N-CSRS 1 malvernfundsfinal.htm VANGUARD MALVERN FUNDS malvernfundsfinal.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, 2017 – March 31, 2018

Item 1: Reports to Shareholders


 

 
Semiannual Report | March 31, 2018
Vanguard U.S. Value Fund

 


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 2
Advisor’s Report. 4
Results of Proxy Voting. 6
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.


 

Your Fund’s Performance at a Glance

• For the six months ended March 31, 2018, Vanguard U.S. Value Fund returned 2.57%, outpacing its benchmark index but lagging the average return of its peer group.

• Your fund’s stock selection model generated mixed performance. The model focuses on five signals that rank a universe of stocks. Three of those signals—valuation, growth, and sentiment—contributed to relative performance. In particular, the valuation and growth signals were significant drivers of the fund’s relative return.

• Seven of the fund’s 11 industry sectors generated positive relative results, led by industrials, consumer discretionary, and financials.

• Stocks in the information technology and real estate sectors were among those that detracted most from performance. Growth stocks outperformed their value counterparts during the period.

Total Returns: Six Months Ended March 31, 2018    
    Total
    Returns
Vanguard U.S. Value Fund   2.57%
Russell 3000 Value Index   2.11
Multi-Cap Value Funds Average   3.10
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% 1.06%

The fund expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2018, 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 2017.

Peer group: Multi-Cap Value Funds.

1


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.

When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.

It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.

We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.

Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority

2


 

front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.

Steady, time-tested guidance

Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.

Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.

Thank you for your continued loyalty.

Sincerely,


Mortimer J. Buckley
President and Chief Executive Officer
April 13, 2018

Market Barometer      
      Total Returns
    Periods Ended March 31, 2018
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 5.85% 13.98% 13.17%
Russell 2000 Index (Small-caps) 3.25 11.79 11.47
Russell 3000 Index (Broad U.S. market) 5.65 13.81 13.03
FTSE All-World ex US Index (International) 4.03 16.45 6.30
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.08% 1.20% 1.82%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -0.37 2.66 2.73
Citigroup Three-Month U.S. Treasury Bill Index 0.63 1.07 0.30
 
CPI      
Consumer Price Index 1.11% 2.36% 1.40%

 

3


 

Advisor’s Report

For the six months ended March 31, 2018, Vanguard U.S. Value Fund returned 2.57%. The fund bested its benchmark index, the Russell 3000 Value Index, which returned 2.11%, but lagged the average return of its peer group.

Investment environment

The period opened with global equities posting positive returns. In the United States, encouraging economic fundamentals, tax-law changes, and low inflation boosted investor sentiment. The European economy continued on a path of broad improvement, including record-high employment and manufacturing activity and elevated consumer confidence. Developed markets in the Asia-Pacific region also rallied, helped by economic and business activity in Japan and Singapore.

As 2018 began, positive global economic momentum continued against a backdrop of hawkish tones from major central banks. In the United States, companies began to respond to new tax laws, and strong earnings announcements moved the Standard & Poor’s 500 Index to a record high at the end of January. Developed Europe and Asia-Pacific equities also rose, fueled by improvement in macroeconomic fundamentals.

Market sentiment changed suddenly in February, and volatility returned after a long period of calm. From a macroeconomic perspective, it seems the markets finally awoke to the fact that the U.S. tax cuts and large government spending packages

posed upside risks for inflation and Federal Reserve policy. This all occurred on top of pro-growth deregulation. Given the strong economic fundamentals, the timing of these stimulus efforts spurred some of the spike in volatility as the market grew concerned about higher interest rates and rising inflation.

Over the period, U.S. stock market performance was mixed; six of 11 market sectors in the Russell 3000 Value Index advanced, led by information technology and consumer discretionary. Growth stocks outperformed their value counterparts, and large-capitalization stocks topped small-caps.

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 company-specific fundamentals—not technical analysis. Our stock selection model evaluates companies in 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 by management with sound investment policies that favor internal over external funding; consistent earnings growth—a demonstrated ability to grow earnings year after year; strong market sentiment—

4


 

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. We monitor our portfolio based on those rankings and adjust when appropriate. Our approach also includes a dynamic weighting process that shifts the relative importance of the themes over time. 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.

Our successes and failures

The fund’s outperformance was driven by our valuation and growth signals. The sentiment signal contributed to a lesser degree. Our management decisions and quality signals detracted from performance during the period.

Stock selection results were positive in seven sectors, with industrials, consumer discretionary, and financials leading the way. Information technology and real estate detracted most.

At the stock level, the largest contributions came from an underweight position in General Electric, as well as an overweight to Burlington Stores, New York Times, Freeport-McMoRan, and United Rentals.

Overweight allocations to PG&E, Sanderson Farms, and RPC and underweights to Intel and Cisco Systems detracted.

Portfolio Managers: James P. Stetler

Binbin Guo, Principal, Head of Alpha Equity Investments

Vanguard Quantitative Equity Group

April 16, 2018

5


 

Results of Proxy Voting

At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:

Proposal 1—Elect trustees for the fund.*

The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.

      Percentage
Trustee For Withheld For
Mortimer J. Buckley 1,930,092,408 11,735,364 99.4%
Emerson U. Fullwood 1,928,646,766 13,181,005 99.3%
Amy Gutmann 1,929,464,755 12,363,017 99.4%
JoAnn Heffernan Heisen 1,929,642,570 12,185,201 99.4%
F. Joseph Loughrey 1,928,796,727 13,031,044 99.3%
Mark Loughridge 1,929,651,616 12,176,156 99.4%
Scott C. Malpass 1,929,376,782 12,450,990 99.4%
F. William McNabb III 1,927,619,020 14,208,752 99.3%
Deanna Mulligan 1,929,546,113 12,281,658 99.4%
André F. Perold 1,924,447,639 17,380,132 99.1%
Sarah Bloom Raskin 1,929,965,439 11,862,333 99.4%
Peter F. Volanakis 1,929,234,485 12,593,287 99.4%
* Results are for all funds within the same trust.      

 

Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.

This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.

        Broker Percentage
Vanguard Fund For Abstain Against Non-Votes For
U.S. Value Fund 43,965,821 2,708,663 2,009,063 11,077,332 73.6%

 

6


 

U.S. Value Fund

Fund Profile

As of March 31, 2018

Portfolio Characteristics    
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 243 2,107 3,771
Median Market Cap $35.5B $54.9B $64.2B
Price/Earnings Ratio 15.4x 17.1x 21.2x
Price/Book Ratio 2.1x 1.9x 2.9x
Return on Equity 11.6% 11.4% 15.0%
Earnings Growth Rate 7.4% 4.8% 8.4%
Dividend Yield 2.1% 2.4% 1.8%
Foreign Holdings 0.0% 0.0% 0.0%
Turnover Rate      
(Annualized) 84%
Ticker Symbol VUVLX
Expense Ratio1 0.23%
30-Day SEC Yield 2.01%
Short-Term Reserves 0.0%

 

Sector Diversification (% of equity exposure)
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Consumer Discretionary 7.3% 7.1% 12.9%
Consumer Staples 7.5 7.7 6.8
Energy 10.6 10.4 5.5
Financials 27.5 27.4 15.1
Health Care 13.3 13.1 13.3
Industrials 8.4 8.5 10.9
Information Technology 9.1 9.2 23.9
Materials 3.1 3.0 3.3
Real Estate 4.7 5.0 3.7
Telecommunication      
Services 2.7 2.7 1.7
Utilities 5.8 5.9 2.9

Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.

 

 

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.95 0.86
Beta 1.04 1.00

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)
JPMorgan Chase & Co. Diversified Banks 3.4%
Exxon Mobil Corp. Integrated Oil & Gas 2.6
Berkshire Hathaway Inc. Multi-Sector Holdings 2.4
Chevron Corp. Integrated Oil & Gas 2.2
Pfizer Inc. Pharmaceuticals 2.1
AT&T Inc. Integrated  
  Telecommunication  
  Services 2.0
Bank of America Corp. Diversified Banks 1.9
Johnson & Johnson Pharmaceuticals 1.7
Wells Fargo & Co. Diversified Banks 1.6
Walmart Inc. Hypermarkets &  
  Super Centers 1.5
Top Ten   21.4%

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, 2018, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2018, the annualized expense ratio was 0.23%.

7


 

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, 2007, Through March 31, 2018


Average Annual Total Returns: Periods Ended March 31, 2018      
  Inception One Five Ten
  Date Year Years Years
U.S. Value Fund 6/29/2000 7.38% 11.19% 8.34%

 

See Financial Highlights for dividend and capital gains information.

8


 

U.S. Value Fund

Financial Statements (unaudited)

Statement of Net Assets

As of March 31, 2018

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 (99.5%)1    
Consumer Discretionary (7.3%)  
  Best Buy Co. Inc. 162,212 11,353
* Liberty Media Corp-    
  Liberty SiriusXM A 228,503 9,391
  Lear Corp. 49,519 9,215
  Comcast Corp. Class A 268,848 9,187
  New York Times Co.    
  Class A 371,113 8,944
  Toll Brothers Inc. 173,579 7,507
* Burlington Stores Inc. 55,987 7,455
  Royal Caribbean    
  Cruises Ltd. 50,072 5,895
  Ralph Lauren Corp.    
  Class A 47,870 5,352
* Weight Watchers    
  International Inc. 83,420 5,316
* Michael Kors Holdings Ltd. 84,171 5,225
  Hilton Worldwide    
  Holdings Inc. 64,673 5,094
  Tailored Brands Inc. 202,292 5,069
  Ford Motor Co. 438,955 4,864
  News Corp. Class A 281,560 4,449
*,^ Conn’s Inc. 61,179 2,080
  Winnebago Industries Inc. 55,278 2,078
* Deckers Outdoor Corp. 21,101 1,900
  News Corp. Class B 115,836 1,865
* Crocs Inc. 107,158 1,741
* Cooper-Standard    
  Holdings Inc. 11,321 1,390
* Liberty Media Corp    
  Liberty SiriusXM C 22,665 926
  John Wiley & Sons Inc.    
  Class A 12,645 805

 

      Market
      Value
    Shares ($000)
  Target Corp. 9,646 670
  Gannett Co. Inc. 54,079 540
  Time Warner Inc. 3,830 362
  Lions Gate Entertainment    
  Corp. Class A 11,887 307
      118,980
Consumer Staples (7.4%)    
  Walmart Inc. 271,502 24,156
  Procter & Gamble Co. 260,301 20,637
  PepsiCo Inc. 94,391 10,303
  Philip Morris    
  International Inc. 95,334 9,476
  Hershey Co. 76,868 7,607
  Sanderson Farms Inc. 60,612 7,214
  Tyson Foods Inc. Class A 87,151 6,379
  Brown-Forman Corp.    
  Class B 110,908 6,033
  Conagra Brands Inc. 155,163 5,722
* US Foods Holding Corp. 174,586 5,721
* HRG Group Inc. 306,148 5,048
  Nu Skin Enterprises Inc.    
  Class A 68,126 5,022
  Lamb Weston Holdings    
  Inc. 61,306 3,569
  CVS Health Corp. 50,940 3,169
  Colgate-Palmolive Co. 16,012 1,148
  Flowers Foods Inc. 22,608 494
      121,698
Energy (10.6%)    
  Exxon Mobil Corp. 567,504 42,341
  Chevron Corp. 315,350 35,962
  ConocoPhillips 315,410 18,701
  Valero Energy Corp. 154,829 14,363
  Marathon Petroleum Corp. 194,410 14,213

