2,300 2,300
  European Investment Bank 1.000% 3/15/18 13,775 13,740
  European Investment Bank 1.875% 3/15/19 18,375 18,488
  European Investment Bank 2.500% 4/15/21 11,025 11,219
  Export-Import Bank of Korea 1.500% 10/21/19 17,250 17,022
  Export-Import Bank of Korea 5.125% 6/29/20 1,375 1,490
  Export-Import Bank of Korea 4.000% 1/29/21 4,775 5,007
  FMS Wertmanagement AoeR 1.125% 9/5/17 4,580 4,580
  FMS Wertmanagement AoeR 1.625% 11/20/18 9,175 9,201
  Hydro-Quebec 1.375% 6/19/17 15,327 15,352
8 ICBCIL Finance Co. Ltd. 2.375% 5/19/19 6,360 6,318
  Industrial & Commercial Bank of China Ltd. 2.351% 11/13/17 4,500 4,505
  Inter-American Development Bank 2.375% 8/15/17 6,425 6,457
  International Finance Corp. 1.750% 9/4/18 15,600 15,631
10 Japan Bank for International Cooperation 1.750% 7/31/18 4,600 4,601
10 Japan Bank for International Cooperation 1.750% 11/13/18 7,575 7,568
  Japan Finance Organization for Municipalities 1.375% 4/18/18 4,000 3,971
8 Japan Finance Organization for Municipalities 2.125% 3/6/19 13,775 13,746
11 KFW 1.000% 6/11/18 11,475 11,435
11 KFW 1.000% 9/7/18 10,000 9,953
11 KFW 1.875% 4/1/19 4,600 4,637
11 KFW 4.000% 1/27/20 4,125 4,386
11 KFW 2.625% 1/25/22 4,600 4,705
  Kingdom of Saudi Arabia 2.375% 10/26/21 12,700 12,476
8 Kommunalbanken AS 1.000% 3/15/18 2,750 2,740
8 Kommunalbanken AS 1.125% 5/23/18 7,350 7,324
8 Kommunalbanken AS 2.125% 3/15/19 12,850 12,967
8 Kommunalbanken AS 1.750% 5/28/19 13,775 13,799
8 Kommuninvest I Sverige AB 1.000% 10/24/17 2,750 2,747
  Korea Development Bank 3.875% 5/4/17 9,200 9,215
  Korea Development Bank 2.250% 8/7/17 12,700 12,717
  Korea Development Bank 3.500% 8/22/17 23,130 23,266
  Korea Development Bank 4.625% 11/16/21 1,800 1,949
8 Korea East-West Power Co. Ltd. 2.500% 7/16/17 2,050 2,053
8 Korea Expressway Corp. 1.625% 4/28/17 32,150 32,151
8 Korea Expressway Corp. 1.875% 10/22/17 1,800 1,800
8 Korea Gas Corp. 2.875% 7/29/18 7,350 7,435
8 Korea Land & Housing Corp. 1.875% 8/2/17 4,600 4,600
  Korea National Oil Corp. 3.125% 4/3/17 4,600 4,600
8 Korea National Oil Corp. 2.750% 1/23/19 18,375 18,544
8 Korea Resources Corp. 2.125% 5/2/18 2,750 2,751
8 Municipality Finance plc 1.125% 4/17/18 2,300 2,295
8 Nederlandse Waterschapsbank NV 1.875% 3/13/19 7,350 7,381

 

21


 

Institutional Short-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
8 Nederlandse Waterschapsbank NV 1.250% 9/9/19 11,000 10,868
  North American Development Bank 2.300% 10/10/18 2,400 2,421
12 Oesterreichische Kontrollbank AG 1.750% 1/24/20 25,364 25,346
8 Province of Alberta 1.000% 6/21/17 2,750 2,752
8 Province of Alberta 1.750% 8/26/20 8,600 8,514
  Province of Alberta Canada 1.900% 12/6/19 20,000 20,008
  Province of Manitoba 2.100% 9/6/22 1,275 1,254
  Province of Ontario 1.100% 10/25/17 21,125 21,148
  Province of Ontario 1.625% 1/18/19 34,665 34,573
  Province of Ontario 2.000% 1/30/19 27,130 27,228
  Province of Ontario 1.250% 6/17/19 54,190 53,543
  Province of Ontario 4.000% 10/7/19 2,375 2,498
  Province of Ontario 4.400% 4/14/20 1,375 1,468
  Province of Quebec 2.750% 8/25/21 5,825 5,912
  Republic of Lithuania 7.375% 2/11/20 8,990 10,224
  Republic of Lithuania 6.125% 3/9/21 16,000 18,056
  Republic of Poland 6.375% 7/15/19 17,261 18,944
  Republic of Poland 5.125% 4/21/21 1,240 1,358
  Republic of Poland 5.000% 3/23/22 18,925 20,794
8 Sinopec Group Overseas Development 2012 Ltd. 2.750% 5/17/17 2,000 2,003
8 State Grid Overseas Investment 2014 Ltd. 2.750% 5/7/19 9,175 9,276
  State of Israel 3.150% 6/30/23 1,800 1,822
  Statoil ASA 1.250% 11/9/17 25,000 24,971
  Statoil ASA 1.200% 1/17/18 2,630 2,620
  Statoil ASA 1.950% 11/8/18 16,420 16,464
  Statoil ASA 3.150% 1/23/22 2,700 2,760
  Statoil ASA 2.650% 1/15/24 1,825 1,785
  Svensk Exportkredit AB 1.125% 4/5/18 5,475 5,461
8 Temasek Financial I Ltd. 4.300% 10/25/19 2,250 2,379
8 Temasek Financial I Ltd. 2.375% 1/23/23 4,600 4,509
Total Sovereign Bonds (Cost $933,364)       934,430
Taxable Municipal Bonds (0.3%)        
  Florida Hurricane Catastrophe Fund Finance Corp.        
  Revenue 2.107% 7/1/18 1,825 1,840
  Louisiana Local Government Environmental        
  Facilities & Community Development Authority        
  Revenue 2010-EGSL 3.220% 2/1/21 2,998 3,035
  Louisiana Local Government Environmental        
  Facilities & Community Development Authority        
  Revenue 2010-ELL 3.450% 2/1/22 9,743 9,923
  Princeton University New Jersey GO 4.950% 3/1/19 5,975 6,340
Total Taxable Municipal Bonds (Cost $21,020)       21,138

 

22


 

Institutional Short-Term Bond Fund        
 
 
 
          Market
          Value
    Coupon   Shares ($000)
Temporary Cash Investments (2.1%)        
Money Market Fund (0.5%)        
13 Vanguard Market Liquidity Fund 0.965%   396,977 39,706
 
        Face  
      Maturity Amount  
      Date ($000)  
Commercial Paper (0.8%)        
9 Electricite de France SA 1.906% 1/5/18 23,500 23,151
8,9 Engie SA 1.543% 10/10/17 3,815 3,781
8,9 Engie SA 1.520% 10/12/17 5,075 5,030
8,9 Engie SA 1.520% 10/13/17 2,200 2,180
8,9 Engie SA 1.520% 10/16/17 11,865 11,758
8,9 Engie SA 1.520% 10/18/17 5,860 5,806
8,9 Engie SA 1.565% 10/20/17 1,000 991
8,9 Engie SA 1.544% 11/9/17 3,645 3,608
8,9 Engie SA 1.565% 11/10/17 3,610 3,573
8,9 Engie SA 1.565% 11/15/17 3,395 3,359
          63,237
Certificates of Deposit (0.8%)        
  Bank of Tokyo-Mitsubishi UFJ Ltd.        
  (New York Branch) 1.520% 8/9/17 22,070 22,086
  Royal Bank of Canada (New York Branch) 1.360% 10/5/17 21,580 21,577
  Toronto Dominion Bank (New York Branch) 1.350% 8/11/17 14,230 14,232
          57,895
Total Temporary Cash Investments (Cost $160,857)       160,838
Total Investments (99.2%) (Cost $7,762,336)       7,754,143
 
          Amount
          ($000)
Other Assets and Liabilities (0.8%)        
Other Assets        
Investment in Vanguard       534
Receivables for Investment Securities Sold       60,401
Receivables for Accrued Income       29,646
Other Assets       1,002
Total Other Assets       91,583
Liabilities        
Payables for Investment Securities Purchased       (23,920)
Payables to Vanguard       (1,567)
Other Liabilities       (2,397)
Total Liabilities       (27,884)
Net Assets (100%)        
Applicable to 568,759,146 outstanding $.001 par value shares of      
beneficial interest (unlimited authorization)       7,817,842
Net Asset Value Per Share       $13.75

 

23


 

Institutional Short-Term Bond Fund

At March 31, 2017, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 7,821,561
Overdistributed Net Investment Income (78)
Accumulated Net Realized Gains 3,118
Unrealized Appreciation (Depreciation)  
Investment Securities (8,193)
Futures Contracts (525)
Swap Contracts 1,959
Net Assets 7,817,842

 

• See Note A in Notes to Financial Statements.
1 Securities with a value of $2,899,000 have been segregated as initial margin for open cleared swap contracts.
2 Securities with a value of $5,774,000 have been segregated as initial margin for open futures contracts.
3 U.S. government-guaranteed.
4 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed
by the full faith and credit of the U.S. government.
5 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed
by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth,
in exchange for senior preferred stock.
6 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
7 Adjustable-rate security.
8 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 March 31, 2017, the aggregate value of these securities
was $1,719,243,000, representing 22.0% of net assets.
9 Security exempt from registration under Section 4(2) of the Securities Act of 1933. Such securities may be sold in transactions
exempt from registration only to dealers in that program or other “accredited investors.” At March 31, 2017, the aggregate value
of these securities was $63,237,000, representing 0.8% of net assets.
10 Guaranteed by the Government of Japan.
11 Guaranteed by the Federal Republic of Germany.
12 Guaranteed by the Republic of Austria.
13 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown
is the 7-day yield.
GO—General Obligation Bond.
See accompanying Notes, which are an integral part of the Financial Statements.

24


 

Institutional Short-Term Bond Fund  
 
 
Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Interest1 72,141
Total Income 72,141
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 151
Management and Administrative 647
Marketing and Distribution 76
Custodian Fees 72
Trustees’ Fees and Expenses 4
Total Expenses 950
Net Investment Income 71,191
Realized Net Gain (Loss)  
Investment Securities Sold1 (6,076)
Futures Contracts 15,654
Swap Contracts (838)
Realized Net Gain (Loss) 8,740
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (69,667)
Futures Contracts 394
Swap Contracts 1,350
Change in Unrealized Appreciation (Depreciation) (67,923)
Net Increase (Decrease) in Net Assets Resulting from Operations 12,008

 

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $553,000 and ($5,000), respectively.

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

25


 

Institutional Short-Term Bond Fund    
 
 
Statement of Changes in Net Assets    
 
  Six Months Ended Year Ended
  March 31, September 30,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 71,191 140,919
Realized Net Gain (Loss) 8,740 2,311
Change in Unrealized Appreciation (Depreciation) (67,923) 31,501
Net Increase (Decrease) in Net Assets Resulting from Operations 12,008 174,731
Distributions    
Net Investment Income (72,353) (139,853)
Realized Capital Gain1 (8,272) (2,233)
Total Distributions (80,625) (142,086)
Capital Share Transactions    
Issued 297,853 100,988
Issued in Lieu of Cash Distributions 80,625 142,087
Redeemed (2,889,461) (148,693)
Net Increase (Decrease) from Capital Share Transactions (2,510,983) 94,382
Total Increase (Decrease) (2,579,600) 127,027
Net Assets    
Beginning of Period 10,397,442 10,270,415
End of Period2 7,817,842 10,397,442

 

1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $1,244,000 and $2,233,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($78,000) and $640,000.

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

26


 

Institutional Short-Term Bond Fund

Financial Highlights      
 
  Six Months Year June 19,
  Ended Ended 20151 to
  March 31, Sept. 30, Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015
Net Asset Value, Beginning of Period $13.84 $13.79 $13.79
Investment Operations      
Net Investment Income .106 .188 . 047
Net Realized and Unrealized Gain (Loss) on Investments (.077) .052 .001
Total from Investment Operations .029 . 240 .048
Distributions      
Dividends from Net Investment Income (.108) (.187) (. 048)
Distributions from Realized Capital Gains (.011) (.003)
Total Distributions (.119) (.190) (. 048)
Net Asset Value, End of Period $13.75 $13.84 $13.79
 
Total Return 0.21% 1.75% 0.35%
 
Ratios/Supplemental Data      
Net Assets, End of Period (Millions) $7,818 $10,397 $10,270
Ratio of Total Expenses to Average Net Assets 0.02% 0.02% 0.02%2
Ratio of Net Investment Income to Average Net Assets 1.51% 1.37% 1.22%2
Portfolio Turnover Rate 69% 119% 28%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized. 1 Commencement of operations as a registered investment company.

2 Annualized.

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

27


 

Institutional Short-Term Bond Fund

Notes to Financial Statements

Vanguard Institutional Short-Term Bond Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund has been established by Vanguard as an investment vehicle for certain collective trusts and other accounts managed by Vanguard or its affiliates, and qualifying education savings plans. The fund is offered to investors who meet certain administrative and service criteria and invest a minimum of $10 million. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries.

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. Bonds and 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. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. 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 by methods deemed by the board of trustees to represent fair value.

2. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearing-house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

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

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts represented 16% and 9% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

28


 

Institutional Short-Term Bond Fund

3. Swap Contracts: The fund invests in credit default swaps to adjust the overall credit risk of the fund or to actively overweight or underweight credit risk to a specific issuer or group of issuers. The fund may sell credit protection through credit default swaps to simulate investments in long positions that are either unavailable or considered to be less attractively priced in the bond market. The fund may purchase credit protection through credit default swaps to reduce credit exposure to a given issuer or issuers. Under the terms of the swaps, an up-front payment may be exchanged between the seller and buyer. In addition, the seller of the credit protection receives a periodic payment of premium from the buyer that is a fixed percentage applied to a notional amount. If, for example, the reference entity is subject to a credit event (such as bankruptcy, failure to pay, or obligation acceleration) during the term of the swap, the seller agrees to either physically settle or cash settle the swap contract. If the swap is physically settled, the seller agrees to pay the buyer an amount equal to the notional amount and take delivery of a debt instrument of the reference issuer with a par amount equal to such notional amount. If the swap is cash settled, the seller agrees to pay the buyer the difference between the notional amount and the final price for the relevant debt instrument, as determined either in a market auction or pursuant to a pre-agreed-upon valuation procedure.

The fund enters into interest rate swap transactions to adjust the fund’s sensitivity to changes in interest rates and maintain the ability to generate income at prevailing market rates. Under the terms of the swaps, one party pays the other an amount that is a fixed percentage rate applied to a notional amount. In return, the counterparty agrees to pay a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount.

The notional amounts of swap contracts are not recorded in the Statement of Net Assets. 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 Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the seller of credit protection is required to take delivery (or, in a cash settled swap, pay the settlement amount determined) upon occurrence of a credit event, periodic payments are made, or the swap terminates, at which time realized gain (loss) is recorded. The net premium to be received or paid by the fund under swap contracts is accrued daily and recorded as realized gain (loss) over the life of the contract.

The primary risk associated with selling credit protection is that, upon the occurrence of a defined credit event, the market value of the debt instrument received by the fund (or, in a cash settled swap, the debt instruments used to determine the settlement payment by the fund) will be significantly less than the amount paid by the fund and, in a physically settled swap, the fund may receive an illiquid debt instrument. 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 rehypoth-ecated. 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,

29


 

Institutional Short-Term Bond Fund

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 Statement of Net Assets. 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 fund enters into centrally cleared interest rate swaps to achieve the same objectives specified with respect to the equivalent over-the-counter swaps but with less counterparty risk because a regulated clearinghouse is the counterparty instead of the clearing broker or executing broker. 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. To further mitigate counterparty risk, the fund trades with a diverse group of prequalified executing brokers; monitors the financial strength of its clearing brokers, executing brokers, and clearinghouse; and has entered into agreements with its clearing brokers and executing brokers.

During the six months ended March 31, 2017, the fund’s average amounts of investments in credit protection sold and credit protection purchased each represented less than 1% of net assets, respectively, based on the average of notional amounts at each quarter-end during the period. The average amount of investments in interest rate swaps represented 7% of net assets, based on the average of notional amounts at each quarter-end during the period.

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2015–2016), and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

30


 

Institutional Short-Term Bond Fund

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $534,000, representing 0.01% of the fund’s net assets and 0.21% of Vanguard’s capitalization. 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. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 1,954,310
Asset-Backed/Commercial Mortgage-Backed Securities 2,510,602
Corporate Bonds 2,172,825
Sovereign Bonds 934,430
Taxable Municipal Bonds 21,138
Temporary Cash Investments 39,706 121,132
Futures Contracts—Assets1 411
Futures Contracts—Liabilities1 (1,276)
Swap Contracts—Assets 1591 183
Swap Contracts—Liabilities (64)1 (40)
Total 38,936 7,714,580
1 Represents variation margin on the last day of the reporting period.      