 

9


 

U.S. Value Fund    
 
 
 
      Market
      Value
    Shares ($000)
  PBF Energy Inc. Class A 276,302 9,367
  HollyFrontier Corp. 124,479 6,082
^ RPC Inc. 320,096 5,771
* ProPetro Holding Corp. 292,648 4,650
* W&T Offshore Inc. 754,707 3,343
* Exterran Corp. 115,347 3,080
  Delek US Holdings Inc. 72,296 2,942
  Schlumberger Ltd. 44,420 2,878
  Phillips 66 28,613 2,745
  CVR Energy Inc. 88,643 2,679
* California Resources Corp.   136,304 2,338
* Denbury Resources Inc. 294,860 808
* Abraxas Petroleum Corp. 324,629 721
* REX American Resources    
  Corp. 5,003 364
      173,348
Financials (27.4%)    
  JPMorgan Chase & Co. 513,092 56,425
* Berkshire Hathaway Inc.    
  Class B 199,191 39,735
  Bank of America Corp. 1,037,285 31,108
  Wells Fargo & Co. 513,806 26,929
  PNC Financial Services    
  Group Inc. 117,732 17,806
  Morgan Stanley 308,685 16,657
  Citigroup Inc. 208,566 14,078
  Aflac Inc. 303,292 13,272
  State Street Corp. 132,976 13,262
  SunTrust Banks Inc. 177,119 12,051
  BlackRock Inc. 21,637 11,721
  Allstate Corp. 123,602 11,718
  T. Rowe Price Group Inc. 108,450 11,709
  Fifth Third Bancorp 363,719 11,548
  Regions Financial Corp. 614,456 11,417
  Citizens Financial Group    
  Inc. 260,476 10,935
  Lincoln National Corp. 143,050 10,451
  Ally Financial Inc. 359,583 9,763
  Torchmark Corp. 111,509 9,386
  Unum Group 193,888 9,231
  Walker & Dunlop Inc. 154,598 9,186
  Ameriprise Financial Inc. 54,042 7,995
  Zions Bancorporation 135,963 7,169
*,^ Credit Acceptance Corp. 21,198 7,004
  Bank of New York Mellon    
  Corp. 125,856 6,485
  Reinsurance Group of    
  America Inc. Class A 39,938 6,150
* E*TRADE Financial Corp. 100,174 5,551

 

  CME Group Inc. 32,184 5,205
  Legg Mason Inc. 106,312 4,322
  US Bancorp 80,989 4,090
  Universal Insurance    
  Holdings Inc. 123,147 3,928
  BankUnited Inc. 95,782 3,829
  TCF Financial Corp. 158,838 3,623
  CNO Financial Group Inc. 160,656 3,481
  Goldman Sachs Group Inc. 9,508 2,395
  American Express Co. 23,793 2,219
  MetLife Inc. 48,340 2,218
* BofI Holding Inc. 43,873 1,778
  Assurant Inc. 17,442 1,594
  Bank of NT Butterfield &    
  Son Ltd. 30,550 1,371
  BB&T Corp. 25,620 1,333
  Federal Agricultural    
  Mortgage Corp. 14,789 1,287
  American National    
  Insurance Co. 10,898 1,275
  Santander Consumer    
  USA Holdings Inc. 78,144 1,274
  Synovus Financial Corp. 22,177 1,108
  Primerica Inc. 10,922 1,055
  Hamilton Lane Inc. Class A 25,357 944
  First American Financial    
  Corp. 11,417 670
  Federated Investors Inc.    
  Class B 16,577 554
  FNF Group 12,681 508
  Prudential Financial Inc. 4,898 507
  Comerica Inc. 4,670 448
      449,758
Health Care (13.2%)    
  Pfizer Inc. 991,878 35,202
  Johnson & Johnson 222,882 28,562
  Merck & Co. Inc. 362,941 19,769
  Anthem Inc. 71,521 15,713
  Bristol-Myers Squibb Co. 242,227 15,321
* Centene Corp. 104,974 11,219
  Baxter International Inc. 144,785 9,417
  Agilent Technologies Inc. 139,480 9,331
* WellCare Health Plans Inc. 46,185 8,943
  Humana Inc. 32,469 8,729
* IQVIA Holdings Inc. 82,133 8,058
  Cigna Corp. 46,961 7,877
  Abbott Laboratories 78,129 4,681
* Express Scripts Holding    
  Co. 65,587 4,531
  Medtronic plc 52,587 4,219

 

10


 

U.S. Value Fund    
 
 
 
      Market
      Value
    Shares ($000)
  Amgen Inc. 21,488 3,663
* Haemonetics Corp. 45,752 3,347
  Perrigo Co. plc 36,131 3,011
  Analogic Corp. 23,523 2,256
* Impax Laboratories Inc. 109,341 2,127
* MyoKardia Inc. 38,848 1,896
* Tivity Health Inc. 44,694 1,772
* Enanta Pharmaceuticals    
  Inc. 19,220 1,555
* Concert Pharmaceuticals    
  Inc. 53,186 1,218
* Exelixis Inc. 54,867 1,215
* Myriad Genetics Inc. 38,576 1,140
* Triple-S Management    
  Corp. Class B 40,539 1,060
      215,832
Industrials (8.3%)    
  Honeywell International    
  Inc. 96,434 13,936
  Raytheon Co. 59,675 12,879
  Caterpillar Inc. 65,272 9,620
  Spirit AeroSystems    
  Holdings Inc. Class A 114,484 9,582
* United Rentals Inc. 53,548 9,249
  SkyWest Inc. 169,951 9,245
  Quad/Graphics Inc. 310,101 7,861
  Terex Corp. 179,907 6,730
  Copa Holdings SA Class A 49,982 6,429
  Oshkosh Corp. 78,956 6,101
* Meritor Inc. 239,018 4,914
  Global Brass & Copper    
  Holdings Inc. 143,688 4,806
* XPO Logistics Inc. 39,912 4,064
  General Electric Co. 298,101 4,018
  Waste Management Inc. 46,403 3,904
  Pentair plc 42,742 2,912
  United Technologies Corp. 22,884 2,879
  Lockheed Martin Corp. 7,781 2,630
  Triton International Ltd. 79,836 2,443
  Harris Corp. 12,414 2,002
* Rush Enterprises Inc.    
  Class A 39,096 1,661
  Allison Transmission    
  Holdings Inc. 32,313 1,262
* CAI International Inc. 58,050 1,234
* Harsco Corp. 54,845 1,133
  Schneider National Inc.    
  Class B 40,390 1,053
  PACCAR Inc. 13,678 905
  Eaton Corp. plc 10,272 821
  Werner Enterprises Inc. 21,324 778
  ArcBest Corp. 23,477 753
* Textainer Group    
  Holdings Ltd. 36,589 620
  Dover Corp. 3,348 329
      136,753

 

Information Technology (9.0%)  
  Intel Corp. 396,798 20,665
  Cisco Systems Inc. 410,790 17,619
  HP Inc. 623,002 13,656
  QUALCOMM Inc. 192,461 10,664
  Oracle Corp. 231,938 10,611
* ON Semiconductor Corp. 381,917 9,342
  Booz Allen Hamilton    
  Holding Corp. Class A 238,292 9,227
* VMware Inc. Class A 70,689 8,572
  CDW Corp. 87,054 6,121
* CACI International Inc.    
  Class A 35,843 5,425
  Hewlett Packard    
  Enterprise Co. 302,837 5,312
* Extreme Networks Inc. 443,102 4,905
*,^ Advanced Micro Devices    
  Inc. 445,475 4,477
  SYNNEX Corp. 27,238 3,225
* Electro Scientific    
  Industries Inc. 144,492 2,793
  ManTech International    
  Corp. Class A 42,914 2,380
* Dell Technologies Inc.    
  Class V 31,693 2,320
  Western Digital Corp. 19,564 1,805
* TTM Technologies Inc. 115,535 1,767
* Twitter Inc. 58,248 1,690
* SunPower Corp. Class A 169,851 1,355
* QuinStreet Inc. 103,361 1,320
* Virtusa Corp. 20,213 980
* Micron Technology Inc. 15,664 817
* Alpha & Omega    
  Semiconductor Ltd. 31,706 490
      147,538
Materials (3.1%)    
* Freeport-McMoRan Inc. 627,488 11,025
  CF Industries Holdings    
  Inc. 245,681 9,269
  Louisiana-Pacific Corp. 317,748 9,142
  Huntsman Corp. 286,996 8,395
  Westlake Chemical Corp. 38,893 4,323
  Chemours Co. 40,904 1,992
  DowDuPont Inc. 28,242 1,799
  Warrior Met Coal Inc. 59,110 1,656
* Alcoa Corp. 34,037 1,530
* AdvanSix Inc. 28,603 995
  LyondellBasell Industries    
  NV Class A 5,053 534
      50,660
Real Estate (4.7%)    
  Weyerhaeuser Co. 349,352 12,227
  Pebblebrook Hotel Trust 249,208 8,560
  Prologis Inc. 128,268 8,080

 

11


 

U.S. Value Fund    
 
 
 
      Market
      Value
    Shares ($000)
  Xenia Hotels & Resorts    
  Inc. 402,120 7,930
  Jones Lang LaSalle Inc. 33,913 5,923
  Hospitality Properties    
  Trust 225,309 5,709
*,^ Forestar Group Inc. 221,790 4,691
  CorEnergy Infrastructure    
  Trust Inc. 119,938 4,502
* CBRE Group Inc. Class A 65,808 3,107
  Lexington Realty Trust 372,159 2,929
  Forest City Realty Trust    
  Inc. Class A 125,902 2,551
  NorthStar Realty Europe    
  Corp. 144,948 1,887
  National Health Investors    
  Inc. 27,537 1,853
  CubeSmart 59,497 1,678
  Apple Hospitality REIT Inc. 72,089 1,267
  Preferred Apartment    
  Communities Inc. Class A 71,693 1,017
  Select Income REIT 44,401 865
  Alexander & Baldwin Inc. 24,277 562
  Chatham Lodging Trust 26,804 513
  First Industrial Realty    
  Trust Inc. 15,628 457
  Spirit Realty Capital Inc. 52,869 410
      76,718
Telecommunication Services (2.7%)  
  AT&T Inc. 901,891 32,152
* T-Mobile US Inc. 104,598 6,385
  Verizon Communications    
  Inc. 85,115 4,070
  Telephone & Data    
  Systems Inc. 70,233 1,969
      44,576

 

Utilities (5.8%)    
NextEra Energy Inc. 113,785 18,584
Exelon Corp. 351,360 13,707
FirstEnergy Corp. 336,598 11,448
NRG Energy Inc. 364,800 11,137
Entergy Corp. 136,932 10,787
CenterPoint Energy Inc. 373,048 10,222
* Vistra Energy Corp. 432,995 9,019
National Fuel Gas Co. 132,009 6,792
American Electric Power    
Co. Inc. 30,205 2,072
Consolidated Edison Inc. 9,205 717
    94,485
Total Common Stocks    
(Cost $1,368,791)   1,630,346
Temporary Cash Investments (0.8%)1  
Money Market Fund (0.7%)    
2,3 Vanguard Market    
Liquidity Fund, 1.775% 113,093 11,309
 