 

31


 

Institutional Short-Term Bond Fund

D. At March 31, 2017, the fair values of derivatives were reflected in the Statement of Net Assets as follows:

  Interest Rate Credit  
  Contracts Contracts Total
Statement of Assets and Liabilities Caption ($000) ($000) ($000)
Other Assets 570 183 753
Liabilities (1,340) (40) (1,380)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended March 31, 2017, were:

Interest Rate Credit  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts 15,654 15,654
Swap Contracts (1,176) 338 (838)
Realized Net Gain (Loss) on Derivatives 14,478 338 14,816
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts 394 394
Swap Contracts 48 1,302 1,350
Change in Unrealized Appreciation (Depreciation) on Derivatives 442 1,302 1,744

 

At March 31, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
2-Year U.S. Treasury Note June 2017 4,986 1,079,235 676
5-Year U. S. Treasury Note June 2017 (4,142) (487,623) (547)
Ultra 10-Year U.S. Treasury Note June 2017 (961) (128,669) (699)
10-Year U.S. Treasury Note June 2017 (155) (19,307) (3)
30-Year U.S. Treasury Bond June 2017 66 9,956 49
Ultra Long U.S. Treasury Bond June 2017 (1) (161) (1)
        (525)

 

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

32


 

Institutional Short-Term Bond Fund

At March 31, 2017, the fund had the following open swap contracts:

Over-the-Counter Credit Default Swaps          
        Remaining    
        Up-Front Periodic  
        Premium Premium Unrealized
      Notional Received Received Appreciation
  Termination   Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Credit Protection Sold/Moody’s Rating          
Federation of Malaysia/A3 6/20/22 GSI 1,990 5 1.000 (3)
Federation of Malaysia/A3 6/20/22 BARC 9,900 92 1.000 55
Republic of Chile/Aa3 6/20/22 CITNA 7,600 (63) 1.000 33
Republic of Chile/Aa3 6/20/22 BARC 11,250 (99) 1.000 42
Republic of Chile/Aa3 6/20/22 BNPSW 14,700 (186) 1.000 (1)
      45,440     126
 
Credit Protection Purchased            
El du Pont de Nemours & Co. 12/20/20 JPMC 4,915 88 (1.000) (36)
Republic of Korea 6/20/22 BNPSW 3,500 91 (1.000) 5
Republic of Korea 6/20/22 GSI 14,500 407 (1.000) 48
      22,915     17
            143

 

The notional amount represents the maximum potential amount the fund could be required to pay as a seller of credit protection if the
reference entity was subject to a credit event.
BARC—Barclays Bank plc.
BNPSW—BNP Paribas.
CITNA—Citibank, N.A.
GSI—Goldman Sachs International.
JPMC—JP Morgan Chase Bank.

33


 

Institutional Short-Term Bond Fund          
 
 
 
 
Centrally Cleared Interest Rate Swaps        
        Fixed Floating  
        Interest Rate Interest Rate Unrealized
  Future   Notional Received Received Appreciation
  Effective   Amount (Paid) (Paid) (Depreciation)
Termination Date Date Clearinghouse ($000) (%) (%) ($000)
8/15/17 NA LCH 112,000 0.981 (0.912)2 (28)
6/21/18 6/21/171 CME 108,907 1.000 (0.000)3 91
6/21/19 6/21/171 CME 260,424 1.250 (0.000)3 618
6/21/20 6/21/171 CME 73,232 1.250 (0.000)3 322
6/21/21 6/21/171 CME 30,216 1.250 (0.000)3 190
6/21/22 6/21/171 CME 13,308 (1.250) 0.0003 1,005
6/21/24 6/21/171 CME 33,241 (1.500) 0.0003 (382)
            1,816

CME—Chicago Mercantile Exchange.

LCH—London Clearing House.

1 Forward interest rate swap. In a forward interest rate swap, the fund and the counterparty agree to make periodic net payments beginning on a specified future effective date.

2 Based on 1-month London Interbank Offered Rate (LIBOR) as of the most recent payment date.

3 Based on 3-month London Interbank Offered Rate (LIBOR) as of the most recent payment date.

 

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

Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes; the effect on the fund’s income dividends to shareholders is offset by a change in principal return. Realized gains of $444,000 on swap contracts have been reclassified from accumulated net realized gains to overdistributed net investment income.

At March 31, 2017, the cost of investment securities for tax purposes was $7,763,473,000. Net unrealized depreciation of investment securities for tax purposes was $9,330,000, consisting of unrealized gains of $16,508,000 on securities that had risen in value since their purchase and $25,838,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2017, the fund purchased $864,511,000 of investment securities and sold $2,473,426,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $2,144,553,000 and $2,844,914,000, respectively.

34


 

Institutional Short-Term Bond Fund    
 
 
 
 
G. Capital shares issued and redeemed were:    
  Six Months Ended Year Ended
  March 31, 2017 September 30, 2016
  Shares Shares
  (000) (000)
Issued 21,656 7,323
Issued in Lieu of Cash Distributions 5,864 10,301
Redeemed (210,273) (10,767)
Net Increase (Decrease) in Shares Outstanding (182,753) 6,857

 

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

35


 

Institutional Intermediate-Term Bond Fund

Fund Profile      
As of March 31, 2017      
 
Financial Attributes      
    Bloomberg Bloomberg 
    Barclays Barclays 
      U.S. U.S.
    Intermediate Aggregate
    Aggregate Bond
  Fund ex Baa Index Index
Number of Bonds 1,062   5,478 10,170
Yield to Maturity        
(before expenses) 2.1%   2.3% 2.6%
Average Coupon 2.6%   2.7% 3.1%
Average Duration 3.8 years 4.4 years 6.0 years
Average Effective        
Maturity 4.6 years 5.4 years 8.2 years
Ticker Symbol VIITX  
Expense Ratio1 0.02%  
30-Day SEC Yield 1.94%  
Short-Term        
Reserves 10.9%  
 
Volatility Measures      
  Bloomberg    
  Barclays U.S.   Bloomberg
  Intermediate Barclays U.S.
  Aggregate ex Aggregate Bond
  Baa Index   Index
R-Squared   0.99   0.95
Beta   0.97   0.67

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

 

Sector Diversification (% of portfolio)  
Asset-Backed 8.0%
Commercial Mortgage-Backed 1.9
Finance 12.4
Foreign 6.5
Government Mortgage-Backed 27.5
Industrial 7.7
Treasury/Agency 34.9
Utilities 1.1

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

 

 

Distribution by Credit Quality (% of portfolio)

U.S. Government 51.0%
Aaa 12.6
Aa 8.0
A 16.5
Not Rated 11.9

Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

 

 

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 5.4%
1 - 3 Years 28.6
3 - 5 Years 27.2
5 - 7 Years 15.5
7 - 10 Years 22.5
10 - 20 Years 0.8

 

1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2017, the annualized expense ratio was 0.02%.

36


 

Institutional Intermediate-Term Bond Fund

Performance Summary

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

Fiscal-Year Total Returns (%): September 30, 2006, Through March 31, 2017  
        Bloomberg
        Barclays
        U.S.
        Intermediate
        Aggregate
    Institutional Plus Shares ex Baa Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2007 0.00% 5.32% 5.32% 5.37%
2008 0.00 3.46 3.46 4.54
2009 0.00 9.36 9.36 9.18
2010 0.00 7.42 7.42 7.07
2011 0.00 3.96 3.96 4.24
2012 0.00 4.58 4.58 3.83
2013 0.00 -0.76 -0.76 -0.81
2014 0.00 2.50 2.50 2.46
2015 0.56 2.43 2.99 3.16
2016 2.06 1.64 3.70 3.24
2017 0.94 -2.31 -1.37 -1.51
Note: For 2017, performance data reflect the six months ended March 31, 2017.    

 

The fund is the successor to VFTC Intermediate-Term Bond Trust (the predecessor trust), a collective trust managed by Vanguard Fiduciary Trust Company, an affiliate of The Vanguard Group, Inc. The predecessor trust transferred its assets to the fund in connection with the fund’s commencement of operations on or about June 19, 2015. The performance of the fund’s Institutional Plus Shares includes the performance of the predecessor trust prior to the commencement of the fund’s operations. The performance of the predecessor trust has not been adjusted to reflect the expenses of the fund’s Institutional Plus Shares. If the performance of the predecessor trust was adjusted to reflect the expenses of the fund’s Institutional Plus Shares, the predecessor trust’s performance would have been lower. The fund is managed with the same investment objective, strategies, policies, and risks as the predecessor trust. The predecessor trust was not an investment company and, therefore, was not subject to certain investment restrictions imposed on investment companies by the Investment Company Act of 1940. If the predecessor trust had been an investment company, its performance may have been different.

Average Annual Total Returns: Periods Ended March 31, 2017      
 
            Ten Years
  Inception Date One Year Five Years Income Capital Total
Institutional Plus Shares 11/30/1997 0.37% 1.96% 0.37% 3.41% 3.78%
 
See Financial Highlights for dividend and capital gains information.        

 

37


 

Institutional Intermediate-Term Bond Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2017

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

        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
U.S. Government and Agency Obligations (61.3%)        
U.S. Government Securities (32.4%)        
  United States Treasury Inflation Indexed Bonds 1.625% 1/15/18 33,500 39,627
  United States Treasury Inflation Indexed Bonds 0.125% 4/15/18 176,940 187,388
1 United States Treasury Inflation Indexed Bonds 0.375% 1/15/27 252,162 252,469
  United States Treasury Note/Bond 0.625% 11/30/17 10,000 9,977
  United States Treasury Note/Bond 2.250% 11/30/17 650 655
  United States Treasury Note/Bond 1.000% 12/31/17 142,400 142,400
  United States Treasury Note/Bond 1.000% 2/15/18 750 750
  United States Treasury Note/Bond 0.625% 6/30/18 490,000 486,937
  United States Treasury Note/Bond 1.375% 7/31/18 9,183 9,209
  United States Treasury Note/Bond 1.000% 8/15/18 1,500 1,497
2 United States Treasury Note/Bond 0.750% 8/31/18 126,500 125,769
  United States Treasury Note/Bond 1.000% 9/15/18 151,000 150,622
  United States Treasury Note/Bond 1.125% 1/15/19 11,900 11,878
  United States Treasury Note/Bond 0.750% 2/15/19 97,330 96,448
  United States Treasury Note/Bond 1.125% 2/28/19 3,200 3,193
  United States Treasury Note/Bond 1.375% 2/28/19 9,131 9,152
  United States Treasury Note/Bond 1.000% 3/15/19 59,700 59,392
  United States Treasury Note/Bond 0.875% 4/15/19 5,300 5,257
  United States Treasury Note/Bond 1.625% 4/30/19 16,173 16,284
  United States Treasury Note/Bond 1.125% 5/31/19 64,083 63,843
  United States Treasury Note/Bond 1.500% 5/31/19 42,200 42,371
  United States Treasury Note/Bond 0.875% 6/15/19 25,000 24,758
  United States Treasury Note/Bond 0.875% 7/31/19 133,100 131,686
  United States Treasury Note/Bond 0.750% 8/15/19 4,465 4,402
  United States Treasury Note/Bond 3.625% 8/15/19 706 743
  United States Treasury Note/Bond 1.000% 8/31/19 39,984 39,628
  United States Treasury Note/Bond 0.875% 9/15/19 28,700 28,341
  United States Treasury Note/Bond 1.750% 9/30/19 16,600 16,745
  United States Treasury Note/Bond 1.000% 11/15/19 65,075 64,363
  United States Treasury Note/Bond 3.375% 11/15/19 15,086 15,845
  United States Treasury Note/Bond 1.375% 12/15/19 57,069 56,953
  United States Treasury Note/Bond 1.125% 12/31/19 60,000 59,475
  United States Treasury Note/Bond 1.625% 12/31/19 21,600 21,695
  United States Treasury Note/Bond 1.375% 1/15/20 48,351 48,230
  United States Treasury Note/Bond 1.375% 2/15/20 98,015 97,709
  United States Treasury Note/Bond 1.250% 2/29/20 200,000 198,562
3 United States Treasury Note/Bond 1.375% 4/30/20 100,050 99,519
  United States Treasury Note/Bond 1.375% 5/31/20 15,800 15,699

 

38


 

Institutional Intermediate-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
United States Treasury Note/Bond 1.625% 6/30/20 21,300 21,320
United States Treasury Note/Bond 2.625% 8/15/20 20,000 20,641
United States Treasury Note/Bond 2.125% 8/31/20 110,000 111,718
United States Treasury Note/Bond 1.375% 9/30/20 51,400 50,886
United States Treasury Note/Bond 1.375% 10/31/20 19,350 19,135
United States Treasury Note/Bond 1.750% 10/31/20 100,300 100,520
United States Treasury Note/Bond 1.625% 11/30/20 17,218 17,165
United States Treasury Note/Bond 2.000% 11/30/20 4,300 4,344
United States Treasury Note/Bond 1.750% 12/31/20 134,350 134,433
United States Treasury Note/Bond 1.375% 1/31/21 46,510 45,856
United States Treasury Note/Bond 2.125% 1/31/21 3,594 3,643
United States Treasury Note/Bond 1.125% 2/28/21 20,570 20,069
United States Treasury Note/Bond 1.375% 4/30/21 18,100 17,794
United States Treasury Note/Bond 1.375% 5/31/21 79,000 77,593
United States Treasury Note/Bond 1.125% 6/30/21 142,827 138,698
United States Treasury Note/Bond 1.125% 7/31/21 21,000 20,367
United States Treasury Note/Bond 2.125% 8/15/21 37,400 37,838
United States Treasury Note/Bond 1.250% 10/31/21 60,200 58,507
United States Treasury Note/Bond 1.750% 11/30/21 31,321 31,115
United States Treasury Note/Bond 2.000% 12/31/21 150,000 150,562
United States Treasury Note/Bond 2.125% 12/31/21 103,000 103,966
United States Treasury Note/Bond 1.500% 1/31/22 10,000 9,803
United States Treasury Note/Bond 1.750% 5/15/22 10,333 10,222
1 United States Treasury Note/Bond 2.125% 6/30/22 24,800 24,967
United States Treasury Note/Bond 1.750% 9/30/22 26,500 26,094
United States Treasury Note/Bond 1.625% 11/15/22 15,050 14,700
United States Treasury Note/Bond 2.000% 2/15/23 20,000 19,891
United States Treasury Note/Bond 1.750% 5/15/23 41,300 40,390
United States Treasury Note/Bond 1.375% 6/30/23 12,800 12,224
United States Treasury Note/Bond 2.500% 8/15/23 19,860 20,257
United States Treasury Note/Bond 2.750% 11/15/23 20,000 20,706
United States Treasury Note/Bond 2.125% 11/30/23 10,000 9,962
United States Treasury Note/Bond 2.750% 2/15/24 28,820 29,820
United States Treasury Note/Bond 2.375% 8/15/24 18,550 18,695
United States Treasury Note/Bond 2.250% 11/15/25 21,000 20,816
United States Treasury Note/Bond 1.625% 2/15/26 43,950 41,320
United States Treasury Note/Bond 1.625% 5/15/26 20,941 19,642
United States Treasury Note/Bond 2.000% 11/15/26 10,000 9,659
United States Treasury Note/Bond 5.375% 2/15/31 3,300 4,406
        4,179,215
Agency Bonds and Notes (1.9%)        
4 AID-Jordan 2.578% 6/30/22 24,000 24,455
5 Federal Home Loan Banks 0.875% 3/19/18 3,100 3,094
5 Federal Home Loan Banks 0.875% 10/1/18 8,500 8,451
5 Federal Home Loan Banks 1.250% 1/16/19 15,000 14,977
5 Federal Home Loan Banks 0.875% 8/5/19 16,000 15,783
6 Federal Home Loan Mortgage Corp. 0.750% 1/12/18 21,950 21,904
6 Federal Home Loan Mortgage Corp. 0.875% 3/7/18 3,350 3,344
6 Federal Home Loan Mortgage Corp. 0.875% 7/19/19 55,800 55,096
6 Federal Home Loan Mortgage Corp. 1.500% 1/17/20 7,000 6,988
6 Federal Home Loan Mortgage Corp. 1.125% 8/12/21 1,100 1,062
6 Federal National Mortgage Assn. 1.125% 12/14/18 13,250 13,210
6 Federal National Mortgage Assn. 1.000% 10/24/19 16,750 16,542
6 Federal National Mortgage Assn. 1.875% 9/24/26 65,000 60,458
        245,364

 