  Face  
  Amount  
  ($000)  
U. S. Government and Agency Obligations (0.1%)
4 United States Treasury Bill,    
1.446%, 5/31/18 610 608
United States Treasury Bill,    
1.849%, 8/16/18 500 497
    1,105
Total Temporary Cash Investments  
(Cost $12,413)   12,414
Total Investments (100.3%)    
(Cost $1,381,204)   1,642,760

 

12


 

U.S. Value Fund  
 
 
 
 
  Amount
  ($000)
Other Assets and Liabilities (-0.3%)  
Other Assets  
Investment in Vanguard 91
Receivables for Investment Securities Sold 2,711
Receivables for Accrued Income 1,686
Receivables for Capital Shares Issued 725
Variation Margin Receivable—Futures  
Contracts 106
Other Assets 350
Total Other Assets 5,669
Liabilities  
Payables for Investment Securities  
Purchased (8)
Collateral for Securities on Loan (5,163)
Payables for Capital Shares Redeemed (3,719)
Payables to Vanguard (1,382)
Total Liabilities (10,272)
Net Assets (100%)  
Applicable to 87,877,795 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,638,157
Net Asset Value Per Share $18.64

 

At March 31, 2018, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 1,349,072
Undistributed Net Investment Income 5,641
Accumulated Net Realized Gains 22,010
Unrealized Appreciation (Depreciation)  
Investment Securities 261,556
Futures Contracts (122)
Net Assets 1,638,157

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 $5,079,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 100.0% and 0.3%, 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 $5,163,000 of collateral received for securities on loan.
4 Securities with a value of $374,000 have been segregated as initial margin for open futures contracts.
REIT—Real Estate Investment Trust.

 

Derivative Financial Instruments Outstanding as of Period End    
Futures Contracts        
        ($000)
        Value and
    Number of   Unrealized
    Long (Short) Notional Appreciation
  Expiration Contracts Amount (Depreciation)
Long Futures Contracts        
E-mini S&P 500 Index June 2018 60 7,929 (122)

 

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

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, 2018
  ($000)
Investment Income  
Income  
Dividends 16,676
Interest1 50
Securities Lending—Net 97
Total Income 16,823
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 570
Management and Administrative 1,211
Marketing and Distribution 144
Custodian Fees 12
Shareholders’ Reports and Proxy 24
Trustees’ Fees and Expenses 1
Total Expenses 1,962
Net Investment Income 14,861
Realized Net Gain (Loss)  
Investment Securities Sold1 27,403
Futures Contracts 661
Realized Net Gain (Loss) 28,064
Change in Unrealized Appreciation (Depreciation)  
Investment Securities1 2,606
Futures Contracts (176)
Change in Unrealized Appreciation (Depreciation) 2,430
Net Increase (Decrease) in Net Assets Resulting from Operations 45,355

1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $43,000, $1,000, and ($1,000), respectively. Purchases and sales are for temporary cash investment purposes.

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,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 14,861 36,922
Realized Net Gain (Loss) 28,064 100,791
Change in Unrealized Appreciation (Depreciation) 2,430 109,876
Net Increase (Decrease) in Net Assets Resulting from Operations 45,355 247,589
Distributions    
Net Investment Income (32,253) (30,933)
Realized Capital Gain1 (97,416) (22,230)
Total Distributions (129,669) (53,163)
Capital Share Transactions    
Issued 122,535 422,683
Issued in Lieu of Cash Distributions 121,791 50,256
Redeemed (197,166) (365,711)
Net Increase (Decrease) from Capital Share Transactions 47,160 107,228
Total Increase (Decrease) (37,154) 301,654
Net Assets    
Beginning of Period 1,675,311 1,373,657
End of Period2 1,638,157 1,675,311

1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $22,961,000 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 $5,641,000 and $23,033,000.

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 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $19.63 $17.25 $16.48 $16.95 $14.41 $11.89
Investment Operations            
Net Investment Income .1701 .4371 .440 .355 .299 .304
Net Realized and Unrealized Gain (Loss)            
on Investments .376 2.606 1.341 (.543) 2.531 2.506
Total from Investment Operations .546 3.043 1.781 (.188) 2.830 2.810
Distributions            
Dividends from Net Investment Income (. 382) (. 386) (. 358) (. 282) (. 290) (. 290)
Distributions from Realized Capital Gains (1.154) (.277) (.653)
Total Distributions (1.536) (.663) (1.011) (.282) (.290) (.290)
Net Asset Value, End of Period $18.64 $19.63 $17.25 $16.48 $16.95 $14.41
 
Total Return2 2.57% 17.87% 11.09% -1.18% 19.89% 24.16%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $1,638 $1,675 $1,374 $1,215 $1,117 $829
Ratio of Total Expenses to            
Average Net Assets 0.23% 0.23% 0.23% 0.26% 0.29% 0.29%
Ratio of Net Investment Income to            
Average Net Assets 1.74% 2.36% 2.63% 2.10% 1.92% 2.26%
Portfolio Turnover Rate 84% 95% 76% 66% 57% 75%

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 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.

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 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 futures gains (losses).

During the six months ended March 31, 2018, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2014–2017), and for the period ended March 31, 2018, 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, 2018, 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);

18


 

U.S. Value Fund

the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2018, the fund had contributed to Vanguard capital in the amount of $91,000, representing 0.01% of the fund’s net assets and 0.04% 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.

The following table summarizes the market value of the fund’s investments as of March 31, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 1,630,346
Temporary Cash Investments 11,309 1,105
Futures Contracts—Assets1 106
Total 1,641,761 1,105
1 Represents variation margin on the last day of the reporting period.      

 

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. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.

At March 31, 2018, the cost of investment securities for tax purposes was $1,381,204,000. Net unrealized appreciation of investment securities for tax purposes was $261,556,000, consisting of unrealized gains of $289,594,000 on securities that had risen in value since their purchase and $28,038,000 in unrealized losses on securities that had fallen in value since their purchase.

E. During the six months ended March 31, 2018, the fund purchased $709,716,000 of investment securities and sold $773,976,000 of investment securities, other than temporary cash investments.

19


 

U.S. Value Fund    
 
 
 
 
F. Capital shares issued and redeemed were:    
  Six Months Ended Year Ended
  March 31, 2018 September 30, 2017
  Shares Shares
  (000) (000)
Issued 6,279 22,746
Issued in Lieu of Cash Distributions 6,353 2,714
Redeemed (10,113) (19,713)
Net Increase (Decrease) in Shares Outstanding 2,519 5,747

 

G. Management has determined that no material events or transactions occurred subsequent to March 31, 2018, 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, 2018      
  Beginning Ending Expenses
  Account Value Account Value Paid During
U.S. Value Fund 9/30/2017 3/31/2018 Period
Based on Actual Fund Return $1,000.00 $1,025.68 $1.16
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.

26


 

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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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 208 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

Emerson U. Fullwood

Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. 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 University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. 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 in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) 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 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 in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

André F. Perold

Born in 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.

Sarah Bloom Raskin

Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

Peter F. Volanakis

Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). 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 in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

Peter Mahoney

Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.

Anne E. Robinson

Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings
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

 


 

 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com

 
Fund Information > 800-662-7447 Source for Bloomberg Barclays indexes: Bloomberg
Direct Investor Account Services > 800-662-2739 Index Services Limited. Copyright 2018, Bloomberg. All
Institutional Investor Services > 800-523-1036 rights reserved. 
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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  
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Commission, Washington, DC 20549-1520.  
  © 2018 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q1242 052018

 


 
Semiannual Report | March 31, 2018
Vanguard Capital Value Fund

 


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These
principles, grounded in Vanguard’s research and experience, can put you on
the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds.

Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 2
Advisor’s Report. 4
Results of Proxy Voting. 7
Fund Profile. 8
Performance Summary. 9
Financial Statements. 10
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.


 

Your Fund’s Performance at a Glance

• Vanguard Capital Value Fund returned 1.95% for the six months ended March 31, 2018. It lagged its benchmark, the Russell 3000 Value Index, and the average return of its multicapitalization value fund peers.

• Seven of the 11 industry sectors represented in the fund recorded positive results.

Information technology (+9%) and energy (+7%) posted the highest absolute returns, though the fund’s tech holdings underperformed their benchmark counterparts, while the opposite was true for its energy stocks. Results in materials (+4%), consumer staples (+4%), and real estate (+1%) also outdistanced the benchmark returns for those sectors.

• Financials, the fund’s largest sector, modestly advanced (+1%), but poor stock selection made it the largest relative detractor. The fund’s holdings in utilities (–8%) and health care (–2%) underperformed their benchmark counterparts.

Total Returns: Six Months Ended March 31, 2018  
  Total
  Returns
Vanguard Capital Value Fund 1.95%
Russell 3000 Value Index 2.11
Multi-Cap Value Funds Average 3.10
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 0.27% 1.06%

The fund expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2018, the fund’s annualized expense ratio was 0.29%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.

Peer group: Multi-Cap Value Funds.

1


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.

When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.

It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.

We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.

Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority

2


 

front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.

Steady, time-tested guidance

Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.

Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make

Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.

Thank you for your continued loyalty.

Sincerely,


Mortimer J. Buckley
President and Chief Executive Officer
April 13, 2018

Market Barometer      
      Total Returns
    Periods Ended March 31, 2018
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 5.85% 13.98% 13.17%
Russell 2000 Index (Small-caps) 3.25 11.79 11.47
Russell 3000 Index (Broad U.S. market) 5.65 13.81 13.03
FTSE All-World ex US Index (International) 4.03 16.45 6.30
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.08% 1.20% 1.82%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -0.37 2.66 2.73
Citigroup Three-Month U.S. Treasury Bill Index 0.63 1.07 0.30
 
CPI      
Consumer Price Index 1.11% 2.36% 1.40%

 

3


 

Advisor’s Report

For the six months ended March 31, 2018, Vanguard Capital Value Fund returned 1.95%. It trailed its benchmark, the Russell 3000 Value Index, and the average return of its multicapitalization value fund peers.

The investment environment

Stocks provided a net positive return over the six months, though the period was characterized by a strong showing over the first four months, then a falling back through February and March. Investors generally gravitated toward economically sensitive sectors whose results were expected to benefit from fiscal stimulus. Also in favor were businesses whose U.S. operations and intellectual property practices might permit them to keep, rather than fully pass through to customers, the benefits of reduced corporate taxes. Conversely, interest-rate-sensitive sectors, or those seen as unlikely to benefit in the long term from recent tax-law changes, faced stiffer performance challenges.

As a result, five of the six sectors with positive absolute returns for the period were cyclical in nature. Information technology, financials, consumer discretionary, and materials all outpaced the Russell 3000 Value Index. Real estate, telecommunication services, and consumer staples all declined and trailed the benchmark return the furthest.

Earnings growth for U.S. companies has generally been well-sustained, against a backdrop of rising global demand, improving corporate capital-spending intentions,

and low domestic unemployment. The weighting of cyclical sectors in the value index increased steadily through the first five months of the period, and we reduced the fund’s exposure to them by selling holdings in consumer discretionary and financials. We did add to holdings in industrials and materials where we saw attractive risk–reward opportunities in specific stocks.