39


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
Conventional Mortgage-Backed Securities (25.9%)        
6,7 Fannie Mae Pool 2.000% 5/1/28–1/1/32 40,550 39,517
6,7,8 Fannie Mae Pool 2.500% 2/1/28–2/1/43 117,932 118,023
6,7,8 Fannie Mae Pool 3.000% 5/1/27–5/1/47 373,023 374,581
6,7,8 Fannie Mae Pool 3.500% 8/1/20–5/1/47 401,071 411,787
6,7,8 Fannie Mae Pool 4.000% 7/1/18–5/1/47 317,860 334,533
6,7,8 Fannie Mae Pool 4.500% 10/1/17–5/1/47 113,197 121,559
6,7,8 Fannie Mae Pool 5.000% 9/1/17–4/1/47 95,800 104,847
6,7 Fannie Mae Pool 5.500% 10/1/17–6/1/40 27,948 30,955
6,7 Fannie Mae Pool 6.000% 3/1/21–11/1/39 15,312 17,240
6,7 Fannie Mae Pool 6.500% 7/1/20–8/1/39 9,188 10,198
6,7 Fannie Mae Pool 7.000% 9/1/28–9/1/38 4,386 5,100
6,7 Fannie Mae Pool 7.500% 8/1/30–6/1/32 373 417
6,7 Fannie Mae Pool 8.000% 7/1/30–1/1/31 16 20
6,7 Fannie Mae Pool 8.500% 12/1/30 10 12
6,7 Freddie Mac Gold Pool 2.000% 9/1/28–6/1/30 6,050 5,900
6,7,8 Freddie Mac Gold Pool 2.500% 9/1/27–4/1/43 73,946 74,010
6,7,8 Freddie Mac Gold Pool 3.000% 8/1/26–5/1/47 246,266 246,240
6,7,8 Freddie Mac Gold Pool 3.500% 8/1/20–5/1/47 233,549 240,028
6,7,8 Freddie Mac Gold Pool 4.000% 5/1/18–5/1/47 80,521 84,419
6,7 Freddie Mac Gold Pool 4.500% 10/1/18–12/1/45 30,257 32,431
6,7 Freddie Mac Gold Pool 5.000% 12/1/17–4/1/41 13,416 14,473
6,7 Freddie Mac Gold Pool 5.500% 9/1/17–2/1/40 15,324 17,136
6,7 Freddie Mac Gold Pool 6.000% 7/1/20–5/1/40 23,284 26,406
6,7 Freddie Mac Gold Pool 6.500% 2/1/29–9/1/38 5,066 5,616
6,7 Freddie Mac Gold Pool 7.000% 5/1/28–6/1/38 2,643 3,044
6,7 Freddie Mac Gold Pool 7.500% 3/1/30–5/1/32 287 329
6,7 Freddie Mac Gold Pool 8.000% 4/1/30–1/1/31 27 32
7 Ginnie Mae I Pool 2.500% 1/15/43–6/15/43 1,122 1,091
7 Ginnie Mae I Pool 3.000% 9/15/42–8/15/45 18,123 18,330
7 Ginnie Mae I Pool 3.500% 1/15/42–7/15/45 14,017 14,549
7 Ginnie Mae I Pool 4.000% 4/15/39–1/15/45 2,757 2,913
7 Ginnie Mae I Pool 4.500% 9/15/33–12/15/46 66,368 71,278
7 Ginnie Mae I Pool 5.000% 2/15/33–9/15/41 17,772 19,698
7 Ginnie Mae I Pool 5.500% 3/15/31–7/15/40 9,089 10,211
7 Ginnie Mae I Pool 6.000% 12/15/28–3/15/40 4,235 4,798
7 Ginnie Mae I Pool 6.500% 12/15/27–6/15/38 4,350 4,947
7 Ginnie Mae I Pool 7.000% 8/15/24–11/15/31 267 294
7 Ginnie Mae I Pool 7.500% 11/15/30–3/15/32 48 55
7 Ginnie Mae I Pool 8.000% 4/15/30–10/15/30 55 61
7 Ginnie Mae I Pool 8.500% 7/15/30 20 23
7 Ginnie Mae I Pool 9.000% 1/15/20–7/15/21 4 4
7 Ginnie Mae II Pool 2.500% 3/20/43–4/20/43 3,574 3,491
7,8 Ginnie Mae II Pool 3.000% 6/20/43–5/1/47 243,639 245,995
7,8 Ginnie Mae II Pool 3.500% 8/20/42–5/1/47 338,287 351,835
7,8 Ginnie Mae II Pool 4.000% 2/20/34–5/1/47 196,766 208,758
7,8 Ginnie Mae II Pool 4.500% 3/20/33–4/1/47 20,341 21,726
7 Ginnie Mae II Pool 5.000% 5/20/39–2/20/42 29,665 32,227
7 Ginnie Mae II Pool 5.500% 4/20/37–3/20/41 4,460 4,909
7 Ginnie Mae II Pool 6.000% 5/20/36–10/20/41 6,801 7,639
7 Ginnie Mae II Pool 6.500% 3/20/38–7/20/39 84 97
          3,343,782

 

40


 

Institutional Intermediate-Term Bond Fund

        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
Nonconventional Mortgage-Backed Securities (1.1%)        
6,7,9 Fannie Mae Pool 2.625% 12/1/32 9 9
6,7,9 Fannie Mae Pool 2.778% 5/1/33 68 72
6,7,9 Fannie Mae Pool 2.849% 12/1/40 3,455 3,647
6,7,9 Fannie Mae Pool 2.939% 8/1/36 6,289 6,649
6,7,9 Fannie Mae Pool 3.035% 8/1/33 95 100
6,7,9 Fannie Mae Pool 3.050% 7/1/33 140 145
6,7,9 Fannie Mae Pool 3.082% 8/1/35 5,433 5,737
6,7,9 Fannie Mae Pool 3.145% 5/1/33 12 13
6,7,9 Fannie Mae REMICS 1.232% 9/25/46 12,215 12,174
6,7,9 Fannie Mae REMICS 1.282% 9/25/41–4/25/45 6,736 6,706
6,7,9 Fannie Mae REMICS 1.302% 6/25/36 7,308 7,304
6,7,9 Fannie Mae REMICS 1.332% 5/25/43–12/25/46 28,145 28,153
6,7,9 Fannie Mae REMICS 1.352% 6/25/35 1,980 1,983
6,7,9 Fannie Mae REMICS 1.382% 11/25/42–9/25/46 14,466 14,511
6,7,9 Fannie Mae REMICS 1.392% 11/25/35 2,576 2,590
6,7,9 Fannie Mae REMICS 1.427% 2/25/37 1,173 1,176
6,7,9 Fannie Mae REMICS 1.482% 8/25/46 5,666 5,710
6,7,9 Freddie Mac Non Gold Pool 2.746% 7/1/35 14,822 15,627
6,7,9 Freddie Mac Non Gold Pool 2.818% 9/1/37 11,765 12,471
6,7,9 Freddie Mac Non Gold Pool 3.000% 8/1/37 92 96
6,7,9 Freddie Mac Non Gold Pool 3.017% 7/1/33 1,871 1,972
6,7,9 Freddie Mac Non Gold Pool 3.435% 10/1/32 24 25
6,7,9 Freddie Mac Non Gold Pool 3.586% 1/1/33 12 13
6,7,9 Freddie Mac Non Gold Pool 3.711% 2/1/33 39 41
6,7,9 Freddie Mac REMICS 1.262% 11/15/36–8/15/43 5,830 5,835
6,7,9 Freddie Mac REMICS 1.272% 11/15/36 2,023 2,027
6,7,9 Freddie Mac REMICS 1.362% 6/15/42 1,122 1,126
          135,912
Total U.S. Government and Agency Obligations (Cost $7,951,235)   7,904,273
Asset-Backed/Commercial Mortgage-Backed Securities (10.1%)    
7 Ally Auto Receivables Trust 2015-1 1.750% 5/15/20 1,600 1,600
7 Ally Auto Receivables Trust 2015-2 1.840% 6/15/20 2,920 2,922
7 Ally Master Owner Trust Series 2014-5 1.600% 10/15/19 8,920 8,929
7 Ally Master Owner Trust Series 2015-3 1.630% 5/15/20 14,525 14,528
7,9 American Express Credit Account Master Trust        
  2014-1 1.282% 12/15/21 12,202 12,260
7,9 American Express Issuance Trust II 2013-2 1.342% 8/15/19 3,317 3,329
7,10 Americold 2010 LLC Trust Series 2010-ARTA 4.954% 1/14/29 4,828 5,219
7,10 Aventura Mall Trust 2013-AVM 3.743% 12/5/32 400 420
7,10 Avis Budget Rental Car Funding AESOP LLC        
  2017-1A 3.070% 9/20/23 8,780 8,844
7,9 BA Credit Card Trust 2014-A1 1.292% 6/15/21 15,428 15,488
7 Banc of America Commercial Mortgage Trust        
  2015-UBS7 3.705% 9/15/48 715 740
7,9,10Bank of America Student Loan Trust 2010-1A 1.838% 2/25/43 4,678 4,648
10 Bank of Montreal 1.750% 6/15/21 5,835 5,684
  Bank of Nova Scotia 1.850% 4/14/20 3,696 3,665
  Bank of Nova Scotia 1.875% 4/26/21 10,260 10,068
10 Bank of Nova Scotia 1.875% 9/20/21 7,770 7,569
7 Barclays Dryrock Issuance Trust 2014-3 2.410% 7/15/22 9,200 9,305
7,9,10BMW Floorplan Master Owner Trust 2015-1A 1.412% 7/15/20 8,115 8,127
7,9 Brazos Higher Education Authority Inc. Series        
  2005-3 1.353% 6/25/26 3,161 3,071

 

41


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7,9 Brazos Higher Education Authority Inc. Series        
  2011-1 1.852% 2/25/30 1,835 1,825
7 Cabela’s Credit Card Master Note Trust 2015-1A 2.260% 3/15/23 1,430 1,432
7,9 Cabela’s Credit Card Master Note Trust 2015-2 1.582% 7/17/23 3,225 3,253
7,9 Cabela’s Credit Card Master Note Trust 2016-1 1.762% 6/15/22 3,440 3,476
10 Canadian Imperial Bank of Commerce 2.250% 7/21/20 2,235 2,241
7,9 Capital One Multi-Asset Execution Trust 2014-A3 1.292% 1/18/22 11,094 11,139
7 Capital One Multi-Asset Execution Trust 2015-A2 2.080% 3/15/23 6,480 6,503
7 Capital One Multi-Asset Execution Trust 2015-A4 2.750% 5/15/25 7,765 7,894
7 Capital One Multi-Asset Execution Trust 2015-A8 2.050% 8/15/23 11,390 11,341
7,9 Capital One Multi-Asset Execution Trust 2016-A1 1.362% 2/15/22 33,200 33,387
7,9 Capital One Multi-Asset Execution Trust 2016-A2 1.542% 2/15/24 2,900 2,935
7,9,10CARDS II Trust 2016-1A 1.612% 7/15/21 9,200 9,231
7 CarMax Auto Owner Trust 2014-4 1.810% 7/15/20 2,100 2,101
7 CarMax Auto Owner Trust 2015-2 1.800% 3/15/21 1,690 1,692
7 CarMax Auto Owner Trust 2015-3 1.980% 2/16/21 1,265 1,268
7 CarMax Auto Owner Trust 2016-1 1.880% 6/15/21 3,080 3,077
7 CarMax Auto Owner Trust 2016-4 1.400% 8/15/21 4,430 4,392
7 CarMax Auto Owner Trust 2016-4 1.600% 6/15/22 2,110 2,077
7 CD 2017-CD3 Commercial Mortgage Trust 3.631% 2/10/50 1,580 1,626
7 CenterPoint Energy Transition Bond Co. IV LLC        
  2012-1 2.161% 10/15/21 5,853 5,875
7,10 CFCRE Commercial Mortgage Trust 2011-C2 5.755% 12/15/47 2,054 2,317
7 CFCRE Commercial Mortgage Trust 2016-C4 3.283% 5/10/58 3,235 3,221
7 Chase Issuance Trust 2014-A2 2.770% 3/15/23 2,333 2,377
7,9 Chase Issuance Trust 2016-A1 1.322% 5/17/21 30,978 31,125
7,10 Chrysler Capital Auto Receivables Trust 2015-BA 2.260% 10/15/20 2,790 2,801
7,10 Chrysler Capital Auto Receivables Trust 2016-AA 1.960% 1/18/22 5,360 5,369
7,10 Chrysler Capital Auto Receivables Trust 2016-BA 1.640% 7/15/21 2,300 2,292
7,10 Chrysler Capital Auto Receivables Trust 2016-BA 1.870% 2/15/22 1,630 1,604
7,9 Citibank Credit Card Issuance Trust 2008-A7 2.353% 5/20/20 3,898 3,955
7,9 Citibank Credit Card Issuance Trust 2013-A2 1.264% 5/26/20 14,014 14,039
7,9 Citibank Credit Card Issuance Trust 2013-A7 1.288% 9/10/20 6,379 6,402
7 Citibank Credit Card Issuance Trust 2014-A1 2.880% 1/23/23 4,486 4,617
7 Citibank Credit Card Issuance Trust 2014-A6 2.150% 7/15/21 7,080 7,138
7 Citigroup Commercial Mortgage Trust 2012-GC8 3.024% 9/10/45 1,280 1,305
7,10 Citigroup Commercial Mortgage Trust 2012-GC8 3.683% 9/10/45 400 418
7 Citigroup Commercial Mortgage Trust 2013-GC11 3.093% 4/10/46 1,364 1,387
7 Citigroup Commercial Mortgage Trust 2013-GC15 3.942% 9/10/46 333 348
7 Citigroup Commercial Mortgage Trust 2014-GC19 3.753% 3/10/47 160 167
7 Citigroup Commercial Mortgage Trust 2014-GC19 4.023% 3/10/47 7,478 7,927
7 Citigroup Commercial Mortgage Trust 2014-GC21 3.477% 5/10/47 65 68
7 Citigroup Commercial Mortgage Trust 2014-GC21 3.575% 5/10/47 1,290 1,330
7 Citigroup Commercial Mortgage Trust 2014-GC21 3.855% 5/10/47 3,705 3,879
7 Citigroup Commercial Mortgage Trust 2014-GC23 3.622% 7/10/47 1,380 1,428
7 Citigroup Commercial Mortgage Trust 2014-GC23 3.863% 7/10/47 240 247
7 Citigroup Commercial Mortgage Trust 2014-GC25 3.372% 10/10/47 530 540
7 Citigroup Commercial Mortgage Trust 2014-GC25 3.635% 10/10/47 3,869 3,982
7 Citigroup Commercial Mortgage Trust 2015-GC33 3.778% 9/10/58 1,983 2,060
7 Citigroup Commercial Mortgage Trust 2016-C1 3.209% 5/10/49 533 531
7 CNH Equipment Trust 2014-A 1.500% 5/15/20 3,409 3,407
7 CNH Equipment Trust 2016-B 1.970% 11/15/21 3,090 3,074
7 COBALT CMBS Commercial Mortgage Trust        
  2007-C2 5.484% 4/15/47 174 173
7 COMM 2012-CCRE2 Mortgage Trust 3.147% 8/15/45 595 612

 

42


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7 COMM 2012-CCRE2 Mortgage Trust 3.791% 8/15/45 893 933
7 COMM 2012-CCRE3 Mortgage Trust 2.822% 10/15/45 1,531 1,546
7,10 COMM 2012-CCRE3 Mortgage Trust 3.416% 10/15/45 610 625
7 COMM 2012-CCRE4 Mortgage Trust 2.853% 10/15/45 1,221 1,231
7 COMM 2012-CCRE4 Mortgage Trust 3.251% 10/15/45 30 30
7 COMM 2012-CCRE5 Mortgage Trust 2.771% 12/10/45 518 520
7 COMM 2013-CCRE11 Mortgage Trust 3.983% 8/10/50 1,835 1,948
7 COMM 2013-CCRE11 Mortgage Trust 4.258% 8/10/50 842 907
7 COMM 2013-CCRE12 Mortgage Trust 3.623% 10/10/46 655 686
7 COMM 2013-CCRE12 Mortgage Trust 3.765% 10/10/46 310 325
7 COMM 2013-CCRE12 Mortgage Trust 4.046% 10/10/46 1,895 2,021
7 COMM 2013-CCRE13 Mortgage Trust 4.194% 11/10/23 3,226 3,470
7 COMM 2013-CCRE9 Mortgage Trust 4.232% 7/10/45 3,734 4,043
7,10 COMM 2013-CCRE9 Mortgage Trust 4.256% 7/10/45 2,083 2,216
7,10 COMM 2013-LC13 Mortgage Trust 3.774% 8/10/46 546 576
7 COMM 2013-LC13 Mortgage Trust 4.205% 8/10/46 150 161
7 COMM 2013-LC6 Mortgage Trust 2.941% 1/10/46 834 843
7,10 COMM 2013-SFS Mortgage Trust 2.987% 4/12/35 500 502
7 COMM 2014-CCRE14 Mortgage Trust 3.743% 2/10/47 470 495
7 COMM 2014-CCRE14 Mortgage Trust 3.955% 2/10/47 4,000 4,245
7 COMM 2014-CCRE14 Mortgage Trust 4.236% 2/10/47 853 913
7 COMM 2014-CCRE17 Mortgage Trust 3.977% 5/10/47 1,182 1,247
7 COMM 2014-CCRE17 Mortgage Trust 4.174% 5/10/47 295 311
7 COMM 2014-CCRE18 Mortgage Trust 3.452% 7/15/47 100 104
7 COMM 2014-CCRE18 Mortgage Trust 3.550% 7/15/47 6,000 6,214
7 COMM 2014-CCRE18 Mortgage Trust 3.828% 7/15/47 3,389 3,544
7 COMM 2014-CCRE20 Mortgage Trust 3.326% 11/10/47 870 884
7 COMM 2014-CCRE20 Mortgage Trust 3.590% 11/10/47 3,532 3,637
7 COMM 2014-CCRE21 Mortgage Trust 3.528% 12/10/47 4,470 4,578
7 COMM 2014-LC17 Mortgage Trust 3.917% 10/10/47 1,375 1,445
7 COMM 2015-CCRE22 Mortgage Trust 3.309% 3/10/48 460 462
7 COMM 2015-CCRE24 Mortgage Trust 3.445% 8/10/48 310 323
7 COMM 2015-CCRE24 Mortgage Trust 3.696% 8/10/48 2,450 2,529
7 COMM 2015-CCRE25 Mortgage Trust 3.759% 8/10/48 850 881
7 COMM 2015-CCRE27 Mortgage Trust 3.612% 10/10/48 3,024 3,095
7 COMM 2015-LC19 Mortgage Trust 3.040% 2/10/48 25 26
7 COMM 2015-LC19 Mortgage Trust 3.183% 2/10/48 170 171
10 Commonwealth Bank of Australia 2.000% 6/18/19 2,602 2,602
10 Commonwealth Bank of Australia 2.125% 7/22/20 2,280 2,274
7 CSAIL 2015-C1 Commercial Mortgage Trust 3.505% 4/15/50 140 143
7 CSAIL 2015-C4 Commercial Mortgage Trust 3.808% 11/15/48 145 151
7 CSAIL 2016-C7 Commercial Mortgage Trust 3.502% 11/15/49 1,520 1,543
7 Discover Card Execution Note Trust 2012-A6 1.670% 1/18/22 13,138 13,115
7,9 Discover Card Execution Note Trust 2013-A1 1.212% 8/17/20 3,294 3,299
7 Discover Card Execution Note Trust 2015-A4 2.190% 4/17/23 9,500 9,549
7,9 Discover Card Execution Note Trust 2016-A2 1.452% 9/15/21 3,670 3,697
10 DNB Boligkreditt AS 1.450% 3/21/18 1,198 1,196
7,10 Enterprise Fleet Financing LLC Series 2015-2 2.090% 2/22/21 3,300 3,302
7,10 Enterprise Fleet Financing LLC Series 2016-1 2.080% 9/20/21 7,640 7,603
7,10 Enterprise Fleet Financing LLC Series 2016-2 2.040% 2/22/22 1,390 1,379
7,9,10Evergreen Credit Card Trust Series 2016-1 1.632% 4/15/20 36,000 36,151
7,9,10Evergreen Credit Card Trust Series 2016-3 1.412% 11/16/20 2,550 2,559
7,9 First National Master Note Trust 2015-1 1.682% 9/15/20 2,790 2,796
7,10 Ford Credit Auto Owner Trust 2014-REV1 2.260% 11/15/25 4,089 4,121
7 Ford Credit Auto Owner Trust 2015-C 1.740% 2/15/21 4,455 4,450