For the first time in recent memory, we reduced the fund’s holdings in the economically sensitive industry sectors (energy, consumer discretionary, and financials) below their weighting in the index. We felt the investment community had become quite complacent about the upward trajectory of the economy, and we found more interesting values among companies with idiosyncratic challenges in other areas of the market.

Our successes

Our security selections were strongest in energy, consumer staples, and real estate but proved more difficult in financials, IT, and utilities. Selection was ultimately a modest negative for the six months. Sector allocation, and particularly an overweighting of IT, added to returns and provided a nearly equal offset.

Bermuda-based insurer XL Group was the fund’s largest contributor to performance, highlighted by the company’s agreement to a takeover approach from AXA, Europe’s second-largest insurance provider. Generic-pharmaceuticals maker Mylan

4


 

got a boost from favorable earnings and cash-flow delivery. It was further helped by indications that the rate of annual decline for generics pricing had stabilized after an extended period of acceleration. Grocery chain Kroger, energy producer Anadarko Petroleum, and L Brands (owner of the Victoria’s Secret and Bath & Body Works chains) also performed notably for the fund. As of the end of the period, we sold our holdings in both XL Group and L Brands.

Our shortfalls

Among the fund’s detractors over the period, a few suffered key setbacks, including satellite telecommunications provider SES, which was forced to cut its dividend by 40% amid declining revenues and cash flow from its video transmission business. Although pressure on its broadcast video customers from weak subscriber growth and competition from streaming services was well-known, we had expected that SES could better manage through its challenges.

Insurer MetLife underperformed, despite benefiting from rising long-term interest rates, as the company disclosed two material weaknesses (one of them unfavorable to prior reported earnings, the other favorable) in its accounting practices. The net effect was not large relative to shareholders’ equity or ongoing earnings prospects, but it hurt the valuation, as it called into question the company’s internal controls.

Shares of Pacific Gas & Electric were caught up in concerns over responsibility for casualties and property damage from wildfires in Northern California. Although the investigation into what caused the blazes will continue for some time, the stock was affected immediately, as California regulations place more liability on the utility than would be the case in many other jurisdictions. We decided to sell PG&E and reallocate the capital to Southern California utility Edison International, which had similarly been implicated in wildfire damage but for which we judged the market reaction to be overly punitive.

Fund positioning and outlook

At the end of March, the fund’s most significant overweightings relative to the Russell 3000 Value Index were in materials, real estate, IT, and consumer staples. Our largest net purchases were in industrials, real estate, and consumer staples.

Within industrials, we added holdings in two airlines, Delta and Southwest, as outsized capacity additions by competitor United spread worries of a market-share battle, particularly in some of Delta’s markets. Southwest also saw some revenue setbacks as it struggled with implementing a new reservation system. Although airline earnings can be volatile, and the stocks historically have traded at sizable discounts to the broad market during good times, we believe that both companies (and particularly Southwest) are in good position to generate

5


 

and distribute high free cash flow to shareholders, given clean balance sheets and controlled capital-spending plans.

In real estate, we established a position in student housing REIT Education Realty Trust, as the shares sold off amid concerns about industry overcapacity and the company faced difficulties reaching the desired occupancy numbers for its large on-campus development at the University of Kentucky.

Our investment outlook recognizes that the economy is moving at a steady clip, with fiscal policy stimulating government spending and incentives in the new tax law for corporate capital spending. However, we recognize the potential for negative surprises, especially as a result of rising trade frictions with China, and we have been positioning the portfolio at the margin to be somewhat less vulnerable to an unfavorable shift in economic growth expectations.

We will, as always, look to areas of the market characterized by investor unease and a wide range of potential outcomes as fertile fishing ponds for our contrarian ideas. At the same time, we are focusing more intently at this stage on companies with opportunities to help themselves out of their temporary difficulty, rather than those needing a big boost from accelerating economic activity.

We appreciate the trust of the Capital Value Fund’s shareholders and believe that your confidence will be justified by the future investment performance of the fund’s holdings over the full market cycle.

Respectfully,

David W. Palmer, CFA
Senior Managing Director and Equity Portfolio Manager

Wellington Management Company llp

April 17, 2018

6


 

Results of Proxy Voting

At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:

Proposal 1—Elect trustees for the fund.*

The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.

      Percentage
Trustee For Withheld For
Mortimer J. Buckley 1,930,092,408 11,735,364 99.4%
Emerson U. Fullwood 1,928,646,766 13,181,005 99.3%
Amy Gutmann 1,929,464,755 12,363,017 99.4%
JoAnn Heffernan Heisen 1,929,642,570 12,185,201 99.4%
F. Joseph Loughrey 1,928,796,727 13,031,044 99.3%
Mark Loughridge 1,929,651,616 12,176,156 99.4%
Scott C. Malpass 1,929,376,782 12,450,990 99.4%
F. William McNabb III 1,927,619,020 14,208,752 99.3%
Deanna Mulligan 1,929,546,113 12,281,658 99.4%
André F. Perold 1,924,447,639 17,380,132 99.1%
Sarah Bloom Raskin 1,929,965,439 11,862,333 99.4%
Peter F. Volanakis 1,929,234,485 12,593,287 99.4%
* Results are for all funds within the same trust.      

 

Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.

This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.

        Broker Percentage
Vanguard Fund For Abstain Against Non-Votes For
Capital Value Fund 47,661,606 2,635,697 3,412,106 4,596,895 81.7%

 

7


 

Capital Value Fund

Fund Profile

As of March 31, 2018

Portfolio Characteristics    
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 90 2,107 3,771
Median Market Cap $21.6B $54.9B $64.2B
Price/Earnings Ratio 13.1x 17.1x 21.2x
Price/Book Ratio 1.8x 1.9x 2.9x
Return on Equity 11.7% 11.4% 15.0%
Earnings Growth Rate 12.3% 4.8% 8.4%
Dividend Yield 2.3% 2.4% 1.8%
Foreign Holdings 11.2% 0.0% 0.0%
Turnover Rate      
(Annualized) 53%
Ticker Symbol VCVLX
Expense Ratio1 0.27%
30-Day SEC Yield 2.14%
Short-Term Reserves 0.6%

 

Sector Diversification (% of equity exposure)
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Consumer      
Discretionary 5.9% 7.1% 12.9%
Consumer Staples 8.7 7.7 6.8
Energy 10.1 10.4 5.5
Financials 21.3 27.4 15.1
Health Care 10.2 13.1 13.3
Industrials 8.6 8.5 10.9
Information      
Technology 11.2 9.2 23.9
Materials 7.3 3.0 3.3
Real Estate 8.1 5.0 3.7
Telecommunication      
Services 2.4 2.7 1.7
Utilities 6.2 5.9 2.9

Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.

 

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.87 0.80
Beta 1.28 1.25

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 3.3%
Citigroup Inc. Diversified Banks 3.1
Wells Fargo & Co. Diversified Banks 3.0
PNC Financial Services    
Group Inc. Regional Banks 2.9
Verizon Communications Integrated  
Inc. Telecommunication  
  Services 2.4
Kroger Co. Food Retail 2.3
Arthur J Gallagher & Co. Insurance Brokers 2.0
QUALCOMM Inc. Semiconductors 2.0
Reliance Steel &    
Aluminum Co. Steel 1.9
Mylan NV Pharmaceuticals 1.9
Top Ten   24.8%

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, 2018, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2018, the annualized expense ratio was 0.29%.

8


 

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, 2007, Through March 31, 2018


 

Average Annual Total Returns: Periods Ended March 31, 2018      
  Inception One Five Ten
  Date Year Years Years
Capital Value Fund 12/17/2001 6.39% 8.24% 8.80%

 

See Financial Highlights for dividend and capital gains information.

9


 

Capital Value Fund

Financial Statements (unaudited)

Statement of Net Assets

As of March 31, 2018

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 (99.5%)    
Consumer Discretionary (5.9%)  
  Newell Brands Inc. 416,100 10,602
  Comcast Corp. Class A 282,700 9,660
  General Motors Co. 241,429 8,774
*,^ Under Armour Inc.    
  Class A 534,300 8,736
  Expedia Group Inc. 61,035 6,739
  SES SA Class A 311,581 4,221
* Global Brands Group    
  Holding Ltd. 31,800,000 1,798
      50,530
Consumer Staples (8.7%)    
  Kroger Co. 835,711 20,007
  British American    
  Tobacco plc 266,739 15,485
  Walgreens Boots    
  Alliance Inc. 162,987 10,671
  Coty Inc. Class A 474,901 8,691
  Hormel Foods Corp. 189,500 6,504
  Philip Morris International    
  Inc. 59,300 5,894
* Hostess Brands Inc.    
  Class A 287,900 4,258
* Simply Good Foods Co. 208,700 2,865
      74,375
Energy (10.1%)    
  Anadarko Petroleum    
  Corp. 246,221 14,874
  Halliburton Co. 274,261 12,874
  Canadian Natural    
  Resources Ltd. 346,747 10,912
  Cimarex Energy Co. 103,431 9,671
* Diamondback Energy Inc. 54,031 6,836
  Marathon Oil Corp. 418,843 6,756
  Tenaris SA ADR 179,200 6,213
  Hess Corp. 118,698 6,009

 

      Market
      Value
    Shares ($000)
  Pioneer Natural    
  Resources Co. 30,441 5,229
* Laredo Petroleum Inc. 575,300 5,011
* Southwestern Energy Co. 455,275 1,971
      86,356
Financials (21.1%)    
  MetLife Inc. 614,392 28,194
  Citigroup Inc. 391,018 26,394
  Wells Fargo & Co. 495,091 25,948
  PNC Financial Services    
  Group Inc. 166,258 25,145
  Arthur J Gallagher & Co. 251,100 17,258
  American International    
  Group Inc. 288,823 15,718
  RenaissanceRe Holdings    
  Ltd. 107,247 14,855
  Bank of the Ozarks 207,200 10,001
  Principal Financial Group    
  Inc. 94,460 5,753
  Lancashire Holdings Ltd. 678,959 5,528
  Unum Group 82,585 3,932
* Brighthouse Financial Inc. 57,192 2,940
      181,666
Health Care (10.1%)    
* Mylan NV 392,449 16,157
  Bristol-Myers Squibb Co. 220,373 13,939
  McKesson Corp. 97,919 13,794
  Allergan plc 54,456 9,164
  Koninklijke Philips NV 236,000 9,041
* Biogen Inc. 27,535 7,540
* Envision Healthcare Corp. 174,551 6,708
* Seattle Genetics Inc. 88,700 4,643
  AstraZeneca plc ADR 129,200 4,518
* Five Prime Therapeutics    
  Inc. 92,100 1,582
      87,086

 

10


 

Capital Value Fund

      Market
      Value
    Shares ($000)
Industrials (8.5%)    
* Genesee & Wyoming Inc.    
  Class A 154,084 10,908
  Delta Air Lines Inc. 170,800 9,362
  Steelcase Inc. Class A 643,443 8,751
  Herman Miller Inc. 270,315 8,637
  Sanwa Holdings Corp. 640,400 8,258
  Eaton Corp. plc 99,768 7,972
  Dun & Bradstreet Corp. 63,072 7,379
  Southwest Airlines Co. 110,100 6,306
* JELD-WEN Holding Inc. 189,300 5,796
      73,369
Information Technology (11.2%)  
  QUALCOMM Inc. 303,553 16,820
  Western Digital Corp. 151,484 13,977
  KLA-Tencor Corp. 119,900 13,070
* Keysight Technologies Inc.   211,209 11,065
  Genpact Ltd. 270,084 8,640
^ Silicon Motion Technology    
  Corp. ADR 177,472 8,540
  Amdocs Ltd. 103,500 6,906
*,^ Acacia Communications    
  Inc. 171,600 6,600
  Marvell Technology Group    
  Ltd. 311,400 6,539
  Cisco Systems Inc. 89,115 3,822
      95,979
Materials (7.2%)    
  Reliance Steel &    
  Aluminum Co. 191,940 16,457
  Celanese Corp. Class A 144,513 14,481
  PPG Industries Inc. 74,707 8,337
  CRH plc 230,209 7,796
^ Nutrien Ltd. 138,100 6,527
  Ball Corp. 110,600 4,392
  Cabot Corp. 74,100 4,129
      62,119
Other (0.0%)    
*,1,2 Allstar Co-Invest LLC    
  Private Placement NA 198
 
Real Estate (8.1%)    
  Host Hotels & Resorts Inc.  771,584 14,382
  STORE Capital Corp. 546,023 13,552
  Education Realty Trust    
  Inc. 248,600 8,142
  Brixmor Property Group    
  Inc. 494,116 7,535

 

    Market
    Value
  Shares ($000)
Columbia Property Trust    
Inc. 366,383 7,496
Simon Property Group Inc.  45,638 7,044
American Tower Corp. 46,659 6,782
Taubman Centers Inc. 75,500 4,297
    69,230
Telecommunication Services (2.4%)  
Verizon Communications    
Inc. 435,620 20,831
 
Utilities (6.2%)    
Exelon Corp. 396,020 15,449
Edison International 191,959 12,220
OGE Energy Corp. 291,665 9,558
Sempra Energy 76,285 8,484
Iberdrola SA 1,006,986 7,407
    53,118
Total Common Stocks    
(Cost $782,389)   854,857
Temporary Cash Investments (2.3%)  
Money Market Fund (1.7%)    
3,4 Vanguard Market    
Liquidity Fund,    
1.775% 145,322 14,532
 
  Face  
  Amount  
  ($000)  
Repurchase Agreement (0.6%)  
RBS Securities, Inc.    
1.790%, 4/2/18    
(Dated 3/29/18,    
Repurchase Value    
$5,301,000,    
collateralized by U. S.    
Treasury Note/Bond    
1.500%, 10/31/19, with    
a value of $5,409,000) 5,300 5,300
Total Temporary Cash Investments  
(Cost $19,831)   19,832
Total Investments (101.8%)    
(Cost $802,220)   874,689

 

11


 

Capital Value Fund

  Amount
  ($000)
Other Assets and Liabilities (-1.8%)  
Other Assets  
Investment in Vanguard 47
Receivables for Investment Securities Sold 359
Receivables for Accrued Income 1,702
Receivables for Capital Shares Issued 322
Unrealized Appreciation—Forward Currency
Contracts 33
Other Assets 4 1,118
Total Other Assets 3,581
Liabilities  
Payables for Investment Securities  
Purchased (117)
Collateral for Securities on Loan (14,949)
Payables to Investment Advisor (129)
Payables for Capital Shares Redeemed (1,964)
Payables to Vanguard (2,025)
Total Liabilities (19,184)
Net Assets (100%)  
Applicable to 66,269,154 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 859,086
Net Asset Value Per Share $12.96

 

At March 31, 2018, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 828,976
Undistributed Net Investment Income 2,565
Accumulated Net Realized Losses (44,949)
Unrealized Appreciation (Depreciation)  
Investment Securities 72,469
Forward Currency Contracts 33
Foreign Currencies (8)
Net Assets 859,086

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 $14,434,000.
1 Security value determined using significant unobservable inputs.
2 Restricted security represents 0.0% of net assets. Shares not applicable for this private placement. See Restricted Securities table for additional information.
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 $14,949,000 of collateral received for securities on loan, of which $14,532,000 is held in Vanguard Market Liquidity Fund and $417,000 is held in cash.
ADR—American Depositary Receipt.

 

 

Restricted Securities as of Period End    
 
    Acquisition
  Acquisition Cost
Security Name Date ($000)
Allstar Co-Invest LLC Private Placement August 2011 1,677

 

12


 

Capital Value Fund

Derivative Financial Instruments Outstanding as of Period End      
 
Forward Currency Contracts            
            Unrealized
  Contract         Appreciation
  Settlement Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Deutsche Bank AG 6/20/18 USD 10,435 EUR 8,413 19
Credit Suisse International 6/20/18 USD 7,586 JPY 801,276 14
            33
EUR—Euro.            
JPY—Japanese yen.            
USD—U.S. dollar.            

 

Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.

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

13


 

Capital Value Fund

Statement of Operations

  Six Months Ended
  March 31, 2018
  ($000)
Investment Income  
Income  
Dividends1 9,574
Interest 2 37
Securities Lending—Net 440
Total Income 10,051
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 1,018
Performance Adjustment (768)
The Vanguard Group—Note C  
Management and Administrative 941
Marketing and Distribution 59
Custodian Fees 19
Shareholders’ Reports and Proxy 16
Trustees’ Fees and Expenses 1
Total Expenses 1,286
Net Investment Income 8,765
Realized Net Gain (Loss)  
Investment Securities Sold 2 53,212
Forward Currency Contracts (403)
Foreign Currencies (55)
Realized Net Gain (Loss) 52,754
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 2 (42,060)
Forward Currency Contracts (219)
Foreign Currencies 2
Change in Unrealized Appreciation (Depreciation) (42,277)
Net Increase (Decrease) in Net Assets Resulting from Operations 19,242

1 Dividends are net of foreign withholding taxes of $42,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund
were $0, ($1,000), and $1,000, respectively. Purchases and sales are for temporary cash investment purposes.

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,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 8,765 18,261
Realized Net Gain (Loss) 52,754 69,458
Change in Unrealized Appreciation (Depreciation) (42,277) 38,881
Net Increase (Decrease) in Net Assets Resulting from Operations 19,242 126,600
Distributions    
Net Investment Income (17,678) (15,817)
Realized Capital Gain
Total Distributions (17,678) (15,817)
Capital Share Transactions    
Issued 35,150 80,436
Issued in Lieu of Cash Distributions 16,300 14,657
Redeemed (97,277) (235,684)
Net Increase (Decrease) from Capital Share Transactions (45,827) (140,591)
Total Increase (Decrease) (44,263) (29,808)
Net Assets    
Beginning of Period 903,349 933,157
End of Period1 859,086 903,349

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $2,565,000 and $11,533,000.

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 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $12.96 $11.50 $11.45 $15.32 $14.57 $10.58
Investment Operations            
Net Investment Income .1291 .2411 .180 .1291 .1782 .138
Net Realized and Unrealized Gain (Loss)            
on Investments .131 1.420 1.060 (2.330) 2.055 4.051
Total from Investment Operations .260 1.661 1.240 (2.201) 2.233 4.189
Distributions            
Dividends from Net Investment Income (. 260) (. 201) (.144) (.175) (.111) (.199)
Distributions from Realized Capital Gains (1.046) (1.494) (1.372)
Total Distributions (.260) (.201) (1.190) (1.669) (1.483) (.199)
Net Asset Value, End of Period $12.96 $12.96 $11.50 $11.45 $15.32 $14.57
 
Total Return3 1.95% 14.56% 11.36% -15.67% 16.50% 40.21%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $859 $903 $933 $1,059 $1,784 $1,249
Ratio of Total Expenses to            
Average Net Assets4 0.29% 0.27% 0.25% 0.50% 0.47% 0.41%
Ratio of Net Investment Income to            
Average Net Assets 1.99% 1.97% 1.51% 0.93% 1.19%2 1.03%
Portfolio Turnover Rate 53% 41% 134% 90% 90% 132%

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 $0.18 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 (0.17%), (0.19%), (0.20%), 0.06%, 0.02%,
and (0.05%).

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 by the fund

17


 

Capital Value 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, 2018, 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, 2014–2017), and for the period ended March 31, 2018, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

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

18


 

Capital Value Fund

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, 2018, or at any time during the period then ended.

9. Other: Dividend income is recorded on the ex-dividend date. Interest income 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, 2018, the investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets before a decrease of $768,000 (0.17%) based on performance.

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2018, the fund had contributed to Vanguard capital in the amount of $47,000, 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.

19


 

Capital Value Fund

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

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

The following table summarizes the market value of the fund’s investments as of March 31, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 804,166 50,493 198
Temporary Cash Investments 14,532 5,300
Forward Currency Contracts—Assets 33
Total 818,698 55,826 198

 

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. For tax purposes, at September 30, 2017, the fund had available capital losses totaling $97,717,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending September 30, 2018; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.

At March 31, 2018, the cost of investment securities for tax purposes was $802,220,000. Net unrealized appreciation of investment securities for tax purposes was $72,469,000, consisting of unrealized gains of $116,773,000 on securities that had risen in value since their purchase and $44,304,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended March 31, 2018, the fund purchased $237,107,000 of investment securities and sold $290,267,000 of investment securities, other than temporary cash investments.

20


 

Capital Value Fund

G. Capital shares issued and redeemed were:

  Six Months Ended Year Ended
  March 31, 2018 September 30, 2017
  Shares Shares
  (000) (000)
Issued 2,644 6,622
Issued in Lieu of Cash Distributions 1,227 1,209
Redeemed (7,311) (19,274)
Net Increase (Decrease) in Shares Outstanding (3,440) (11,443)

 

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2018, 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, 2018      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Capital Value Fund 9/30/2017 3/31/2018 Period
Based on Actual Fund Return $1,000.00 $1,019.53 $1.46
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.49 1.46

 

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 0.29%. 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 Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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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 208 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

Emerson U. Fullwood

Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. 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 University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. 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 in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) 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 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 in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

André F. Perold

Born in 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.

Sarah Bloom Raskin

Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

Peter F. Volanakis

Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). 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 in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

Peter Mahoney

Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.

Anne E. Robinson

Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings
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

 


 

 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com

 
Fund Information > 800-662-7447 Source for Bloomberg Barclays indexes: Bloomberg
Direct Investor Account Services > 800-662-2739 Index Services Limited. Copyright 2018, Bloomberg. All
 Institutional Investor Services > 800-523-1036 rights reserved.
Text Telephone for People  
 Who Are Deaf or Hard of Hearing > 800-749-7273 CFA® is a registered trademark owned by CFA Institute.
 
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.  
  © 2018 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q3282 052018

 


 
Semiannual Report | March 31, 2018
 
Vanguard Short-Term Inflation-Protected
Securities Index Fund

 


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 3
Results of Proxy Voting. 5
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.


 

Your Fund’s Performance at a Glance

• For the six months ended March 31, 2018, Vanguard Short-Term Inflation-Protected Securities Index Fund returned 0.35% for Investor Shares, tracking its benchmark index (+0.42%) and exceeding the average return of its peer funds (+0.31%). The 30-day SEC yield for Investor Shares began the period at –0.20% and ended at 0.01%.