 

43


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7,10 Ford Credit Auto Owner Trust 2015-REV2 2.440% 1/15/27 9,700 9,788
7 Ford Credit Auto Owner Trust 2016-B 1.520% 8/15/21 4,510 4,463
7,10 Ford Credit Auto Owner Trust 2016-REV1 2.310% 8/15/27 11,910 11,926
7,10 Ford Credit Auto Owner Trust 2016-REV2 2.030% 12/15/27 15,232 15,023
7,10 Ford Credit Auto Owner Trust 2017-1 2.620% 8/15/28 20,000 20,124
7,9 Ford Credit Floorplan Master Owner Trust A Series        
  2014-2 1.412% 2/15/21 6,191 6,221
7,9 Ford Credit Floorplan Master Owner Trust A Series        
  2015-2 1.482% 1/15/22 7,310 7,356

 

7 Ford Credit Floorplan Master Owner Trust A Series        
2015-5 2.390% 8/15/22 8,230 8,274

 

7,9 Ford Credit Floorplan Master Owner Trust A Series        
  2016-1 1.812% 2/15/21 11,720 11,840
7,9 Ford Credit Floorplan Master Owner Trust A Series        
  2016-3 1.532% 7/15/21 4,500 4,531
7,9 Ford Credit Floorplan Master Owner Trust A Series        
  2016-4 1.442% 7/15/20 3,480 3,490
7,9 GE Dealer Floorplan Master Note Trust Series        
  2015-2 1.628% 1/20/22 12,080 12,134
7 GM Financial Automobile Leasing Trust 2015-1 1.730% 6/20/19 950 952
7 GM Financial Automobile Leasing Trust 2015-3 1.690% 3/20/19 3,880 3,886
7 GM Financial Automobile Leasing Trust 2016-1 1.790% 3/20/20 7,100 7,068
7 GM Financial Automobile Leasing Trust 2017-1 2.260% 8/20/20 5,000 5,008
7,9,10GMF Floorplan Owner Revolving Trust 2016-1 1.762% 5/17/21 10,260 10,350
7,9,10Golden Credit Card Trust 2014-2A 1.362% 3/15/21 2,921 2,920
7,10 Golden Credit Card Trust 2016-5A 1.600% 9/15/21 20,130 19,938
7,10 GreatAmerica Leasing Receivables Funding LLC        
  Series 2014-1 1.470% 8/15/20 844 844
7,10 GreatAmerica Leasing Receivables Funding LLC        
  Series 2016-1 1.990% 4/20/22 3,770 3,753
7,10 GreatAmerica Leasing Receivables Funding LLC        
  Series 2017-1 2.360% 1/20/23 5,700 5,685
7,10 GS Mortgage Securities Trust 2012-GC6 4.948% 1/10/45 233 256
7 GS Mortgage Securities Trust 2013-GCJ12 3.135% 6/10/46 934 950
7 GS Mortgage Securities Trust 2014-GC20 3.998% 4/10/47 4,923 5,209
7 GS Mortgage Securities Trust 2014-GC26 3.629% 11/10/47 1,900 1,959
7 Harley-Davidson Motorcycle Trust 2014-1 1.550% 10/15/21 2,692 2,693
7,10 Hertz Vehicle Financing II LP 2015-3A 2.670% 9/25/21 5,580 5,532
7,10 Hertz Vehicle Financing LLC 2016-2A 2.950% 3/25/22 5,510 5,493
7,10 Hertz Vehicle Financing LLC 2016-3A 2.270% 7/25/20 7,110 7,057
7,10 Hertz Vehicle Financing LLC 2016-4A 2.650% 7/25/22 7,340 7,097
7 Honda Auto Receivables 2015-4 Owner Trust 1.440% 1/21/22 6,140 6,092
7 Hyundai Auto Receivables Trust 2015-C 1.780% 11/15/21 2,910 2,914
7,10 Hyundai Floorplan Master Owner Trust Series        
  2016-1A 1.810% 3/15/21 2,090 2,088
9 Illinois Student Assistance Commission Series        
  2010-1 2.088% 4/25/22 1,084 1,084
7,10 Irvine Core Office Trust 2013-IRV 3.174% 5/15/48 1,952 1,974
7 John Deere Owner Trust 2015-B 1.780% 6/15/22 480 481
7 John Deere Owner Trust 2016-B 1.490% 5/15/23 880 872
7 John Deere Owner Trust 2017-A 2.110% 12/15/23 7,390 7,408
7,10 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-C3 4.717% 2/15/46 2,819 3,044
7,10 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-C5 5.409% 8/15/46 833 916

 

44


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7,10 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2011-RR1 4.717% 3/16/46 8,782 9,392
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-C6 3.507% 5/15/45 412 429
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-C8 2.829% 10/15/45 944 952
7,10 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-C8 3.424% 10/15/45 1,373 1,393
7,10 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2012-HSBC 3.093% 7/5/32 1,548 1,584
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C13 3.994% 1/15/46 2,635 2,799
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 3.674% 12/15/46 452 475
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 3.881% 12/15/46 100 105
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-C16 4.166% 12/15/46 1,120 1,200
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2013-LC11 2.960% 4/15/46 1,721 1,735
7 JP Morgan Chase Commercial Mortgage Securities        
  Trust 2016-JP4 3.648% 12/15/49 400 411
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 3.363% 7/15/45 1,310 1,343
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 3.664% 7/15/45 2,804 2,931
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C12 4.026% 7/15/45 1,309 1,372
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C14 3.761% 8/15/46 358 376
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C14 4.133% 8/15/46 450 482
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C15 3.659% 11/15/45 179 188
7 JPMBB Commercial Mortgage Securities Trust        
  2013-C17 4.199% 1/15/47 3,697 3,963
7 JPMBB Commercial Mortgage Securities Trust        
  2014-C18 4.079% 2/15/47 4,862 5,159
7 JPMBB Commercial Mortgage Securities Trust        
  2014-C18 4.439% 2/15/47 402 429
7 JPMBB Commercial Mortgage Securities Trust        
  2014-C21 3.428% 8/15/47 580 603
7 JPMBB Commercial Mortgage Securities Trust        
  2014-C21 3.493% 8/15/47 170 175
7 JPMBB Commercial Mortgage Securities Trust        
  2014-C24 3.639% 11/15/47 970 1,001
7 JPMBB Commercial Mortgage Securities Trust        
  2015-C32 3.598% 11/15/48 3,040 3,114
7 JPMBB Commercial Mortgage Securities Trust        
  2015-C33 3.562% 12/15/48 155 162
7 JPMCC Commercial Mortgage Securities Trust        
  2017-JP5 3.723% 3/15/50 6,000 6,205
7 LB-UBS Commercial Mortgage Trust 2008-C1 6.126% 4/15/41 6,288 6,466
7,9,10Master Credit Card Trust II Series 2016-1A 1.726% 9/23/19 10,790 10,836
7,10 Master Credit Card Trust II Series 2017-1A 2.260% 7/21/21 20,000 20,101

 

45


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7,9 MBNA Credit Card Master Note Trust 2004-A3 1.172% 8/16/21 15,215 15,249
7,9,10Mercedes-Benz Master Owner Trust 2016-B 1.612% 5/17/21 12,000 12,073
7,10 MMAF Equipment Finance LLC 2011-AA 3.040% 8/15/28 2,216 2,222
7,10 MMAF Equipment Finance LLC 2012-AA 1.980% 6/10/32 599 601
7,10 MMAF Equipment Finance LLC 2013-AA 1.680% 5/11/20 1,147 1,147
7,10 MMAF Equipment Finance LLC 2013-AA 2.570% 6/9/33 895 904
7,10 MMAF Equipment Finance LLC 2016-AA 2.210% 12/15/32 5,240 5,186
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C5 3.176% 8/15/45 2,328 2,380
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C5 3.792% 8/15/45 896 935
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2012-C6 2.858% 11/15/45 1,132 1,146
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C10 4.084% 7/15/46 4,817 5,173
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C11 3.960% 8/15/46 1,160 1,227
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C11 4.170% 8/15/46 350 380
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C12 3.824% 10/15/46 375 394
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C12 4.259% 10/15/46 130 141
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2013-C13 4.039% 11/15/46 75 79
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C14 4.064% 2/15/47 358 381
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C14 4.384% 2/15/47 179 191
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 3.773% 4/15/47 1,960 2,056
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C15 4.051% 4/15/47 4,350 4,612
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C16 3.892% 6/15/47 2,493 2,628
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2014-C16 4.094% 6/15/47 295 312
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C22 3.306% 4/15/48 1,090 1,100
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C23 3.451% 7/15/50 6,000 6,143
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C25 3.383% 10/15/48 2,640 2,721
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2015-C25 3.635% 10/15/48 2,903 2,997
7 Morgan Stanley Bank of America Merrill Lynch        
  Trust 2016-C32 3.720% 12/15/49 792 816
7,10 Morgan Stanley Capital I Trust 2012-STAR 3.201% 8/5/34 2,011 2,013
7 Morgan Stanley Capital I Trust 2016-UBS9 3.594% 3/15/49 1,760 1,807
10 National Australia Bank Ltd. 2.250% 3/16/21 13,870 13,802
7,9 Navient Student Loan Trust 2014-8 1.422% 4/25/23 7,092 7,096
7,9 Navient Student Loan Trust 2015-3 1.632% 6/26/56 4,800 4,780
7,9,10Navient Student Loan Trust 2016-2 2.032% 6/25/65 1,450 1,462
7,9,10Navient Student Loan Trust 2016-3 1.832% 6/25/65 1,880 1,889
7,9,10Navient Student Loan Trust 2016-6A 1.732% 3/25/66 7,040 7,065

 

46


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7,9,10Navient Student Loan Trust 2017-1 1.520% 7/26/66 26,000 26,089
7,10 NextGear Floorplan Master Owner Trust 2016-1A 2.740% 4/15/21 2,950 2,978
7 Nissan Auto Receivables 2015-A Owner Trust 1.500% 9/15/21 6,990 6,955
7 Nissan Auto Receivables 2015-B Owner Trust 1.790% 1/17/22 775 774
7 Nissan Auto Receivables 2015-C Owner Trust 1.670% 2/15/22 15,000 14,913
7 Nissan Auto Receivables 2016-A Owner Trust 1.590% 7/15/22 9,120 9,061
7 Nissan Auto Receivables 2016-B Owner Trust 1.540% 10/17/22 2,910 2,868
7 Nissan Master Owner Trust Receivables Series        
  2015-A 1.440% 1/15/20 7,500 7,498
7,9 Nissan Master Owner Trust Receivables Series        
  2016-A 1.552% 6/15/21 13,480 13,580
9 North Carolina State Education Assistance Authority        
  2011-1 1.938% 1/26/26 590 590
7,10 Palisades Center Trust 2016-PLSD 2.713% 4/13/33 840 836
7,9,10PHEAA Student Loan Trust 2016-2A 1.932% 11/25/65 6,742 6,755
  Royal Bank of Canada 2.200% 9/23/19 3,072 3,086
  Royal Bank of Canada 2.100% 10/14/20 4,360 4,343
7 Royal Bank of Canada 1.875% 2/5/21 4,800 4,772
  Royal Bank of Canada 2.300% 3/22/21 2,903 2,905
7,10 Securitized Term Auto Receivables Trust 2016-1A 1.524% 3/25/20 4,390 4,367
7,10 Securitized Term Auto Receivables Trust 2016-1A 1.794% 2/25/21 3,800 3,766
7,10 Securitized Term Auto Receivables Trust 2017-1A 1.890% 8/25/20 13,680 13,646
7,10 Securitized Term Auto Receivables Trust 2017-1A 2.209% 6/25/21 4,120 4,116
7,9 SLM Student Loan Trust 2005-5 1.138% 4/25/25 5,663 5,657
7,9 SLM Student Loan Trust 2014-1 1.362% 7/26/21 2,087 2,084
7 SMART ABS Series 2014-1US Trust 1.680% 12/14/19 253 252
7 SMART ABS Series 2016-2US Trust 2.050% 12/14/22 810 789
10 SpareBank 1 Boligkreditt AS 1.250% 5/2/18 998 993
7,10 SpareBank 1 Boligkreditt AS 1.750% 11/15/20 5,077 5,027
10 Swedbank Hypotek AB 1.375% 3/28/18 1,131 1,127
7 Synchrony Credit Card Master Note Trust 2015-1 2.370% 3/15/23 2,955 2,983
7 Synchrony Credit Card Master Note Trust 2015-2 1.600% 4/15/21 3,500 3,503
7 Synchrony Credit Card Master Note Trust 2015-4 2.380% 9/15/23 6,363 6,421
7 Synchrony Credit Card Master Note Trust 2016-2 2.210% 5/15/24 5,840 5,805
7 Synchrony Credit Card Master Note Trust 2016-3 1.580% 9/15/22 16,370 16,233
7 Synchrony Credit Card Master Note Trust Series        
  2012-2 2.220% 1/15/22 2,986 3,010
7 Synchrony Credit Card Master Note Trust Series        
  2012-6 1.360% 8/17/20 6,931 6,934
7 Toyota Auto Receivables 2016-B Owner Trust 1.520% 8/16/21 2,470 2,447
7,9,10Trillium Credit Card Trust II 2016-1A 1.702% 5/26/21 23,940 24,047
7 UBS Commercial Mortgage Trust 2012-C1 4.171% 5/10/45 244 259
7,10 UBS-BAMLL Trust 2012-WRM 3.663% 6/10/30 3,940 4,046
7 UBS-Barclays Commercial Mortgage Trust 2012-C4 2.850% 12/10/45 1,340 1,352
7 UBS-Barclays Commercial Mortgage Trust 2013-C6 3.244% 4/10/46 200 205
7 UBS-Barclays Commercial Mortgage Trust 2013-C6 3.469% 4/10/46 120 122
7,10 Verizon Owner Trust 2017-1A 2.060% 9/20/21 11,000 11,031
7,10 VNDO 2012-6AVE Mortgage Trust 2.996% 11/15/30 2,529 2,568
7,10 Volkswagen Credit Auto Master Trust 2014-1A 1.400% 7/22/19 1,300 1,299
7,10 Volvo Financial Equipment LLC Series 2016-1A 1.890% 9/15/20 1,280 1,275
7,10 Volvo Financial Equipment LLC Series 2017-1A 2.210% 11/15/21 2,310 2,306
7 Wells Fargo Commercial Mortgage Trust        
  2012-LC5 2.918% 10/15/45 863 876
7 Wells Fargo Commercial Mortgage Trust        
  2012-LC5 3.539% 10/15/45 517 534

 

47


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 3.928% 7/15/46 416 441
7 Wells Fargo Commercial Mortgage Trust        
  2013-LC12 4.218% 7/15/46 296 318
7 Wells Fargo Commercial Mortgage Trust        
  2015-C26 2.991% 2/15/48 90 91
7 Wells Fargo Commercial Mortgage Trust        
  2015-C26 3.166% 2/15/48 1,405 1,401
7 Wells Fargo Commercial Mortgage Trust        
  2015-C29 3.400% 6/15/48 550 570
7 Wells Fargo Commercial Mortgage Trust        
  2015-C30 3.664% 9/15/58 1,870 1,928
7 Wells Fargo Commercial Mortgage Trust        
  2015-LC22 3.839% 9/15/58 2,572 2,684
7 Wells Fargo Commercial Mortgage Trust        
  2015-SG1 3.556% 9/15/48 240 250
7 Wells Fargo Commercial Mortgage Trust        
  2015-SG1 3.789% 9/15/48 720 746
7 Wells Fargo Commercial Mortgage Trust        
  2016-C37 3.794% 12/15/49 320 333
7 Wells Fargo Commercial Mortgage Trust        
  2017-RC1 3.631% 1/15/60 900 922
7,9 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2012-2 1.728% 4/22/19 6,570 6,571
7,9 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2014-1 1.358% 7/20/19 9,800 9,804
7,9 Wells Fargo Dealer Floorplan Master Note Trust        
  Series 2014-2 1.428% 10/20/19 2,600 2,602
10 Westpac Banking Corp. 1.850% 11/26/18 1,028 1,029
10 Westpac Banking Corp. 2.000% 3/3/20 2,550 2,541
10 Westpac Banking Corp. 2.250% 11/9/20 3,460 3,458
7,10 WFRBS Commercial Mortgage Trust 2011-C3 4.375% 3/15/44 1,221 1,303
7 WFRBS Commercial Mortgage Trust 2012-C7 3.431% 6/15/45 1,072 1,114
7 WFRBS Commercial Mortgage Trust 2012-C7 4.090% 6/15/45 610 641
7 WFRBS Commercial Mortgage Trust 2012-C8 3.001% 8/15/45 208 212
7 WFRBS Commercial Mortgage Trust 2012-C9 2.870% 11/15/45 2,428 2,460
7 WFRBS Commercial Mortgage Trust 2012-C9 3.388% 11/15/45 566 576
7 WFRBS Commercial Mortgage Trust 2013-C15 3.720% 8/15/46 476 499
7 WFRBS Commercial Mortgage Trust 2013-C15 4.153% 8/15/46 225 241
7 WFRBS Commercial Mortgage Trust 2013-C17 3.558% 12/15/46 161 168
7 WFRBS Commercial Mortgage Trust 2013-C18 3.676% 12/15/46 595 624
7 WFRBS Commercial Mortgage Trust 2013-C18 4.162% 12/15/46 1,488 1,594
7 WFRBS Commercial Mortgage Trust 2014-C19 3.829% 3/15/47 100 105
7 WFRBS Commercial Mortgage Trust 2014-C19 4.101% 3/15/47 1,031 1,094
7 WFRBS Commercial Mortgage Trust 2014-C23 3.917% 10/15/57 815 857
7 WFRBS Commercial Mortgage Trust 2014-C24 3.607% 11/15/47 2,810 2,897
7 WFRBS Commercial Mortgage Trust 2014-LC14 3.522% 3/15/47 140 146
7 WFRBS Commercial Mortgage Trust 2014-LC14 3.766% 3/15/47 2,560 2,670
7 WFRBS Commercial Mortgage Trust 2014-LC14 4.045% 3/15/47 1,352 1,434
7,10 Wheels SPV 2 LLC 2016-1A 1.870% 5/20/25 665 663
7 World Financial Network Credit Card Master Note        
  Trust Series 2013-A 1.610% 12/15/21 1,732 1,734