• Two interest rate increases, strong economic and employment data, and general market volatility led yields of both regular U.S. Treasury securities and Treasury Inflation-Protected Securities (TIPS) to increase. TIPS outperformed regular Treasuries for the period.

• A measure of expected inflation over the next five years (the gap between nominal and TIPS yields) widened from 1.82% to 2.02%.

• To minimize the risk of overdistributing income, the fund withheld income distribution in March. Distributions will be made when sufficient income is available.

Total Returns: Six Months Ended March 31, 2018        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Short-Term Inflation-Protected Securities Index Fund      
Investor Shares 0.01% 1.48% -1.13% 0.35%
ETF Shares 0.10      
Market Price       0.37
Net Asset Value       0.41
Admiral™ Shares 0.10 1.51 -1.09 0.42
Institutional Shares 0.12 1.51 -1.13 0.38
Bloomberg Barclays U.S. Treasury Inflation-Protected        
Securities (TIPS) 0–5 Year Index       0.42
Inflation-Protected Bond Funds Average       0.31

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 0.15% 0.06% 0.06% 0.04% 0.71%

The fund expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2018, the fund’s annualized expense ratios were 0.15% for Investor Shares, 0.06% for ETF Shares, 0.06% 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 2017.

Peer group: Inflation-Protected Bond Funds.

2


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.

When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.

It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.

We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.

Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority

3


 

front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.

Steady, time-tested guidance

Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.

Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.

Thank you for your continued loyalty.

Sincerely,


Mortimer J. Buckley

President and Chief Executive Officer April 13, 2018

Market Barometer      
      Total Returns
    Periods Ended March 31, 2018
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 5.85% 13.98% 13.17%
Russell 2000 Index (Small-caps) 3.25 11.79 11.47
Russell 3000 Index (Broad U.S. market) 5.65 13.81 13.03
FTSE All-World ex US Index (International) 4.03 16.45 6.30
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.08% 1.20% 1.82%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -0.37 2.66 2.73
Citigroup Three-Month U.S. Treasury Bill Index 0.63 1.07 0.30
 
CPI      
Consumer Price Index 1.11% 2.36% 1.40%

 

4


 

Results of Proxy Voting

At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:

Proposal 1—Elect trustees for the fund.*

The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.

      Percentage
Trustee For Withheld For
Mortimer J. Buckley 1,930,092,408 11,735,364 99.4%
Emerson U. Fullwood 1,928,646,766 13,181,005 99.3%
Amy Gutmann 1,929,464,755 12,363,017 99.4%
JoAnn Heffernan Heisen 1,929,642,570 12,185,201 99.4%
F. Joseph Loughrey 1,928,796,727 13,031,044 99.3%
Mark Loughridge 1,929,651,616 12,176,156 99.4%
Scott C. Malpass 1,929,376,782 12,450,990 99.4%
F. William McNabb III 1,927,619,020 14,208,752 99.3%
Deanna Mulligan 1,929,546,113 12,281,658 99.4%
André F. Perold 1,924,447,639 17,380,132 99.1%
Sarah Bloom Raskin 1,929,965,439 11,862,333 99.4%
Peter F. Volanakis 1,929,234,485 12,593,287 99.4%
* Results are for all funds within the same trust.      

 

Proposal 2—Approve a manager-of-managers arrangement with third-party investment advisors.

This arrangement enables the fund to enter into and materially amend investment advisory arrangements with third-party investment advisors, subject to the approval of the fund’s board of trustees and certain conditions imposed by the Securities and Exchange Commission, while avoiding the costs and delays associated with obtaining future shareholder approval.

        Broker Percentage
Vanguard Fund For Abstain Against Non-Votes For
Short-Term Inflation-Protected          
Securities Index Fund 634,444,382 6,334,598 15,104,418 38,822,950 91.3%

 

5



 

Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.

This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.

        Broker Percentage
Vanguard Fund For Abstain Against Non-Votes For
Short-Term Inflation-Protected          
Securities Index Fund 635,602,591 6,151,369 14,129,438 38,822,950 91.5%

 

6


 

Short-Term Inflation-Protected Securities Index Fund

Fund Profile

As of March 31, 2018

Share-Class Characteristics        
  Investor   Admiral Institutional
  Shares ETF Shares Shares Shares
Ticker Symbol VTIPX VTIP VTAPX VTSPX
Expense Ratio1 0.15% 0.06% 0.06% 0.04%
30-Day SEC Yield2 0.01% 0.10% 0.10% 0.12%

 

Financial Attributes    
 
    Bloomberg  
Barclays Bloomberg
    TIPS Barclays
    0-5 Year Aggregate
  Fund Index  Bond Index
Number of Bonds 15 15 9,826
Yield to Maturity      
(before expenses) 2.5% 2.5% 3.1%
Average Coupon 0.5% 0.5% 3.1%
Average Duration 2.5 years 2.5 years 6.1 years
Average Effective      
Maturity 2.5 years 2.5 years 8.4 years
Short-Term      
Reserves 0.1%

 

 

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

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.

 

 

Volatility Measures    
  Bloomberg Bloomberg
  Barclays Barclays
  TIPS Aggregate
  0-5 Year Bond
  Index Index
R-Squared 0.99 0.30
Beta 1.04 0.27

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.

 

 

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 15.5%
1 - 3 Years 39.0
3 - 5 Years 45.5

 

Investment Focus

1 The expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2018, the fund’s annualized expense ratios were 0.15% for Investor Shares, 0.06% for ETF Shares, 0.06% 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, 2018    
            Bloomberg
            Barclays
            TIPS
            0-5 Year
        Investor Shares   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   0.55 -0.24 0.31   0.51
2018   1.48 -1.13 0.35   0.42
Note: For 2018, performance data reflect the six months ended March 31, 2018.        
 
Average Annual Total Returns: Periods Ended March 31, 2018      
          Since Inception
  Inception Date One Year    Five Years Income Capital Total
Investor Shares 10/16/2012 0.27% -0.03% 0.53% -0.38% 0.15%
ETF Shares 10/12/2012          
Market Price   0.29 0.05     0.25
Net Asset Value   0.33 0.06     0.24
Admiral Shares 10/16/2012 0.34 0.06 0.59 -0.35 0.24
Institutional Shares 10/17/2012 0.34 0.08 0.61 -0.34 0.27

 

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, 2018

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% 4/15/18 2,171,438 2,330,906
United States Treasury Inflation Indexed Bonds 1.375% 7/15/18 610,030 708,099
United States Treasury Inflation Indexed Bonds 2.125% 1/15/19 565,482 664,262
United States Treasury Inflation Indexed Bonds 0.125% 4/15/19 2,176,701 2,300,762
United States Treasury Inflation Indexed Bonds 1.875% 7/15/19 641,298 764,475
United States Treasury Inflation Indexed Bonds 1.375% 1/15/20 784,830 918,991
United States Treasury Inflation Indexed Bonds 0.125% 4/15/20 2,178,620 2,296,922
United States Treasury Inflation Indexed Bonds 1.250% 7/15/20 1,215,616 1,418,316
United States Treasury Inflation Indexed Bonds 1.125% 1/15/21 1,393,223 1,613,677
United States Treasury Inflation Indexed Bonds 0.125% 4/15/21 1,917,059 1,987,355
United States Treasury Inflation Indexed Bonds 0.625% 7/15/21 1,524,726 1,696,485
United States Treasury Inflation Indexed Bonds 0.125% 1/15/22 1,688,619 1,828,157
United States Treasury Inflation Indexed Bonds 0.125% 4/15/22 1,921,766 1,930,224
United States Treasury Inflation Indexed Bonds 0.125% 7/15/22 1,771,865 1,889,235
United States Treasury Inflation Indexed Bonds 0.125% 1/15/23 1,785,853 1,884,160
Total U.S. Government and Agency Obligations (Cost $24,442,467)   24,232,026
 
      Shares  
Temporary Cash Investment (0.1%)        
Money Market Fund (0.1%)        
1 Vanguard Market Liquidity Fund (Cost $20,092) 1.775%   200,941 20,094
Total Investments (99.9%) (Cost $24,462,559)       24,252,120

 

9


 

Short-Term Inflation-Protected Securities Index Fund  
 
 
 
  Amount
  ($000)
Other Assets and Liabilities (0.1%)  
Other Assets  
Investment in VGI 1,300
Receivables for Investment Securities Sold 4,867
Receivables for Accrued Income 27,822
Receivables for Capital Shares Issued 14,242
Total Other Assets 48,231
Liabilities  
Payables for Investment Securities Purchased (16,408)
Payables for Capital Shares Redeemed (7,663)
Payables to Vanguard (4,629)
Other Liabilities (1,220)
Total Liabilities (29,920)
Net Assets (100%) 24,270,431
 
 
At March 31, 2018, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 24,508,026
Undistributed Net Investment Income 110,318
Accumulated Net Realized Losses (137,474)
Unrealized Appreciation (Depreciation) (210,439)
Net Assets 24,270,431
 
Investor Shares—Net Assets  
Applicable to 256,693,589 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 6,285,923
Net Asset Value Per Share—Investor Shares $24.49
 
ETF Shares—Net Assets  
Applicable to 97,467,013 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 4,762,888
Net Asset Value Per Share—ETF Shares $48.87
 
Admiral Shares—Net Assets  
Applicable to 235,508,267 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 5,774,304
Net Asset Value Per Share—Admiral Shares $24.52
 
Institutional Shares—Net Assets  
Applicable to 303,547,009 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 7,447,316
Net Asset Value Per Share—Institutional Shares $24.53

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, 2018
  ($000)
Investment Income  
Income  
Interest1 275,703
Total Income 275,703
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 393
Management and Administrative—Investor Shares 3,942
Management and Administrative—ETF Shares 981
Management and Administrative—Admiral Shares 1,220
Management and Administrative—Institutional Shares 1,201
Marketing and Distribution—Investor Shares 507
Marketing and Distribution—ETF Shares 135
Marketing and Distribution—Admiral Shares 217
Marketing and Distribution—Institutional Shares 108
Custodian Fees 58
Shareholders’ Reports and Proxy—Investor Shares 50
Shareholders’ Reports and Proxy—ETF Shares 140
Shareholders’ Reports and Proxy—Admiral Shares 76
Shareholders’ Reports and Proxy—Institutional Shares 5
Trustees’ Fees and Expenses 7
Total Expenses 9,040
Net Investment Income 266,663
Realized Net Gain (Loss)  
Investment Securities Sold1 (10,660)
Futures Contracts 3,032
Realized Net Gain (Loss) (7,628)
Change in Unrealized Appreciation (Depreciation) of Investment Securities1 (165,287)
Net Increase (Decrease) in Net Assets Resulting from Operations 93,748

1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $687,000, $19,000, and $2,000, respectively. Purchases and sales are for temporary cash investment purposes.

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,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 266,663 254,685
Realized Net Gain (Loss) (7,628) (7,041)
Change in Unrealized Appreciation (Depreciation) (165,287) (168,286)
Net Increase (Decrease) in Net Assets Resulting from Operations 93,748 79,358
Distributions    
Net Investment Income    
Investor Shares (91,096) (27,992)
ETF Shares (70,270) (21,465)
Admiral Shares (79,804) (26,937)
Institutional Shares (109,317) (44,908)
Realized Capital Gain    
Investor Shares
ETF Shares
Admiral Shares
Institutional Shares
Total Distributions (350,487) (121,302)
Capital Share Transactions    
Investor Shares 450,623 826,514
ETF Shares 933,842 1,409,404
Admiral Shares 753,073 1,712,740
Institutional Shares 540,233 1,503,409
Net Increase (Decrease) from Capital Share Transactions 2,677,771 5,452,067
Total Increase (Decrease) 2,421,032 5,410,123
Net Assets    
Beginning of Period 21,849,399 16,439,276
End of Period1 24,270,431 21,849,399

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $110,318,000 and $194,124,000.

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
For a Share Outstanding March 31, Year Ended September 30, Sept. 30,
Throughout Each Period 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.77 $24.83 $24.23 $24.74 $24.75 $25.00
Investment Operations            
Net Investment Income . 273 2 .3122 .0802 (.131) .183 . 015
Net Realized and Unrealized Gain (Loss)            
on Investments (.187) (. 237) . 520 (. 206) (.189) (. 241)
Total from Investment Operations . 086 . 075 . 600 (. 337) (. 006) (. 226)
Distributions            
Dividends from Net Investment Income (. 366) (.135) (.173) (. 004) (. 024)
Distributions from Realized Capital Gains
Total Distributions (. 366) (.135) (.173) (. 004) (. 024)
Net Asset Value, End of Period $24.49 $24.77 $24.83 $24.23 $24.74 $24.75
 
Total Return3 0.35% 0.31% 2.48% -1.36% -0.02% -0.91%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $6,286 $5,904 $5,088 $4,532 $4,517 $3,702
Ratio of Total Expenses to            
Average Net Assets 0.15% 0.15% 0.16% 0.17% 0.20% 0.20%4
Ratio of Net Investment Income to            
Average Net Assets 2.21% 1.26% 0.42% (0.53%) 0.88% 0.01%4
Portfolio Turnover Rate 5 17% 27% 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
       
For a Share Outstanding March 31, Year Ended September 30, Sept. 30,
Throughout Each Period 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $49.41 $49.59 $48.36 $49.38 $49.36 $49.83
Investment Operations            
Net Investment Income . 548 2 .6712 .2512 (. 210) . 414 . 065
Net Realized and Unrealized Gain (Loss)            
on Investments (. 346) (. 477) . 979 (. 415) (. 371) (. 483)
Total from Investment Operations .202 .194 1.230 (.625) .043 (.418)
Distributions            
Dividends from Net Investment Income (.742) (. 374) (. 395) (. 023) (. 052)
Distributions from Realized Capital Gains
Total Distributions (.742) (. 374) (. 395) (. 023) (. 052)
Net Asset Value, End of Period $48.87 $49.41 $49.59 $48.36 $49.38 $49.36
 
Total Return 0.41% 0.40% 2.54% -1.26% 0.09% -0.84%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $4,763 $3,881 $2,478 $1,838 $1,336 $967
Ratio of Total Expenses to            
Average Net Assets 0.06% 0.06% 0.07% 0.08% 0.10% 0.10%3
Ratio of Net Investment Income to            
Average Net Assets 2.30% 1.35% 0.51% (0.44%) 0.98% 0.11%3
Portfolio Turnover Rate 4 17% 27% 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
       
For a Share Outstanding March 31, Year Ended September 30, Sept. 30,
Throughout Each Period 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.79 $24.88 $24.27 $24.77 $24.77 $25.00
Investment Operations            
Net Investment Income . 285 2 .3382 .1492 (.105) . 209 . 025
Net Realized and Unrealized Gain (Loss)            
on Investments (.183) (. 241) . 461 (.197) (.195) (. 229)
Total from Investment Operations .102 .097 .610 (. 302) .014 (. 204)
Distributions            
Dividends from Net Investment Income (. 372) (.187) (.198) (. 014) (. 026)
Distributions from Realized Capital Gains
Total Distributions (. 372) (.187) (.198) (. 014) (. 026)
Net Asset Value, End of Period $24.52 $24.79 $24.88 $24.27 $24.77 $24.77
 
Total Return3 0.42% 0.40% 2.51% -1.22% 0.06% -0.82%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $5,774 $5,078 $3,373 $2,126 $1,518 $776
Ratio of Total Expenses to            
Average Net Assets 0.06% 0.06% 0.07% 0.08% 0.10% 0.10%4
Ratio of Net Investment Income to            
Average Net Assets 2.30% 1.35% 0.51% (0.44%) 0.98% 0.11%4
Portfolio Turnover Rate 5 17% 27% 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
       
For a Share Outstanding March 31, Year Ended September 30, Sept. 30,
Throughout Each Period 2018 2017 2016 2015 2014 2013
Net Asset Value, Beginning of Period $24.81 $24.90 $24.28 $24.78 $24.77 $24.99
Investment Operations            
Net Investment Income . 287 2 . 3332 .1392 (. 099) . 215 . 026
Net Realized and Unrealized Gain (Loss)            
on Investments (.194) (. 225) . 481 (.196) (.189) (. 220)
Total from Investment Operations .093 .108 .620 (. 295) .026 (.194)
Distributions            
Dividends from Net Investment Income (. 373) (.198) (. 205) (. 016) (. 026)
Distributions from Realized Capital Gains
Total Distributions (. 373) (.198) (. 205) (. 016) (. 026)
Net Asset Value, End of Period $24.53 $24.81 $24.90 $24.28 $24.78 $24.77
 
Total Return3 0.38% 0.44% 2.55% -1.19% 0.11% -0.78%
 
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $7,447 $6,986 $5,500 $3,837 $2,706 $1,262
Ratio of Total Expenses to            
Average Net Assets 0.04% 0.04% 0.04% 0.05% 0.07% 0.07%4
Ratio of Net Investment Income to            
Average Net Assets 2.32% 1.37% 0.54% (0.41%) 1.01% 0.14%4
Portfolio Turnover Rate 5 17% 27% 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 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 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 futures gains (losses).

During the six months ended March 31, 2018, the fund’s average investments in long and short futures contracts each represented 0% of net assets, based on the average of the notional amounts at each quarter-end during the period. The fund had no open futures contracts at March 31, 2018.

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, 2014–2017), and for the period ended March 31, 2018, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

17


 

Short-Term Inflation-Protected Securities Index Fund

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

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, 2018, 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), shareholder reporting, and the proxy. 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. All other costs of operations payable to Vanguard are generally settled twice a month.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2018, the fund had contributed to Vanguard capital in the amount of $1,300,000, 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.

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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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.

The following table summarizes the market value of the fund’s investments as of March 31, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 24,232,026
Temporary Cash Investments 20,094
Total 20,094 24,232,026

 

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, 2018, the fund realized gains of $18,000 related to previously tax-deferred deflation adjustments, which have been reclassified from accumulated net realized losses to undistributed net investment income. Deferred inflation and amortization adjustments to securities held at March 31, 2018, totaling $2,000 are reflected as a reduction of the amount of tax-basis unrealized appreciation of investment securities.

During the six months ended March 31, 2018, the fund realized $25,642,000 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, 2017, the fund had available capital losses totaling $104,154,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending September 30, 2018; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.

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Short-Term Inflation-Protected Securities Index Fund

At March 31, 2018, the cost of investment securities for tax purposes was $24,462,561,000. Net unrealized depreciation of investment securities for tax purposes was $210,441,000, consisting of unrealized gains of $1,926,000 on securities that had risen in value since their purchase and $212,367,000 in unrealized losses on securities that had fallen in value since their purchase.

E. During the six months ended March 31, 2018, the fund purchased $4,486,907,000 of investment securities and sold $2,232,213,000 of investment securities, other than temporary cash investments. Purchases and sales include $1,003,921,000 and $297,507,000, 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, 2018 September 30, 2017
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 506,408 20,571 1,069,872 43,271
Issued in Lieu of Cash Distributions 90,930 3,730 27,936 1,136
Redeemed (146,715) (6,012) (271,294) (10,974)
Net Increase (Decrease)—Investor Shares 450,623 18,289 826,514 33,433
ETF Shares        
Issued 1,289,376 26,225 1,524,321 30,900
Issued in Lieu of Cash Distributions
Redeemed (355,534) (7,300) (114,917) (2,325)
Net Increase (Decrease)—ETF Shares 933,842 18,925 1,409,404 28,575
Admiral Shares        
Issued 1,151,643 46,874 2,400,906 97,067
Issued in Lieu of Cash Distributions 73,870 3,026 25,001 1,016
Redeemed (472,440) (19,240) (713,167) (28,817)
Net Increase (Decrease)—Admiral Shares 753,073 30,660 1,712,740 69,266
Institutional Shares        
Issued 961,801 39,077 2,636,078 106,487
Issued in Lieu of Cash Distributions 107,454 4,400 44,322 1,801
Redeemed (529,022) (21,557) (1,176,991) (47,524)
Net Increase (Decrease)—Institutional Shares 540,233 21,920 1,503,409 60,764

 

At March 31, 2018, one shareholder was the record or beneficial owner of 37% 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, 2018, 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.

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Six Months Ended March 31, 2018      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Short-Term Inflation-Protected Securities Index Fund 9/30/2017 3/31/2018 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,003.54 $0.75
ETF Shares 1,000.00 1,004.14 0.30
Admiral Shares 1,000.00 1,004.17 0.30
Institutional Shares 1,000.00 1,003.82 0.20
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,024.18 $0.76
ETF Shares 1,000.00 1,024.63 0.30
Admiral Shares 1,000.00 1,024.63 0.30
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 0.15% for Investor Shares, 0.06% for ETF Shares, 0.06% 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).

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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.

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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.

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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 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.

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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


 

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (Tips) 0–5 Year Index (Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Short-Term Inflation-Protected Securities Index Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Short-Term Inflation-Protected Securities Index Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Short-Term Inflation-Protected Securities Index Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect of the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Short-Term Inflation-Protected Securities Index Fund or the owners of the Short-Term Inflation-Protected Securities Index Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Short-Term Inflation-Protected Securities Index Fund. Investors acquire the Short-Term Inflation-Protected Securities Index Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Short-Term Inflation-Protected Securities Index Fund. The Short-Term Inflation-Protected Securities Index Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Short-Term Inflation-Protected Securities Index Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Short-Term Inflation-Protected Securities Index Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Short-Term Inflation-Protected Securities Index Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Short-Term Inflation-Protected Securities Index Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Short-Term Inflation-Protected Securities Index Fund.

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The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Short-Term Inflation-Protected Securities Index Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Short-Term Inflation-Protected Securities Index Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR

TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT

OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE SHORT-TERM INFLATION-PROTECTED SECURITIES INDEX FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

© 2018 Bloomberg. Used with Permission.

Source: Bloomberg Index Services Limited. Copyright 2018, Bloomberg. All rights reserved.

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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 208 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

Emerson U. Fullwood

Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. 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 University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. 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 in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) 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 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 in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

André F. Perold

Born in 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.

Sarah Bloom Raskin

Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

Peter F. Volanakis

Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). 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 in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

Peter Mahoney

Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.