 

7,9 World Financial Network Credit Card Master Note        
Trust Series 2015-A 1.392% 2/15/22 2,585 2,592

 

48


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
7 World Financial Network Credit Card Master Note        
  Trust Series 2015-B 2.550% 6/17/24 1,330 1,344
7 World Omni Auto Receivables Trust 2014-B 1.680% 12/15/20 3,360 3,363
7 World Omni Auto Receivables Trust 2015-B 1.840% 1/17/22 15,000 14,956
7 World Omni Auto Receivables Trust 2016-A 1.770% 9/15/21 1,390 1,392
7 World Omni Auto Receivables Trust 2016-B 1.300% 2/15/22 7,410 7,334
7 World Omni Automobile Lease Securitization        
  Trust 2017-A 2.320% 8/15/22 4,670 4,685
Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $1,294,292)   1,297,590
Corporate Bonds (20.3%)        
Finance (11.8%)        
  Banking (9.5%)        
10 ABN AMRO Bank NV 2.500% 10/30/18 5,390 5,432
  American Express Bank FSB 6.000% 9/13/17 1,000 1,020
  American Express Centurion Bank 6.000% 9/13/17 1,731 1,766
  American Express Credit Corp. 1.875% 11/5/18 4,107 4,111
  American Express Credit Corp. 2.250% 8/15/19 1,800 1,813
  American Express Credit Corp. 2.200% 3/3/20 1,890 1,896
  American Express Credit Corp. 2.375% 5/26/20 4,900 4,926
  American Express Credit Corp. 2.700% 3/3/22 1,095 1,093
  Australia & New Zealand Banking Group Ltd. 2.000% 11/16/18 3,640 3,650
  Australia & New Zealand Banking Group Ltd. 2.550% 11/23/21 5,598 5,566
10 Australia & New Zealand Banking Group Ltd. 4.500% 3/19/24 2,270 2,351
  Bank of New York Mellon Corp. 1.969% 6/20/17 2,880 2,884
  Bank of New York Mellon Corp. 2.150% 2/24/20 590 592
  Bank of New York Mellon Corp. 2.600% 8/17/20 1,246 1,258
  Bank of New York Mellon Corp. 4.150% 2/1/21 2,000 2,125
  Bank of New York Mellon Corp. 2.050% 5/3/21 3,685 3,632
  Bank of New York Mellon Corp. 3.400% 5/15/24 1,890 1,929
  Bank of New York Mellon Corp. 3.000% 2/24/25 600 594
  Bank of New York Mellon Corp. 2.800% 5/4/26 2,470 2,388
7 Bank of New York Mellon Corp. 3.442% 2/7/28 3,875 3,906
  Bank of Nova Scotia 1.650% 6/14/19 4,090 4,067
  Bank of Nova Scotia 4.375% 1/13/21 4,490 4,794
  Bank of Nova Scotia 2.700% 3/7/22 1,360 1,366
10 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.300% 3/5/20 3,600 3,584
10 Bank of Tokyo-Mitsubishi UFJ Ltd. 2.750% 9/14/20 7,652 7,696
10 Banque Federative du Credit Mutuel SA 2.750% 10/15/20 7,440 7,446
10 Banque Federative du Credit Mutuel SA 2.500% 4/13/21 13,020 12,852
  Bear Stearns Cos. LLC 6.400% 10/2/17 7,190 7,358
  Bear Stearns Cos. LLC 7.250% 2/1/18 5,050 5,279
  BNP Paribas SA 2.700% 8/20/18 3,590 3,627
  BNP Paribas SA 2.400% 12/12/18 5,350 5,379
10 BNP Paribas SA 3.800% 1/10/24 4,170 4,158
  BPCE SA 2.500% 12/10/18 7,485 7,535
  BPCE SA 2.500% 7/15/19 2,225 2,235
  BPCE SA 2.650% 2/3/21 2,550 2,540
  BPCE SA 4.000% 4/15/24 2,750 2,856
  Branch Banking & Trust Co. 2.625% 1/15/22 12,200 12,212
  Branch Banking & Trust Co. 3.625% 9/16/25 1,525 1,561
  Commonwealth Bank of Australia 1.625% 3/12/18 990 990
  Commonwealth Bank of Australia 2.500% 9/20/18 9,260 9,355
  Commonwealth Bank of Australia 1.750% 11/2/18 710 708

 

49


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Commonwealth Bank of Australia 2.250% 3/13/19 2,000 2,008
  Commonwealth Bank of Australia 2.300% 9/6/19 6,329 6,368
10 Commonwealth Bank of Australia 5.000% 3/19/20 2,970 3,195
  Commonwealth Bank of Australia 2.400% 11/2/20 4,420 4,413
10 Commonwealth Bank of Australia 2.000% 9/6/21 3,920 3,825
10 Commonwealth Bank of Australia 2.750% 3/10/22 10,060 10,059
10 Commonwealth Bank of Australia 4.500% 12/9/25 3,125 3,258
  Cooperatieve Rabobank UA 2.250% 1/14/19 2,380 2,393
  Cooperatieve Rabobank UA 2.250% 1/14/20 3,610 3,621
  Cooperatieve Rabobank UA 2.500% 1/19/21 740 740
  Cooperatieve Rabobank UA 3.875% 2/8/22 4,187 4,412
  Credit Suisse AG 2.300% 5/28/19 5,990 6,011
  Credit Suisse AG 3.000% 10/29/21 3,000 3,027
  Credit Suisse AG 3.625% 9/9/24 2,800 2,844
10 Danske Bank A/S 2.750% 9/17/20 1,105 1,113
10 Danske Bank A/S 2.700% 3/2/22 11,080 11,044
  Fifth Third Bank 2.300% 3/15/19 1,360 1,369
  Fifth Third Bank 1.625% 9/27/19 5,820 5,754
  Fifth Third Bank 2.250% 6/14/21 5,364 5,300
  Goldman Sachs Group Inc. 2.625% 1/31/19 8,910 9,005
  Goldman Sachs Group Inc. 2.550% 10/23/19 11,885 11,991
  Goldman Sachs Group Inc. 2.300% 12/13/19 21,690 21,679
  Goldman Sachs Group Inc. 2.600% 12/27/20 10,920 10,918
  Goldman Sachs Group Inc. 5.750% 1/24/22 8,970 10,099
  Goldman Sachs Group Inc. 3.000% 4/26/22 26,320 26,379
  Goldman Sachs Group Inc. 4.000% 3/3/24 1,210 1,255
  Goldman Sachs Group Inc. 3.850% 7/8/24 1,880 1,922
  Goldman Sachs Group Inc. 3.750% 5/22/25 950 962
  Goldman Sachs Group Inc. 3.850% 1/26/27 7,045 7,075
10 HSBC Bank plc 1.500% 5/15/18 2,250 2,243
  HSBC Bank USA NA 4.875% 8/24/20 3,896 4,172
  HSBC Holdings plc 3.400% 3/8/21 2,430 2,486
  HSBC Holdings plc 2.950% 5/25/21 4,090 4,095
  HSBC Holdings plc 2.650% 1/5/22 19,080 18,817
  HSBC Holdings plc 4.000% 3/30/22 4,400 4,627
7 HSBC Holdings plc 3.262% 3/13/23 7,485 7,524
  HSBC Holdings plc 3.600% 5/25/23 7,765 7,893
  HSBC Holdings plc 3.900% 5/25/26 12,055 12,197
  HSBC Holdings plc 4.375% 11/23/26 985 993
7 HSBC Holdings plc 4.041% 3/13/28 26,201 26,466
  HSBC USA Inc. 2.625% 9/24/18 2,700 2,726
  HSBC USA Inc. 2.375% 11/13/19 2,960 2,974
  Huntington National Bank 2.200% 11/6/18 1,812 1,818
  Huntington National Bank 2.375% 3/10/20 7,705 7,738
10 ING Bank NV 2.500% 10/1/19 2,670 2,688
  ING Groep NV 3.950% 3/29/27 2,750 2,746
  JPMorgan Chase & Co. 1.700% 3/1/18 2,400 2,400
  JPMorgan Chase & Co. 1.625% 5/15/18 545 545
  JPMorgan Chase & Co. 2.250% 1/23/20 33,352 33,464
  JPMorgan Chase & Co. 4.950% 3/25/20 3,995 4,305
  JPMorgan Chase & Co. 2.750% 6/23/20 4,475 4,529
  JPMorgan Chase & Co. 4.400% 7/22/20 4,720 5,027
  JPMorgan Chase & Co. 4.250% 10/15/20 4,784 5,072
  JPMorgan Chase & Co. 2.550% 10/29/20 25,165 25,246

 

50


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  JPMorgan Chase & Co. 2.550% 3/1/21 10,159 10,158
  JPMorgan Chase & Co. 4.625% 5/10/21 2,740 2,952
  JPMorgan Chase & Co. 2.400% 6/7/21 3,635 3,616
  JPMorgan Chase & Co. 2.295% 8/15/21 6,720 6,646
  JPMorgan Chase & Co. 4.500% 1/24/22 9,891 10,654
  JPMorgan Chase & Co. 3.250% 9/23/22 3,140 3,197
  JPMorgan Chase & Co. 2.972% 1/15/23 34,053 34,034
  JPMorgan Chase & Co. 2.700% 5/18/23 5,337 5,218
  JPMorgan Chase & Co. 3.875% 2/1/24 1,500 1,559
  JPMorgan Chase & Co. 3.625% 5/13/24 3,350 3,419
  JPMorgan Chase & Co. 3.125% 1/23/25 7,986 7,854
  JPMorgan Chase & Co. 3.900% 7/15/25 8,000 8,271
  JPMorgan Chase & Co. 3.300% 4/1/26 7,479 7,327
7 JPMorgan Chase & Co. 3.782% 2/1/28 18,750 18,927
  JPMorgan Chase Bank NA 6.000% 10/1/17 7,190 7,346
  KeyBank NA 1.650% 2/1/18 2,400 2,402
  KeyBank NA 2.350% 3/8/19 881 888
  KeyBank NA 2.500% 11/22/21 1,860 1,846
  Lloyds Bank plc 2.700% 8/17/20 1,545 1,560
  Manufacturers & Traders Trust Co. 2.300% 1/30/19 6,062 6,114
  Manufacturers & Traders Trust Co. 2.250% 7/25/19 3,400 3,424
  Manufacturers & Traders Trust Co. 2.900% 2/6/25 1,400 1,376
  Mitsubishi UFJ Financial Group Inc. 2.950% 3/1/21 25,985 26,204
  Mitsubishi UFJ Financial Group Inc. 2.190% 9/13/21 3,880 3,793
  Mitsubishi UFJ Financial Group Inc. 2.998% 2/22/22 2,975 2,995
  Mitsubishi UFJ Financial Group Inc. 2.527% 9/13/23 825 798
  Mitsubishi UFJ Financial Group Inc. 3.677% 2/22/27 10,000 10,124
10 Mitsubishi UFJ Trust & Banking Corp. 2.650% 10/19/20 11,120 11,129
  Mizuho Financial Group Inc. 2.953% 2/28/22 2,730 2,731
  Morgan Stanley 2.500% 1/24/19 6,752 6,817
  Morgan Stanley 2.375% 7/23/19 25,904 26,045
  Morgan Stanley 5.625% 9/23/19 2,868 3,097
  Morgan Stanley 5.750% 1/25/21 6,800 7,537
  Morgan Stanley 2.625% 11/17/21 24,079 23,926
  Morgan Stanley 3.875% 1/27/26 1,110 1,125
  Morgan Stanley 3.625% 1/20/27 8,090 8,010
  MUFG Americas Holdings Corp. 3.500% 6/18/22 6,290 6,434
  MUFG Americas Holdings Corp. 3.000% 2/10/25 1,800 1,739
  MUFG Union Bank NA 2.625% 9/26/18 1,460 1,474
  National Australia Bank Ltd. 2.300% 7/25/18 3,140 3,164
  National Australia Bank Ltd. 2.000% 1/14/19 728 729
  National Australia Bank Ltd. 2.800% 1/10/22 7,465 7,501
10 National Australia Bank Ltd. 3.500% 1/10/27 9,060 9,167
  National Bank of Canada 2.100% 12/14/18 2,525 2,536
10 Nordea Bank AB 1.625% 9/30/19 3,535 3,497
10 Nordea Bank AB 2.500% 9/17/20 1,865 1,864
  PNC Bank NA 2.200% 1/28/19 3,300 3,322
  PNC Bank NA 2.600% 7/21/20 5,115 5,159
  PNC Bank NA 2.450% 11/5/20 1,707 1,714
  PNC Bank NA 2.150% 4/29/21 2,078 2,056
  PNC Bank NA 2.550% 12/9/21 7,785 7,777
  PNC Bank NA 2.625% 2/17/22 25,735 25,738
  PNC Bank NA 2.700% 11/1/22 4,900 4,859
  PNC Bank NA 3.300% 10/30/24 1,450 1,466

 

51


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  PNC Bank NA 2.950% 2/23/25 4,610 4,550
  PNC Bank NA 3.250% 6/1/25 4,527 4,551
  PNC Financial Services Group Inc. 2.854% 11/9/22 1,200 1,198
  PNC Funding Corp. 5.125% 2/8/20 2,550 2,755
  Royal Bank of Canada 1.500% 7/29/19 6,250 6,187
  Santander UK plc 1.650% 9/29/17 4,500 4,500
  Santander UK plc 3.050% 8/23/18 3,410 3,462
  Santander UK plc 2.500% 3/14/19 3,118 3,142
  Santander UK plc 2.350% 9/10/19 3,950 3,972
  Skandinaviska Enskilda Banken AB 2.625% 3/15/21 980 982
  Skandinaviska Enskilda Banken AB 1.875% 9/13/21 7,465 7,242
  State Street Corp. 1.350% 5/15/18 1,800 1,796
  State Street Corp. 3.300% 12/16/24 1,790 1,814
  State Street Corp. 3.550% 8/18/25 2,611 2,682
  Sumitomo Mitsui Financial Group Inc. 2.934% 3/9/21 2,900 2,921
  Sumitomo Mitsui Financial Group Inc. 2.632% 7/14/26 3,585 3,339
  Svenska Handelsbanken AB 2.450% 3/30/21 11,675 11,648
  Svenska Handelsbanken AB 1.875% 9/7/21 2,415 2,347
10 Swedbank AB 2.375% 2/27/19 3,770 3,795
10 Swedbank AB 2.800% 3/14/22 7,485 7,498
  Toronto-Dominion Bank 1.450% 8/13/19 700 693
  Toronto-Dominion Bank 2.500% 12/14/20 6,580 6,646
  Toronto-Dominion Bank 2.125% 4/7/21 9,125 9,043
10 UBS Group Funding Jersey Ltd. 2.950% 9/24/20 3,095 3,118
10 UBS Group Funding Jersey Ltd. 2.650% 2/1/22 16,370 15,998
10 UBS Group Funding Switzerland AG 4.253% 3/23/28 9,790 9,924
  US Bancorp 2.350% 1/29/21 1,350 1,354
  US Bancorp 3.100% 4/27/26 1,212 1,190
  US Bank NA 1.350% 1/26/18 601 600
  Wachovia Corp. 5.750% 6/15/17 3,390 3,419
  Wachovia Corp. 5.750% 2/1/18 6,740 6,961
  Wells Fargo & Co. 5.625% 12/11/17 7,020 7,211
  Wells Fargo & Co. 2.600% 7/22/20 6,635 6,699
  Wells Fargo & Co. 3.000% 1/22/21 2,240 2,281
  Wells Fargo & Co. 4.600% 4/1/21 5,670 6,092
  Wells Fargo & Co. 2.100% 7/26/21 4,495 4,402
  Wells Fargo & Co. 3.069% 1/24/23 19,895 19,986
  Wells Fargo & Co. 3.450% 2/13/23 7,460 7,522
  Wells Fargo & Co. 3.300% 9/9/24 8,943 8,957
  Wells Fargo & Co. 3.000% 2/19/25 4,700 4,588
  Wells Fargo & Co. 3.550% 9/29/25 9,029 9,097
  Wells Fargo & Co. 3.000% 10/23/26 5,000 4,787
  Wells Fargo Bank NA 6.000% 11/15/17 7,190 7,384
  Wells Fargo Bank NA 1.800% 11/28/18 3,385 3,393
  Wells Fargo Bank NA 2.150% 12/6/19 14,500 14,553
  Westpac Banking Corp. 2.250% 7/30/18 5,575 5,611
  Westpac Banking Corp. 1.950% 11/23/18 2,376 2,380
  Westpac Banking Corp. 4.875% 11/19/19 7,190 7,684
  Westpac Banking Corp. 2.600% 11/23/20 6,430 6,475
  Westpac Banking Corp. 2.100% 5/13/21 7,555 7,420
  Westpac Banking Corp. 2.000% 8/19/21 9,665 9,426
  Westpac Banking Corp. 2.800% 1/11/22 11,600 11,658
  Westpac Banking Corp. 3.350% 3/8/27 10,820 10,751
7 Westpac Banking Corp. 4.322% 11/23/31 7,190 7,267

 

52


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Brokerage (0.2%)        
  BlackRock Inc. 3.200% 3/15/27 8,310 8,312
  Charles Schwab Corp. 2.200% 7/25/18 450 453
  Charles Schwab Corp. 4.450% 7/22/20 1,350 1,443
  Charles Schwab Corp. 3.200% 3/2/27 6,825 6,787
  Invesco Finance plc 3.125% 11/30/22 4,490 4,545
  Invesco Finance plc 3.750% 1/15/26 3,060 3,144
  TD Ameritrade Holding Corp. 2.950% 4/1/22 60 61
  TD Ameritrade Holding Corp. 3.625% 4/1/25 3,220 3,296
 
  Finance Companies (0.4%)        
  GE Capital International Funding Co. 2.342% 11/15/20 38,807 38,961
  GE Capital International Funding Co. 3.373% 11/15/25 8,016 8,213
 
  Insurance (1.5%)        
  Aetna Inc. 2.750% 11/15/22 1,700 1,699
  Aetna Inc. 2.800% 6/15/23 2,050 2,036
10 AIA Group Ltd. 3.200% 3/11/25 15,935 15,599
10 AIG Global Funding 2.700% 12/15/21 2,340 2,330
  Berkshire Hathaway Inc. 2.750% 3/15/23 26,430 26,426
  Berkshire Hathaway Inc. 3.125% 3/15/26 18,155 18,111
  Chubb INA Holdings Inc. 2.875% 11/3/22 9,073 9,144
  Chubb INA Holdings Inc. 2.700% 3/13/23 1,000 992
  Chubb INA Holdings Inc. 3.350% 5/15/24 3,860 3,942
  Chubb INA Holdings Inc. 3.150% 3/15/25 5,574 5,595
10 Jackson National Life Global Funding 4.700% 6/1/18 2,250 2,318
  Manulife Financial Corp. 4.900% 9/17/20 6,695 7,196
  Manulife Financial Corp. 4.150% 3/4/26 6,434 6,794
  Marsh & McLennan Cos. Inc. 4.800% 7/15/21 4,820 5,228
  Marsh & McLennan Cos. Inc. 2.750% 1/30/22 10,400 10,450
  Marsh & McLennan Cos. Inc. 3.500% 6/3/24 1,995 2,036
  Marsh & McLennan Cos. Inc. 3.500% 3/10/25 8,620 8,766
  Marsh & McLennan Cos. Inc. 3.750% 3/14/26 3,982 4,087
  MetLife Inc. 4.368% 9/15/23 8,070 8,679
10 Metropolitan Life Global Funding I 3.000% 1/10/23 9,594 9,638
10 Metropolitan Life Global Funding I 3.450% 12/18/26 8,725 8,777
10 New York Life Global Funding 2.900% 1/17/24 4,765 4,778
  PartnerRe Finance B LLC 5.500% 6/1/20 1,740 1,903
10 Pricoa Global Funding I 2.550% 11/24/20 2,130 2,140
10 Reliance Standard Life Global Funding II 3.050% 1/20/21 1,270 1,280
10 Swiss Re Treasury US Corp. 2.875% 12/6/22 6,555 6,539
  UnitedHealth Group Inc. 1.900% 7/16/18 1,020 1,024
  UnitedHealth Group Inc. 2.700% 7/15/20 1,010 1,031
  UnitedHealth Group Inc. 3.350% 7/15/22 2,080 2,153
  UnitedHealth Group Inc. 2.875% 3/15/23 2,700 2,709
  UnitedHealth Group Inc. 3.750% 7/15/25 5,275 5,505
  UnitedHealth Group Inc. 3.375% 4/15/27 6,080 6,125
 
  Real Estate Investment Trusts (0.2%)        
  Camden Property Trust 4.875% 6/15/23 435 469
  Camden Property Trust 4.250% 1/15/24 1,488 1,551
  Camden Property Trust 3.500% 9/15/24 435 434
  Federal Realty Investment Trust 3.000% 8/1/22 2,300 2,303
  Federal Realty Investment Trust 2.750% 6/1/23 4,490 4,350
10 Scentre Group Trust 1 / Scentre Group Trust 2 3.750% 3/23/27 6,205 6,244

 

53


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Simon Property Group LP 2.500% 9/1/20 727 740
  Simon Property Group LP 4.375% 3/1/21 4,400 4,686
  Simon Property Group LP 3.500% 9/1/25 891 898
  Simon Property Group LP 3.300% 1/15/26 894 881
  Simon Property Group LP 3.250% 11/30/26 7,200 7,044
          1,523,471
Industrial (7.5%)        
  Basic Industry (0.3%)        
10 Air Liquide Finance SA 1.750% 9/27/21 16,586 15,863
10 Air Liquide Finance SA 2.250% 9/27/23 5,020 4,802
  Air Products & Chemicals Inc. 3.000% 11/3/21 1,100 1,132
  Air Products & Chemicals Inc. 2.750% 2/3/23 1,040 1,041
  Airgas Inc. 2.900% 11/15/22 2,575 2,579
  BHP Billiton Finance USA Ltd. 6.420% 3/1/26 545 666
  Praxair Inc. 4.050% 3/15/21 2,800 2,972
  Praxair Inc. 3.000% 9/1/21 2,730 2,805
  Praxair Inc. 2.450% 2/15/22 2,455 2,456
  Praxair Inc. 2.200% 8/15/22 1,120 1,099
 
  Capital Goods (1.3%)        
10 Airbus Group Finance BV 2.700% 4/17/23 9,486 9,401
  Boeing Co. 2.850% 10/30/24 1,642 1,643
  Boeing Co. 2.600% 10/30/25 4,550 4,415
  Caterpillar Financial Services Corp. 2.100% 1/10/20 6,290 6,294
  Caterpillar Financial Services Corp. 1.700% 8/9/21 6,800 6,560
  Caterpillar Financial Services Corp. 2.850% 6/1/22 6,000 6,051
  Caterpillar Financial Services Corp. 3.250% 12/1/24 7,070 7,148
  Caterpillar Inc. 2.600% 6/26/22 1,250 1,252
  Deere & Co. 2.600% 6/8/22 5,220 5,224
  Dover Corp. 3.150% 11/15/25 1,825 1,838
  General Electric Capital Corp. 6.000% 8/7/19 1,441 1,583
  General Electric Capital Corp. 5.500% 1/8/20 4,137 4,538
  General Electric Capital Corp. 2.200% 1/9/20 961 973
  General Electric Capital Corp. 5.550% 5/4/20 391 433
  General Electric Capital Corp. 4.375% 9/16/20 1,604 1,725
  General Electric Capital Corp. 4.625% 1/7/21 12,962 14,068
  General Electric Capital Corp. 5.300% 2/11/21 1,286 1,424
  General Electric Capital Corp. 4.650% 10/17/21 7,785 8,546
  General Electric Capital Corp. 3.150% 9/7/22 3,306 3,416
  General Electric Capital Corp. 3.100% 1/9/23 8,336 8,561
  Illinois Tool Works Inc. 3.500% 3/1/24 2,650 2,756
  Illinois Tool Works Inc. 2.650% 11/15/26 6,920 6,665
  John Deere Capital Corp. 2.450% 9/11/20 5,175 5,216
  John Deere Capital Corp. 2.800% 3/4/21 3,475 3,532
  John Deere Capital Corp. 2.750% 3/15/22 4,645 4,685
  John Deere Capital Corp. 2.800% 1/27/23 1,925 1,930
  John Deere Capital Corp. 2.800% 3/6/23 8,320 8,341
  Parker-Hannifin Corp. 3.500% 9/15/22 1,885 1,973
  Parker-Hannifin Corp. 3.300% 11/21/24 815 833
10 Parker-Hannifin Corp. 3.250% 3/1/27 6,040 6,006
  Precision Castparts Corp. 2.500% 1/15/23 8,650 8,534
  Precision Castparts Corp. 3.250% 6/15/25 13,895 14,008
10 Siemens Financieringsmaatschappij NV 2.700% 3/16/22 11,205 11,215

 

54


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Communication (0.5%)        
  America Movil SAB de CV 5.000% 10/16/19 1,800 1,924
  America Movil SAB de CV 5.000% 3/30/20 4,800 5,156
  America Movil SAB de CV 3.125% 7/16/22 7,364 7,412
  Comcast Cable Communications Holdings Inc. 9.455% 11/15/22 1,530 2,047
  Comcast Corp. 5.875% 2/15/18 2,100 2,179
  Comcast Corp. 5.700% 5/15/18 2,220 2,323
  Comcast Corp. 2.850% 1/15/23 2,700 2,710
  Comcast Corp. 3.600% 3/1/24 3,600 3,691
  Comcast Corp. 3.375% 2/15/25 7,885 7,966
  Comcast Corp. 3.375% 8/15/25 6,815 6,873
  NBCUniversal Media LLC 5.150% 4/30/20 8,090 8,828
  NBCUniversal Media LLC 2.875% 1/15/23 9,090 9,096
  Walt Disney Co. 3.150% 9/17/25 2,500 2,547
 
  Consumer Cyclical (1.1%)        
  Alibaba Group Holding Ltd. 3.125% 11/28/21 1,030 1,037
  Alibaba Group Holding Ltd. 3.600% 11/28/24 1,285 1,296
  American Honda Finance Corp. 1.600% 7/13/18 700 701
  American Honda Finance Corp. 2.250% 8/15/19 6,590 6,645
  American Honda Finance Corp. 2.450% 9/24/20 2,225 2,242
  American Honda Finance Corp. 1.700% 9/9/21 2,790 2,709
  Automatic Data Processing Inc. 3.375% 9/15/25 475 489
10 BMW US Capital LLC 2.000% 4/11/21 7,355 7,199
10 BMW US Capital LLC 1.850% 9/15/21 2,015 1,954
10 BMW US Capital LLC 2.800% 4/11/26 6,700 6,434
  Cummins Inc. 3.650% 10/1/23 1,350 1,409
10 Harley-Davidson Financial Services Inc. 2.250% 1/15/19 7,090 7,127
10 Harley-Davidson Financial Services Inc. 2.400% 9/15/19 1,475 1,484
10 Harley-Davidson Financial Services Inc. 2.150% 2/26/20 1,089 1,082
  Harley-Davidson Inc. 3.500% 7/28/25 7,465 7,580
  Home Depot Inc. 4.400% 4/1/21 2,030 2,191
  Home Depot Inc. 2.625% 6/1/22 2,700 2,721
  Lowe’s Cos. Inc. 4.625% 4/15/20 2,070 2,212
  Lowe’s Cos. Inc. 3.800% 11/15/21 355 376
  Lowe’s Cos. Inc. 3.120% 4/15/22 4,440 4,582
  Lowe’s Cos. Inc. 3.875% 9/15/23 3,775 4,012
  Lowe’s Cos. Inc. 3.375% 9/15/25 775 790
  Lowe’s Cos. Inc. 2.500% 4/15/26 13,500 12,819
  Mastercard Inc. 3.375% 4/1/24 7,714 7,976
10 Nissan Motor Acceptance Corp. 2.550% 3/8/21 5,415 5,399
  PACCAR Financial Corp. 1.750% 8/14/18 740 742
  PACCAR Financial Corp. 2.200% 9/15/19 450 453
  Starbucks Corp. 2.100% 2/4/21 1,980 1,986
  Starbucks Corp. 2.450% 6/15/26 3,645 3,489
  Target Corp. 2.500% 4/15/26 1,750 1,634
  TJX Cos. Inc. 2.750% 6/15/21 1,650 1,680
  TJX Cos. Inc. 2.500% 5/15/23 900 885
  TJX Cos. Inc. 2.250% 9/15/26 2,650 2,431
  Toyota Motor Credit Corp. 1.550% 7/13/18 500 500
  Toyota Motor Credit Corp. 2.800% 7/13/22 600 604
  Toyota Motor Credit Corp. 3.200% 1/11/27 1,340 1,342
  Visa Inc. 2.200% 12/14/20 4,465 4,483
  Visa Inc. 2.800% 12/14/22 4,465 4,504
  Visa Inc. 3.150% 12/14/25 17,825 17,897

 

55


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Wal-Mart Stores Inc. 3.625% 7/8/20 1,365 1,440
  Wal-Mart Stores Inc. 3.250% 10/25/20 1,485 1,550
  Wal-Mart Stores Inc. 4.250% 4/15/21 2,852 3,090
  Wal-Mart Stores Inc. 2.550% 4/11/23 6,290 6,289
 
  Consumer Noncyclical (1.2%)        
  Anheuser-Busch Cos. LLC 5.500% 1/15/18 5,840 6,021
  Anheuser-Busch InBev Finance Inc. 1.250% 1/17/18 970 969
  Anheuser-Busch InBev Finance Inc. 2.150% 2/1/19 2,050 2,063
  Anheuser-Busch InBev Finance Inc. 2.650% 2/1/21 6,300 6,338
  Anheuser-Busch InBev Finance Inc. 2.625% 1/17/23 2,355 2,319
  Anheuser-Busch InBev Finance Inc. 3.300% 2/1/23 10,400 10,592
  Anheuser-Busch InBev Finance Inc. 3.650% 2/1/26 8,000 8,080
  Anheuser-Busch InBev Worldwide Inc. 5.375% 1/15/20 1,990 2,162
  Anheuser-Busch InBev Worldwide Inc. 2.500% 7/15/22 2,725 2,693
  Coca-Cola Femsa SAB de CV 2.375% 11/26/18 2,655 2,662
  Coca-Cola Femsa SAB de CV 3.875% 11/26/23 1,350 1,385
  Colgate-Palmolive Co. 2.100% 5/1/23 1,200 1,167
  Covidien International Finance SA 4.200% 6/15/20 4,126 4,370
  Gilead Sciences Inc. 3.700% 4/1/24 15,760 16,184
  Gilead Sciences Inc. 3.500% 2/1/25 9,095 9,146
  Gilead Sciences Inc. 3.650% 3/1/26 4,505 4,540
  Kaiser Foundation Hospitals 3.500% 4/1/22 1,105 1,144
  Kimberly-Clark Corp. 3.625% 8/1/20 630 660
  McCormick & Co. Inc. 3.500% 9/1/23 2,500 2,596
  McCormick & Co. Inc. 3.250% 11/15/25 485 483
  Medtronic Global Holdings SCA 3.350% 4/1/27 16,250 16,379
  Medtronic Inc. 5.600% 3/15/19 1,800 1,927
  Medtronic Inc. 3.150% 3/15/22 12,000 12,343
  Medtronic Inc. 3.625% 3/15/24 2,030 2,104
  Medtronic Inc. 3.500% 3/15/25 2,370 2,425
  PepsiCo Inc. 4.500% 1/15/20 2,250 2,414
  PepsiCo Inc. 3.100% 7/17/22 6,318 6,488
  PepsiCo Inc. 3.600% 3/1/24 6,536 6,885
  PepsiCo Inc. 2.850% 2/24/26 2,615 2,567
10 Roche Holdings Inc. 2.875% 9/29/21 1,590 1,619
10 Roche Holdings Inc. 3.350% 9/30/24 4,860 4,994
10 Roche Holdings Inc. 3.000% 11/10/25 2,613 2,614
 
  Energy (1.5%)        
  BP Capital Markets plc 1.375% 5/10/18 1,800 1,795
  BP Capital Markets plc 2.241% 9/26/18 3,780 3,804
  BP Capital Markets plc 4.750% 3/10/19 7,640 8,050
  BP Capital Markets plc 4.500% 10/1/20 4,040 4,347
  BP Capital Markets plc 3.561% 11/1/21 6,917 7,207
  BP Capital Markets plc 3.062% 3/17/22 915 926
  BP Capital Markets plc 3.245% 5/6/22 2,600 2,654
  BP Capital Markets plc 2.500% 11/6/22 3,140 3,078
  BP Capital Markets plc 2.750% 5/10/23 6,630 6,548
  BP Capital Markets plc 3.994% 9/26/23 900 941
  BP Capital Markets plc 3.814% 2/10/24 7,590 7,862
  BP Capital Markets plc 3.224% 4/14/24 3,750 3,752
  BP Capital Markets plc 3.535% 11/4/24 915 924
  BP Capital Markets plc 3.506% 3/17/25 13,000 13,062
  BP Capital Markets plc 3.119% 5/4/26 6,600 6,458

 

56


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Chevron Corp. 2.193% 11/15/19 450 454
  Dominion Gas Holdings LLC 2.500% 12/15/19 2,690 2,711
  Dominion Gas Holdings LLC 2.800% 11/15/20 2,685 2,717
  Exxon Mobil Corp. 2.397% 3/6/22 1,100 1,099
  Occidental Petroleum Corp. 1.500% 2/15/18 2,250 2,249
  Occidental Petroleum Corp. 4.100% 2/1/21 5,815 6,154
  Occidental Petroleum Corp. 3.125% 2/15/22 2,695 2,748
  Occidental Petroleum Corp. 2.600% 4/15/22 1,920 1,913
  Occidental Petroleum Corp. 2.700% 2/15/23 1,800 1,778
10 Schlumberger Holdings Corp. 3.625% 12/21/22 6,000 6,217
  Schlumberger Investment SA 3.650% 12/1/23 2,090 2,172
  Shell International Finance BV 4.375% 3/25/20 1,840 1,961
  Shell International Finance BV 3.400% 8/12/23 5,000 5,136
  Shell International Finance BV 3.250% 5/11/25 23,950 24,074
  Shell International Finance BV 2.875% 5/10/26 15,500 15,073
  Total Capital Canada Ltd. 2.750% 7/15/23 2,700 2,677
  Total Capital International SA 2.750% 6/19/21 7,190 7,263
  Total Capital International SA 2.875% 2/17/22 4,040 4,076
  Total Capital International SA 2.700% 1/25/23 1,350 1,336
  Total Capital International SA 3.700% 1/15/24 12,000 12,444
  Total Capital SA 4.450% 6/24/20 4,670 4,997
  Total Capital SA 4.125% 1/28/21 805 854
  TransCanada PipeLines Ltd. 2.500% 8/1/22 1,200 1,182
  TransCanada PipeLines Ltd. 4.875% 1/15/26 10,651 11,820
 
  Other Industrial (0.1%)        
10 CK Hutchison International 16 Ltd. 2.750% 10/3/26 3,690 3,507
10 CK Hutchison International 17 Ltd. 3.500% 4/5/27 14,920 14,837
 
  Technology (1.0%)        
  Apple Inc. 2.000% 5/6/20 3,705 3,722
  Apple Inc. 2.250% 2/23/21 1,500 1,504
  Apple Inc. 2.850% 5/6/21 5,840 5,978
  Apple Inc. 2.150% 2/9/22 895 884
  Apple Inc. 2.850% 2/23/23 4,780 4,813
  Apple Inc. 2.400% 5/3/23 3,590 3,528
  Apple Inc. 3.000% 2/9/24 1,795 1,809
  Apple Inc. 3.450% 5/6/24 5,385 5,575
  Apple Inc. 2.500% 2/9/25 6,320 6,098
  Apple Inc. 3.200% 5/13/25 1,360 1,374
  Apple Inc. 3.250% 2/23/26 4,145 4,191
  Apple Inc. 2.450% 8/4/26 3,000 2,834
  Apple Inc. 3.350% 2/9/27 1,795 1,810
  Applied Materials Inc. 2.625% 10/1/20 4,735 4,808
  Applied Materials Inc. 3.900% 10/1/25 427 451
  Baidu Inc. 3.250% 8/6/18 7,075 7,173
  Cisco Systems Inc. 4.450% 1/15/20 590 632
  Cisco Systems Inc. 2.200% 9/20/23 2,210 2,138
  Cisco Systems Inc. 2.950% 2/28/26 4,290 4,242
  Cisco Systems Inc. 2.500% 9/20/26 2,210 2,092
  Intel Corp. 2.450% 7/29/20 885 898
  Intel Corp. 3.300% 10/1/21 3,950 4,104
  Intel Corp. 2.700% 12/15/22 2,395 2,402
  International Business Machines Corp. 3.625% 2/12/24 1,800 1,887
  International Business Machines Corp. 3.300% 1/27/27 1,010 1,016

 

57


 

Institutional Intermediate-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
Microsoft Corp. 2.375% 2/12/22 445 446
Microsoft Corp. 2.650% 11/3/22 700 706
Microsoft Corp. 2.700% 2/12/25 2,685 2,639
Microsoft Corp. 3.300% 2/6/27 24,760 25,079
Oracle Corp. 2.375% 1/15/19 2,920 2,959
Oracle Corp. 2.500% 5/15/22 8,180 8,152
Oracle Corp. 3.625% 7/15/23 290 304
Oracle Corp. 3.400% 7/8/24 4,000 4,110
Oracle Corp. 2.950% 5/15/25 4,295 4,232
Oracle Corp. 2.650% 7/15/26 1,915 1,817
QUALCOMM Inc. 2.250% 5/20/20 2,315 2,319
Xilinx Inc. 3.000% 3/15/21 1,390 1,423
 
Transportation (0.5%)        
Burlington Northern Santa Fe LLC 3.450% 9/15/21 1,185 1,236
Burlington Northern Santa Fe LLC 3.000% 3/15/23 5,093 5,159
Burlington Northern Santa Fe LLC 3.850% 9/1/23 11,041 11,682
Burlington Northern Santa Fe LLC 3.400% 9/1/24 9,470 9,728
7 CSX Transportation Inc. 6.251% 1/15/23 1,268 1,447
7 Delta Air Lines 2007-1 Class A Pass Through Trust 6.821% 2/10/24 4,769 5,485
7 Northwest Airlines 2007-1 Class A Pass Through        
Trust 7.027% 5/1/21 3,245 3,577
7 Southwest Airlines Co. 2007-1 Pass Through Trust 6.150% 2/1/24 3,607 3,973
Union Pacific Corp. 2.950% 1/15/23 910 923
Union Pacific Corp. 2.750% 4/15/23 4,555 4,544
Union Pacific Corp. 3.646% 2/15/24 3,550 3,730
Union Pacific Corp. 3.750% 3/15/24 3,770 3,964
Union Pacific Corp. 3.250% 8/15/25 1,000 1,014
7 United Airlines 2013-1 Class A Pass Through Trust 4.300% 2/15/27 1,202 1,254
        965,474
Utilities (1.0%)        
Electric (1.0%)        
Ameren Illinois Co. 2.700% 9/1/22 1,827 1,838
Arizona Public Service Co. 2.550% 9/15/26 2,555 2,401
Baltimore Gas & Electric Co. 2.800% 8/15/22 950 948
Berkshire Hathaway Energy Co. 3.750% 11/15/23 4,600 4,808
Commonwealth Edison Co. 3.400% 9/1/21 8,700 9,028
Commonwealth Edison Co. 2.550% 6/15/26 880 836
Connecticut Light & Power Co. 5.500% 2/1/19 2,125 2,258
Connecticut Light & Power Co. 2.500% 1/15/23 5,550 5,464
Duke Energy Florida LLC 4.550% 4/1/20 1,375 1,476
Entergy Arkansas Inc. 3.500% 4/1/26 9,180 9,389
Entergy Louisiana LLC 3.300% 12/1/22 1,300 1,342
Entergy Louisiana LLC 2.400% 10/1/26 4,920 4,605
Georgia Power Co. 3.250% 3/30/27 15,930 15,444
MidAmerican Energy Co. 5.300% 3/15/18 3,326 3,444
National Rural Utilities Cooperative Finance Corp. 10.375% 11/1/18 4,242 4,803
National Rural Utilities Cooperative Finance Corp. 2.950% 2/7/24 2,665 2,671
Oncor Electric Delivery Co. LLC 7.000% 9/1/22 4,180 5,034
PacifiCorp 5.500% 1/15/19 2,665 2,838
PacifiCorp 3.600% 4/1/24 3,600 3,729
Sierra Pacific Power Co. 3.375% 8/15/23 5,740 5,873
Southwestern Public Service Co. 3.300% 6/15/24 13,616 13,855
Virginia Electric & Power Co. 2.950% 1/15/22 7,700 7,837
Virginia Electric & Power Co. 2.950% 11/15/26 10,325 10,057

 

58


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Westar Energy Inc. 2.550% 7/1/26 5,745 5,459
  Westar Energy Inc. 3.100% 4/1/27 5,930 5,846
 
  Natural Gas (0.0%)        
10 Engie SA 2.875% 10/10/22 1,305 1,291
          132,574
Total Corporate Bonds (Cost $2,620,631)       2,621,519
Sovereign Bonds (6.3%)        
  Asian Development Bank 1.750% 1/10/20 17,875 17,940
10 Avi Funding Co. Ltd. 2.850% 9/16/20 9,400 9,403
10 Banco del Estado de Chile 2.000% 11/9/17 1,450 1,450
10 Bank Nederlandse Gemeenten NV 1.375% 9/27/17 2,725 2,724
10 Bank Nederlandse Gemeenten NV 1.500% 2/15/19 20,500 20,442
  Bermuda 4.854% 2/6/24 7,700 8,062
10 Bermuda 4.854% 2/6/24 2,725 2,862
  CDP Financial Inc. 4.400% 11/25/19 12,055 12,806
10 CDP Financial Inc. 4.400% 11/25/19 18,235 19,351
10 CDP Financial Inc. 3.150% 7/24/24 1,269 1,292
  CNOOC Finance 2013 Ltd. 1.750% 5/9/18 5,860 5,838
10 CNPC General Capital Ltd. 3.400% 4/16/23 800 808
  Corp. Andina de Fomento 4.375% 6/15/22 7,161 7,635
10 Corp. Nacional del Cobre de Chile 3.875% 11/3/21 2,950 3,086
  Corp. Nacional del Cobre de Chile 3.875% 11/3/21 1,300 1,361
  CPPIB Capital Inc. 1.250% 9/20/19 10,000 9,878
10 CPPIB Capital Inc. 1.250% 9/20/19 17,700 17,494
10 CPPIB Capital Inc. 2.250% 1/25/22 56,520 56,414
  Development Bank of Japan Inc. 2.750% 9/16/25 7,580 7,591
10,11Dexia Credit Local SA 1.875% 9/15/21 13,260 12,815
10 Electricite de France SA 3.625% 10/13/25 9,110 9,129
  European Investment Bank 1.625% 6/15/17 2,275 2,275
  European Investment Bank 1.625% 12/15/20 35,715 35,271
  European Investment Bank 4.000% 2/16/21 9,100 9,760
  European Investment Bank 2.500% 4/15/21 7,275 7,403
  Export-Import Bank of Korea 1.750% 2/27/18 3,935 3,936
  Export-Import Bank of Korea 2.250% 1/21/20 5,390 5,380
  Export-Import Bank of Korea 5.125% 6/29/20 5,000 5,417
  Export-Import Bank of Korea 4.000% 1/29/21 2,550 2,674
  Export-Import Bank of Korea 4.375% 9/15/21 9,364 10,008
  Export-Import Bank of Korea 1.875% 10/21/21 8,870 8,559
  Export-Import Bank of Korea 4.000% 1/14/24 2,000 2,110
10 ICBCIL Finance Co. Ltd. 2.375% 5/19/19 8,000 7,947
  Industrial & Commercial Bank of China Ltd. 3.231% 11/13/19 1,000 1,019
  Inter-American Development Bank 2.375% 8/15/17 2,725 2,739
  Inter-American Development Bank 3.875% 2/14/20 4,550 4,823
  Inter-American Development Bank 3.000% 2/21/24 3,250 3,369
  International Bank for Reconstruction &        
  Development 1.375% 5/24/21 18,250 17,841
12 Japan Bank for International Cooperation 1.750% 11/13/18 2,725 2,723
  Japan Bank for International Cooperation 2.125% 2/7/19 2,725 2,737
12 Japan Bank for International Cooperation 2.250% 2/24/20 27,500 27,534
13 KFW 1.000% 6/11/18 5,225 5,207
  Kingdom of Saudi Arabia 2.375% 10/26/21 5,800 5,698
  Kingdom of Saudi Arabia 3.250% 10/26/26 7,910 7,687
  Korea Development Bank 3.875% 5/4/17 4,000 4,007

 

59


 

Institutional Intermediate-Term Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Korea Development Bank 3.500% 8/22/17 6,155 6,191
  Korea Development Bank 2.500% 1/13/21 4,750 4,719
10 Korea East-West Power Co. Ltd. 2.500% 7/16/17 2,050 2,053
  Korea East-West Power Co. Ltd. 2.625% 11/27/18 4,755 4,798
10 Korea Expressway Corp. 1.625% 4/28/17 4,750 4,750
10 Korea Gas Corp. 2.875% 7/29/18 3,650 3,692
10 Korea Land & Housing Corp. 1.875% 8/2/17 4,750 4,750
  Landwirtschaftliche Rentenbank 2.375% 9/13/17 5,000 5,017
10 Municipality Finance plc 1.125% 4/17/18 2,275 2,270
10 Nederlandse Waterschapsbank NV 1.875% 3/13/19 1,800 1,807
10 Nederlandse Waterschapsbank NV 1.250% 9/9/19 32,000 31,617
  North American Development Bank 2.300% 10/10/18 3,750 3,782
10 Ontario Teachers’ Cadillac Fairview Properties        
  Trust 3.125% 3/20/22 7,000 7,075
10 Ontario Teachers’ Cadillac Fairview Properties        
  Trust 3.875% 3/20/27 6,600 6,697
10 Province of Alberta 1.000% 6/21/17 1,825 1,826
  Province of Alberta 1.900% 12/6/19 15,000 15,006
10 Province of Alberta 1.750% 8/26/20 1,500 1,485
10 Province of Alberta 2.050% 8/17/26 5,000 4,639
  Province of Manitoba 2.100% 9/6/22 1,900 1,868
  Province of New Brunswick 2.750% 6/15/18 1,145 1,161
  Province of Ontario 1.100% 10/25/17 11,625 11,638
  Province of Ontario 1.200% 2/14/18 2,275 2,268
  Province of Ontario 3.000% 7/16/18 11,926 12,121
  Province of Ontario 1.625% 1/18/19 42,130 42,018
  Province of Ontario 4.000% 10/7/19 5,475 5,758
  Province of Ontario 4.400% 4/14/20 3,175 3,389
  Province of Ontario 2.500% 4/27/26 1,135 1,099
  Province of Quebec 3.500% 7/29/20 10,575 11,017
  Province of Quebec 2.750% 8/25/21 9,225 9,362
  Province of Quebec 2.375% 1/31/22 10,300 10,284
  Province of Quebec 7.500% 7/15/23 1,335 1,658
  Province of Quebec 7.125% 2/9/24 670 830
  Province of Quebec 7.500% 9/15/29 8,805 12,381
7,10 Ras Laffan Liquefied Natural Gas Co. Ltd. II 5.298% 9/30/20 449 471
  Republic of Korea 7.125% 4/16/19 3,175 3,509
10 Republic of Lithuania 7.375% 2/11/20 1,520 1,731
  Republic of Lithuania 7.375% 2/11/20 23,607 26,847
  Republic of Lithuania 6.125% 3/9/21 1,815 2,048
  Republic of Poland 5.125% 4/21/21 10,205 11,174
  Republic of Poland 5.000% 3/23/22 26,142 28,724
10 Republic of Slovakia 4.375% 5/21/22 2,275 2,474
  Republic of Slovenia 5.500% 10/26/22 2,025 2,271
10 Sinopec Group Overseas Development 2012 Ltd. 2.750% 5/17/17 1,450 1,452
  State of Israel 2.875% 3/16/26 15,265 14,979
  State of Kuwait 2.750% 3/20/22 6,563 6,576
  Statoil ASA 5.250% 4/15/19 4,550 4,841
  Statoil ASA 3.150% 1/23/22 7,065 7,223
  Statoil ASA 2.450% 1/17/23 1,825 1,792
  Statoil ASA 3.700% 3/1/24 6,300 6,551
  Svensk Exportkredit AB 2.375% 3/9/22 39,000 39,188
10 Temasek Financial I Ltd. 2.375% 1/23/23 1,750 1,715
Total Sovereign Bonds (Cost $817,107)       817,097

 

60


 

Institutional Intermediate-Term Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
Taxable Municipal Bonds (0.1%)        
Florida Hurricane Catastrophe Fund        
Finance Corp. Revenue 2.995% 7/1/20 2,050 2,105
Louisiana Local Government Environmental        
Facilities & Community Development        
Authority Revenue 2010-EGSL 3.220% 2/1/21 1,697 1,719
Louisiana Local Government Environmental        
Facilities & Community Development        
Authority Revenue 2010-ELL 3.450% 2/1/22 1,288 1,312
University of California Revenue 2.054% 5/15/18 900 907
Total Taxable Municipal Bonds (Cost $5,936)       6,043
 
      Shares  
Temporary Cash Investments (12.0%)        
Money Market Fund (11.9%)        
14 Vanguard Market Liquidity Fund 0.965%   15,408,525 1,541,161
 
      Face  
      Amount  
      ($000)  
Commercial Paper (0.1%)        
10,15Electricite de France 1.906% 1/15/18 10,000 9,851
Total Temporary Cash Investments (Cost $1,550,856)     1,551,012
Total Investments (110.1%) (Cost $14,240,057)       14,197,534
Other Assets and Liabilities (-10.1%)        
Other Assets 3       1,016,203
Liabilities       (2,315,991)
        (1,299,788)
Net Assets (100%)        
Applicable to 560,136,602 outstanding $.001 par value shares of      
beneficial interest (unlimited authorization)       12,897,746
Net Asset Value Per Share       $23.03
 
        Amount
        ($000)
Statement of Assets and Liabilities        
Assets        
Investments in Securities, at Value        
Unaffiliated Issuers       12,656,373
Affiliated Vanguard Funds       1,541,161
Total Investments in Securities       14,197,534
Investment in Vanguard       883
Receivables for Investment Securities Sold       966,225
Receivables for Accrued Income       47,759
Other Assets 3       1,336
Total Assets       15,213,737
Liabilities        
Payables for Investment Securities Purchased       2,305,999
Payables to Vanguard       1,398
Other Liabilities       8,594
Total Liabilities       2,315,991
Net Assets       12,897,746

 

61


 

Institutional Intermediate-Term Bond Fund

At March 31, 2017, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 12,995,714
Undistributed Net Investment Income 450
Accumulated Net Realized Losses (56,136)
Unrealized Appreciation (Depreciation)  
Investment Securities (42,523)
Futures Contracts (626)
Swap Contracts 867
Net Assets 12,897,746

 

• See Note A in Notes to Financial Statements.
1 Securities with a value of $4,182,000 have been segregated as initial margin for open futures contracts.
2 Securities with a value of $1,312,000 have been segregated as initial margin for open cleared swap contracts.
3 Securities and cash with a value of $714,000 have been segregated as collateral for certain open To Be Announced (TBA) transactions.
4 U.S. government-guaranteed.
5 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed
by the full faith and credit of the U.S. government.
6 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed
by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in
exchange for senior preferred stock.
7 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
8 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of March 31, 2017.
9 Adjustable-rate security.
10 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 March 31, 2017, the aggregate value of these securities
was $1,057,828,000, representing 8.2% of net assets.
11 Guaranteed by multiple countries.
12 Guaranteed by the Government of Japan.
13 Guaranteed by the Federal Republic of Germany.
14 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown
is the 7-day yield.
15 Security exempt from registration under Section 4(2) of the Securities Act of 1933. Such securities may be sold in transactions
exempt from registration only to dealers in that program or other “accredited investors.” At March 31, 2017, the value of these
securities was $9,851,000, representing 0.1% of net assets.
See accompanying Notes, which are an integral part of the Financial Statements.

62


 

Institutional Intermediate-Term Bond Fund  
 
 
Statement of Operations  
 
  Six Months Ended
  March 31, 2017
  ($000)
Investment Income  
Income  
Interest1 108,804
Total Income 108,804
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 187
Management and Administrative 760
Marketing and Distribution 82
Custodian Fees 77
Trustees’ Fees and Expenses 4
Total Expenses 1,110
Net Investment Income 107,694
Realized Net Gain (Loss)  
Investment Securities Sold1 (31,154)
Futures Contracts (22,799)
Swap Contracts (563)
Realized Net Gain (Loss) (54,516)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (182,069)
Futures Contracts (327)
Swap Contracts 571
Change in Unrealized Appreciation (Depreciation) (181,825)
Net Increase (Decrease) in Net Assets Resulting from Operations (128,647)

 

1 Interest income and realized net gain (loss) from an affiliated company of the fund were $3,124,000 and $22,000, respectively.

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

63


 

Institutional Intermediate-Term Bond Fund    
 
 
Statement of Changes in Net Assets    
 
  Six Months Ended Year Ended
  March 31, September 30,
  2017 2016
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 107,694 174,145
Realized Net Gain (Loss) (54,516) 99,425
Change in Unrealized Appreciation (Depreciation) (181,825) 43,828
Net Increase (Decrease) in Net Assets Resulting from Operations (128,647) 317,398
Distributions    
Net Investment Income (108,042) (174,092)
Realized Capital Gain1 (94,306) (18,223)
Total Distributions (202,348) (192,315)
Capital Share Transactions    
Issued 3,250,167 1,479,396
Issued in Lieu of Cash Distributions 202,348 192,315
Redeemed (44,588) (11,057)
Net Increase (Decrease) from Capital Share Transactions 3,407,927 1,660,654
Total Increase (Decrease) 3,076,932 1,785,737
Net Assets    
Beginning of Period 9,820,814 8,035,077
End of Period2 12,897,746 9,820,814

 

1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $47,606,000 and $4,126,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $450,000 and $524,000.

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

64


 

Institutional Intermediate-Term Bond Fund

Financial Highlights      
 
  Six Months Year June 19,
  Ended Ended 20151 to
  March 31, Sept. 30, Sept. 30,
For a Share Outstanding Throughout Each Period 2017 2016 2015
Net Asset Value, Beginning of Period $23.79 $23.46 $23.36
Investment Operations      
Net Investment Income . 221 . 473 .126
Net Realized and Unrealized Gain (Loss) on Investments (.551) .383 .101
Total from Investment Operations (.330) .856 .227
Distributions      
Dividends from Net Investment Income (.222) (.473) (.127)
Distributions from Realized Capital Gains (.208) (.053)
Total Distributions (. 430) (. 526) (.127)
Net Asset Value, End of Period $23.03 $23.79 $23.46
 
Total Return -1.37% 3.70% 0.97%
 
Ratios/Supplemental Data      
Net Assets, End of Period (Millions) $12,898 $9,821 $8,035
Ratio of Total Expenses to Average Net Assets 0.02% 0.02% 0.02%2
Ratio of Net Investment Income to Average Net Assets 1.95% 2.02% 1.92%2
Portfolio Turnover Rate 3 206% 251% 45%

 

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Commencement of operations as a registered investment company.
2 Annualized.
3 Includes 66%, 67%, and 12% attributable to mortgage-dollar-roll activity.

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

65


 

Institutional Intermediate-Term Bond Fund

Notes to Financial Statements

Vanguard Institutional Intermediate-Term Bond Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund has been established by Vanguard as an investment vehicle for certain collective trusts and other accounts managed by Vanguard or its affiliates, and qualifying education savings plans. The fund is offered to investors who meet certain administrative and service criteria and invest a minimum of $10 million. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries.

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. Bonds and 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. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. 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 by methods deemed by the board of trustees to represent fair value.

2. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearing-house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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 futures gains (losses).

During the six months ended March 31, 2017, the fund’s average investments in long and short futures contracts represented 9% and 3% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

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Institutional Intermediate-Term Bond Fund

3. Swap Contracts: The fund invests in credit default swaps to adjust the overall credit risk of the fund or to actively overweight or underweight credit risk to a specific issuer or group of issuers. The fund may sell credit protection through credit default swaps to simulate investments in long positions that are either unavailable or considered to be less attractively priced in the bond market. The fund may purchase credit protection through credit default swaps to reduce credit exposure to a given issuer or issuers. Under the terms of the swaps, an up-front payment may be exchanged between the seller and buyer. In addition, the seller of the credit protection receives a periodic payment of premium from the buyer that is a fixed percentage applied to a notional amount. If, for example, the reference entity is subject to a credit event (such as bankruptcy, failure to pay, or obligation acceleration) during the term of the swap, the seller agrees to either physically settle or cash settle the swap contract. If the swap is physically settled, the seller agrees to pay the buyer an amount equal to the notional amount and take delivery of a debt instrument of the reference issuer with a par amount equal to such notional amount. If the swap is cash settled, the seller agrees to pay the buyer the difference between the notional amount and the final price for the relevant debt instrument, as determined either in a market auction or pursuant to a pre-agreed-upon valuation procedure.

The fund enters into interest rate swap transactions to adjust the fund’s sensitivity to changes in interest rates and maintain the ability to generate income at prevailing market rates. Under the terms of the swaps, one party pays the other an amount that is a fixed percentage rate applied to a notional amount. In return, the counterparty agrees to pay a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount.

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 the seller of credit protection is required to take delivery (or, in a cash settled swap, pay the settlement amount determined) upon occurrence of a credit event, periodic payments are made, or the swap terminates, at which time realized gain (loss) is recorded. The net premium to be received or paid by the fund under swap contracts is accrued daily and recorded as realized gain (loss) over the life of the contract.

The primary risk associated with selling credit protection is that, upon the occurrence of a defined credit event, the market value of the debt instrument received by the fund (or, in a cash settled swap, the debt instruments used to determine the settlement payment by the fund) will be significantly less than the amount paid by the fund and, in a physically settled swap, the fund may receive an illiquid debt instrument. 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 counter-party 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 counter-

67


 

Institutional Intermediate-Term Bond Fund

party 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 Statement of Net Assets. 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 fund enters into centrally cleared interest rate swaps to achieve the same objectives specified with respect to the equivalent over-the-counter swaps but with less counterparty risk because a regulated clearinghouse is the counterparty instead of the clearing broker or executing broker. 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. To further mitigate counterparty risk, the fund trades with a diverse group of prequalified executing brokers; monitors the financial strength of its clearing brokers, executing brokers, and clearinghouse; and has entered into agreements with its clearing brokers and executing brokers.

During the six months ended March 31, 2017, the fund’s average amounts of investments in credit protection sold and credit protection purchased each represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period. The average amount of investments in interest rate swaps represented 3% of net assets, based on the average of notional amounts at each quarter-end during the period.

4. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be pledged, resold or rehypothecated. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions 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.

At March 31, 2017, counterparties had deposited in segregated accounts securities with a value of $1,047,000 in connection with TBA transactions.

5. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned

68


 

Institutional Intermediate-Term Bond Fund

on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund’s portfolio turnover rate. Amounts to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities Purchased in the Statement of Assets and Liabilities.

6. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2015–2016), and for the period ended March 31, 2017, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

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

The fund had no borrowings outstanding at March 31, 2017, or at any time during the period then ended.

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

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

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Institutional Intermediate-Term Bond Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2017, the fund had contributed to Vanguard capital in the amount of $883,000, representing 0.01% of the fund’s net assets and 0.35% of Vanguard’s capitalization. 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. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of March 31, 2017, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 7,904,273
Asset-Backed/Commercial Mortgage-Backed Securities 1,297,590
Corporate Bonds 2,621,519
Sovereign Bonds 817,097
Taxable Municipal Bonds 6,043
Temporary Cash Investments 1,541,161 9,851
Futures Contracts—Assets1 1,035
Futures Contracts—Liabilities1 (1,225)
Swap Contracts—Assets 831 79
Swap Contracts—Liabilities (32)1 (74)
Total 1,541,022 12,656,378
1 Represents variation margin on the last day of the reporting period.      

 

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Institutional Intermediate-Term Bond Fund

D. At March 31, 2017, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:

  Interest Rate Credit  
  Contracts Contracts Total
Statement of Assets and Liabilities Caption ($000) ($000) ($000)
Other Assets 1,118 79 1,197
Other Liabilities (1,257) (74) (1,331)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended March 31, 2017, were:

Interest Rate Credit  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts (22,799) (22,799)
Swap Contracts (824) 261 (563)
Realized Net Gain (Loss) on Derivatives (23,623) 261 (23,362)
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts (327) (327)
Swap Contracts 609 (38) 571
Change in Unrealized Appreciation (Depreciation) on Derivatives 282 (38) 244

 

At March 31, 2017, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
Ultra 10-Year U.S. Treasury Note June 2017 (3,520) (471,295) (2,291)
2-Year U.S. Treasury Note June 2017 1,490 322,515 681
5-Year U.S. Treasury Note June 2017 2,003 235,806 178
10-Year U.S. Treasury Note June 2017 1,891 235,548 833
30-Year U.S. Treasury Bond June 2017 48 7,241 58
Ultra Long U. S. Treasury Bond June 2017 (32) (5,140) (85)
        (626)

 

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

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Institutional Intermediate-Term Bond Fund

At March 31, 2017, the fund had the following open swap contracts:

Over-the-Counter Credit Default Swaps          
        Remaining    
        Up-Front Periodic  
        Premium Premium Unrealized
      Notional Received Received Appreciation
  Termination   Amount (Paid) (Paid) (Depreciation)
Reference Entity Date Counterparty ($000) ($000) (%) ($000)
Credit Protection Sold/Moody’s Rating          
Federation of Malaysia/A3 6/20/22 BARC 2,322 22 1.000 13
Federation of Malaysia/A3 6/20/22 GSI 1,610 4 1.000 (2)
People’s Republic of China/Aa3 6/20/22 BARC 3,700 (32) 1.000 (2)
People’s Republic of China/Aa3 6/20/22 GSI 1,300 (8) 1.000 2
Republic of Chile/Aa3 6/20/22 BARC 750 (7) 1.000 3
Republic of Chile/Aa3 6/20/22 BNPSW 13,500 (171) 1.000 (1)
Republic of Chile/Aa3 6/20/22 CITNA 7,400 (61) 1.000 32
      30,582     45
 
Credit Protection Purchased            
El du Pont de Nemours & Co. 12/20/20 JPMC 4,015 72 (1.000) (30)
Republic of Korea 6/20/22 BNPSW 1,500 39 (1.000) 2
Republic of Korea 6/20/22 GSI 8,000 224 (1.000) 27
Wells Fargo & Co. 9/20/20 BOANA 3,740 53 (1.000) (39)
      17,255     (40)
            5

 

The notional amount represents the maximum potential amount the fund could be required to pay as a seller of credit protection if the
reference entity was subject to a credit event.
BARC—Barclays Bank plc.
BNPSW—BNP Paribas.
BOANA—Bank of America, N.A.
CITNA—Citibank, N.A.
GSI—Goldman Sachs International.
JPMC—JP Morgan Chase Bank.

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Institutional Intermediate-Term Bond Fund        
 
 
 
 
Centrally Cleared Interest Rate Swaps        
        Fixed Floating  
        Interest Rate Interest Rate Unrealized
  Future   Notional Received Received Appreciation
  Effective   Amount (Paid) (Paid) (Depreciation)
Termination Date Date Clearinghouse ($000) (%) (%) ($000)
8/15/17 NA LCH 77,650 0.981 (0.912)2 (20)
6/21/18 6/21/171 CME 16,167 (1.000) 0.0003 (13)
6/21/19 6/21/171 CME 59,889 1.250 (0.000)3 139
6/21/20 6/21/171 CME 101,533 1.250 (0.000)3 447
6/21/22 6/21/171 CME 6,527 (1.250) 0.0003 493
6/21/24 6/21/171 CME 16,545 (1.500) 0.0003 (184)
            862

CME—Chicago Mercantile Exchange.

LCH—London Clearing House.

1 Forward interest rate swap. In a forward interest rate swap, the fund and the counterparty agree to make periodic net payments beginning on a specified future effective date.

2 Based on 1-month London Interbank Offered Rate (LIBOR) as of the most recent payment date. 3 Based on

3-month London Interbank Offered Rate (LIBOR) as of the most recent payment date.

 

 

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

Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes; the effect on the fund’s income dividends to shareholders is offset by a change in principal return. Realized gains of $274,000 on swap contracts have been reclassified from accumulated net realized losses to undistributed net investment income.

At March 31, 2017, the cost of investment securities for tax purposes was $14,241,333,000. Net unrealized depreciation of investment securities for tax purposes was $43,799,000, consisting of unrealized gains of $52,618,000 on securities that had risen in value since their purchase and $96,417,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2017, the fund purchased $1,756,766,000 of investment securities and sold $995,784,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $12,464,913,000 and $9,796,441,000, respectively.

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Institutional Intermediate-Term Bond Fund    
 
 
 
 
G. Capital shares issued and redeemed were:    
  Six Months Ended Year Ended
  March 31, 2017 September 30, 2016
  Shares Shares
  (000) (000)
Issued 140,501 62,521
Issued in Lieu of Cash Distributions 8,796 8,169
Redeemed (1,919) (474)
Net Increase (Decrease) in Shares Outstanding 147,378 70,216

 

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2017, that would require recognition or disclosure in these financial statements.

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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.

75


 

Six Months Ended March 31, 2017      
  Beginning Ending Expenses
  Account Value Account Value Paid During
  9/30/2016 3/31/2017 Period
Based on Actual Fund Return      
Institutional Short-Term Bond Fund      
Institutional Plus Shares $1,000.00 $1,002.15 $0.10
Institutional Intermediate-Term Bond Fund      
Institutional Plus Shares $1,000.00 $986.27 $0.10
Based on Hypothetical 5% Yearly Return      
Institutional Short-Term Bond Fund      
Institutional Plus Shares $1,000.00 $1,024.83 $0.10
Institutional Intermediate-Term Bond Fund      
Institutional Plus Shares $1,000.00 $1,024.83 $0.10

 

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 Institutional Short-Term Bond Fund Institutional Plus Shares, 0.02%; and for the Institutional Intermediate-Term Bond Fund Institutional Plus Shares, 0.02%. 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 (182/365).

76


 

Trustees Approve Advisory Arrangements

The board of trustees of Vanguard Institutional Short-Term Bond Fund and Vanguard Institutional Intermediate-Term Bond Fund has renewed each fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard)—through its Fixed Income Group. The board determined that continuing each fund’s internalized management structure was in the best interests of each 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 monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.

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

Nature, extent, and quality of services

The board reviewed the quality of the investment management services provided to the funds since their inceptions in 2015 and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Fixed Income 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 arrangements.

Investment performance

The board considered the performance of the funds since their inceptions in 2015, 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 arrangements should continue. Information about each fund’s performance can be found in the Performance Summary sections of this report.

Cost

The board concluded that each fund’s expense ratio was well below the average expense ratio charged by funds in its respective peer group and that each fund’s advisory expenses were also well below its peer-group average. Information about each fund’s expenses appears in the About Your Fund’s Expenses section of the report as well as in the Financial Statements sections.

77


 

The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.

The benefit of economies of scale

The board concluded that the funds’ at-cost arrangements with Vanguard ensure that the funds will realize economies of scale as they grow, with the cost to shareholders declining as fund assets increase.

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

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Glossary

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

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

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

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is shown. ”Not Rated” is used to classify securities for which a rating is not available. Not rated securities include a fund’s investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts.

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

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

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

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

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

80


 

The People Who Govern Your Fund

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

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

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

Interested Trustee1

F. William McNabb III

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

Independent Trustees

Emerson U. Fullwood

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

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc.

(diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

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


 

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

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

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

Executive Officers

Glenn Booraem

Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017),

Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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

Michael Rollings

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

Vanguard Senior Management Team

Mortimer J. Buckley

John James

Martha G. King

John T. Marcante

Chris D. McIsaac

James M. Norris

Thomas M. Rampulla

Glenn W. Reed

Karin A. Risi

 

Chairman Emeritus and Senior Advisor John J. Brennan

Chairman, 1996–2009

Chief Executive Officer and President, 1996–2008

Founder John C. Bogle

Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.


 

 

  P.O. Box 2600
  Valley Forge, PA 19482-2600
 
 
 
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This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2017 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q4722 052017

 


Item 2: Code of Ethics. The Registrant has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was amended during the reporting period covered by this report to make certain technical, non-material changes.

Item 3: Audit Committee Financial Expert.

Not Applicable.

Item 4: Principal Accountant Fees and Services.

(a) Audit Fees.

Not Applicable.

Item 5: Audit Committee of Listed Registrants.

Not Applicable.

Item 6: Investments. Not Applicable.

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 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: Exhibits.

(a) Certifications.

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 MALVERN FUNDS

 
 

BY:

/s/ F. WILLIAM MCNABB III*

F. WILLIAM MCNABB III

CHIEF EXECUTIVE OFFICER

 

Date: May 18, 2017

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 MALVERN FUNDS

 
 

BY:

/s/ F. WILLIAM MCNABB III*

F. WILLIAM MCNABB III

CHIEF EXECUTIVE OFFICER

 

Date: May 18, 2017
 VANGUARD MALVERN FUNDS

 

BY:

/s/ THOMAS J. HIGGINS*

THOMAS J. HIGGINS

CHIEF FINANCIAL OFFICER

 

Date: May 18, 2017

* By: /s/ Anne E. Robinson

Anne E. Robinson, pursuant to a Power of Attorney filed on October 4, 2016 see file Number 33-32548, Incorporated by Reference.