Anne E. Robinson

Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings
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

 


 

 

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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  
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You can review and copy information about your fund at  
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  © 2018 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q19672 052018

 


 
Semiannual Report | March 31, 2018
Vanguard Core Bond Fund

 


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 2
Advisor’s Report. 4
Results of Proxy Voting. 8
Fund Profile. 9
Performance Summary. 10
Financial Statements. 11
About Your Fund’s Expenses. 54
Trustees Approve Advisory Arrangement. 56
Glossary. 58

 

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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.


 

Your Fund’s Performance at a Glance

• Vanguard Core Bond Fund returned –1.25% for Investor Shares and –1.19% for Admiral Shares for the six months ended March 31, 2018. Those results lagged the –1.08% return of its benchmark and the –1.11% average return for the funds in its peer group.

• The period was marked by rising interest rates and an upswing in volatility. Short-term maturities moved higher as the Federal Reserve notched two rate increases and longer-term rates rose on an upturn in inflation expectations.

• The primary detractors for the fund were yield curve positioning and a slightly longer duration for part of the period. The fund’s positions in mortgage-backed securities also weighed on relative performance.

• Underweighting A-rated bonds helped the fund, as did a tilt toward BBB-rated bonds. More modest contributions came from holdings in asset-backed securities, commercial mortgage-backed securities, emerging-market debt, and Treasury Inflation-Protected Securities.

Total Returns: Six Months Ended March 31, 2018        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Core Bond Fund        
Investor Shares 2.93% 1.35% -2.60% -1.25%
Admiral™ Shares 3.03 1.41 -2.60 -1.19
Bloomberg Barclays U.S. Aggregate Float Adjusted Index       -1.08
Core Bond Funds Average       -1.11
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% 0.74%

 

The fund expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2018, 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 2017.

Peer group: Core Bond Funds.

1


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.

When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.

It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.

We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.

Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority

2


 

front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.

Steady, time-tested guidance

Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.

Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make

Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.

Thank you for your continued loyalty.

Sincerely,


Mortimer J. Buckley
President and Chief Executive Officer
April 13, 2018

Market Barometer      
      Total Returns
    Periods Ended March 31, 2018
  Six One Five Years
  Months Year (Annualized)
Stocks      
Russell 1000 Index (Large-caps) 5.85% 13.98% 13.17%
Russell 2000 Index (Small-caps) 3.25 11.79 11.47
Russell 3000 Index (Broad U.S. market) 5.65 13.81 13.03
FTSE All-World ex US Index (International) 4.03 16.45 6.30
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.08% 1.20% 1.82%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) -0.37 2.66 2.73
Citigroup Three-Month U.S. Treasury Bill Index 0.63 1.07 0.30
 
CPI      
Consumer Price Index 1.11% 2.36% 1.40%

 

3


 

Advisor’s Report

For the six months ended March 31, 2018, Vanguard Core Bond Fund returned –1.25% for Investor Shares and –1.19% for Admiral Shares. Those results fell shy of the –1.08% return of the benchmark, the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, and the average return of –1.11% for peer funds.

With interest rates climbing over the period, the 30-day SEC yield for Investor Shares rose to 2.93% by the end of the period compared with 2.18% six months earlier. The 30-day SEC yield for Admiral Shares was 3.03% for the period ended March 31 compared with 2.28% six months earlier.

The investment environment

Macroeconomic fundamentals remained supportive throughout the period. The U.S. economy continued to expand at a robust pace and unemployment remained low, hovering at 4.1%. Job creation averaged well above the approximately 90,000 needed to absorb the number of workers entering the labor market every month, while the workforce participation rate edged up. Global growth continued to provide a tailwind.

The Federal Reserve, in a vote of confidence on the health of the economy, continued further down the path toward monetary policy normalization. In October, it began to reduce the $4.5 trillion balance

Yields of U.S. Treasury Securities    
  September 30, March 31,
Maturity 2017 2018
2 years 1.49% 2.27%
3 years 1.62 2.38
5 years 1.94 2.56
10 years 2.33 2.74
30 years 2.86 2.97
Source: Vanguard.    

 

4


 

sheet it had amassed as part of the monetary stimulus provided in the wake of the 2007–2009 recession. In December, it raised the federal funds target rate for the fifth time in the current tightening cycle to 1.25%–1.5%.

This backdrop, along with solid corporate profits and the boost expected from the permanent corporate tax cuts enacted at the end of 2017, helped fuel investor appetite for risk assets. Stock indexes hit record highs in January.

In late January, however, investors abruptly began to see the glass as half empty. Market volatility spiked after a prolonged period of calm, with stocks dropping sharply and bond yields rising. Long-awaited signs of wage increases and higher inflation, coupled with the outlook for faster growth from tax cuts and increased government spending, raised fears that the Fed might start hiking rates more aggressively. Scrutiny of some large technology companies and brewing trade tensions added to the volatility.

The Fed, under its new chairman, Jerome Powell, nevertheless continued its measured pace of tightening. It hiked its target rate again in March to 1.5%–1.75% and penciled in two more increases for 2018, pushing short-term yields even higher. The 2-year U.S. Treasury note ended the six-month period up 78 basis points to 2.27%, its highest level in almost a decade. (A basis point is one one-hundredth of a percentage point.)

Longer-term yields, which are more affected by market expectations for growth and inflation, moved less. The yield of the bellwether 10-year Treasury note was up 41 basis points at 2.74% and the 30-year bond was up 11 basis points at 2.97%.

The average yield spread of investment-grade corporate bonds over Treasuries, which had been very tight, widened to reflect greater uncertainty. The spread closed the period at 109 basis points, up from 101 basis points six months earlier.

Management of the fund

The duration of the fund (a measure of its sensitivity to changes in interest rates) was modestly longer than that of its benchmark in late 2017 and early 2018, although we brought it back in line by the end of the period. That hurt relative performance as rates increased across all maturities. Being long at the front end of the yield curve also detracted as short rates in particular moved higher.

Our underweight to bonds rated A in favor of those rated BBB, however, was a positive. A-rated corporate bonds, which had previously seen a more marked tightening than corporate spreads as a whole, widened during this period, contributing to their underperformance.

Single-borrower deals added value in the commercial mortgage-backed securities segment, as did some of our holdings in more complex and less liquid asset-backed securities. Selection in high- and

5


 

medium-beta emerging-market debt also helped. In mortgage-backed securities, our position in interest-only 30-year mortgages underperformed slightly, but that was partially offset by an overweight to agencies.

Although Treasury Inflation-Protected Securities are not included in the fund’s benchmark, we took advantage of a seasonal pattern in these securities to add some value.

More generally, in this volatile environment, we were able to take advantage of price dislocations by acting on relative-value opportunities that arose.

Outlook

The U.S. economy is on pace to break above its long-term potential growth rate to around 2.5% in 2018. Although the slow pace of productivity growth, an aging population, and disruptive new technologies will continue to be long-term structural drags, we could see a cyclical upswing given the recent tax cuts and increased government spending coming on top of solid synchronized global growth.

The unemployment rate has hovered at an 17-year low of 4.1% for six months now and is likely to edge even lower. Tightness in the labor market finally seems to have begun to translate into some upward pressure on wages. That, along with stable and broader global growth, may well lead to higher inflation—a scenario that the financial markets are now pricing in. Weakness in

the U.S. dollar is also likely to bolster core inflation metrics down the road, albeit moderately, through higher import prices. Our long-term outlook for tepid inflation, however, remains unchanged.

That backdrop should justify the Fed’s raising the federal funds rate two more times in 2018 and three times in 2019. The unwinding of the Fed’s balance sheet is likely to continue according to the framework and timetable laid out by policymakers in September given the limited reaction so far from the bond market.

We may continue to see bouts of volatility related to inflation and interest rate expectations. Other potential triggers include the U.S. midterm elections, stalled or scuttled trade negotiations, and flare-ups in geopolitical tensions. We are anticipating a convergence in global monetary policy as 2018 unfolds, with central banks in developed countries adopting less accommodative stances—some raising rates, some planning to do so, some reducing quantitative easing. Withdrawing that accommodation unexpectedly or too quickly could well rattle the markets.

Investors should look beyond short-term volatility and adhere to their long-term investment strategies. And keep in mind the silver lining in higher rates for long-term investors—coupon payments and proceeds from maturing bonds can be reinvested at higher rates.

6


 

Whatever the markets may bring, our experienced team of portfolio managers, credit analysts, and traders will continue to seek out opportunities to add to the funds’ performance.

Portfolio Managers: Brian W. Quigley

Gemma Wright-Casparius, Principal

Daniel Shaykevich, Principal

Samuel C. Martinez, CFA

Vanguard Fixed Income Group

April 23, 2018

7


 

Results of Proxy Voting

At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:

Proposal 1—Elect trustees for the fund.*

The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.

      Percentage
Trustee For Withheld For
Mortimer J. Buckley 1,930,092,408 11,735,364 99.4%
Emerson U. Fullwood 1,928,646,766 13,181,005 99.3%
Amy Gutmann 1,929,464,755 12,363,017 99.4%
JoAnn Heffernan Heisen 1,929,642,570 12,185,201 99.4%
F. Joseph Loughrey 1,928,796,727 13,031,044 99.3%
Mark Loughridge 1,929,651,616 12,176,156 99.4%
Scott C. Malpass 1,929,376,782 12,450,990 99.4%
F. William McNabb III 1,927,619,020 14,208,752 99.3%
Deanna Mulligan 1,929,546,113 12,281,658 99.4%
André F. Perold 1,924,447,639 17,380,132 99.1%
Sarah Bloom Raskin 1,929,965,439 11,862,333 99.4%
Peter F. Volanakis 1,929,234,485 12,593,287 99.4%
* Results are for all funds within the same trust.      

 

Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.

This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.

        Broker Percentage
Vanguard Fund For Abstain Against Non-Votes For
Core Bond Fund 33,268,947 1,276,741 1,152,383 4,473,317 82.8%

 

8


 

Core Bond Fund

Fund Profile

As of March 31, 2018

Share-Class Characteristics  
  Investor Admiral
  Shares Shares
Ticker Symbol VCORX VCOBX
Expense Ratio1 0.25% 0.15%
30-Day SEC Yield 2.93% 3.03%

 

Financial Attributes    
    Bloomberg
    Barclays U.S.
    Aggregate
    Float Adjusted
  Fund Index
Number of Bonds 759 9,826
Yield to Maturity    
(before expenses) 3.7% 3.1%
Average Coupon 3.1% 3.1%
Average Duration 6.0 years 6.2 years
Average Effective    
Maturity 7.6 years 8.4 years
Short-Term    
Reserves 5.4%

 

Sector Diversification (% of portfolio)  
Asset-Backed 9.2%
Commercial Mortgage-Backed 4.1
Finance 9.7
Foreign 5.4
Government Mortgage-Backed 24.6
Industrial 13.9
Treasury/Agency 30.4
Utilities 2.6
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 Effective Maturity  
(% of portfolio)  
Under 1 Year 2.7%
1 - 3 Years 21.0
3 - 5 Years 15.6
5 - 7 Years 17.8
7 - 10 Years 29.9
10 - 20 Years 5.6
20 - 30 Years 7.3
Over 30 Years 0.1

 

Distribution by Credit Quality (% of portfolio)
U.S. Government 52.4%
Aaa 7.9
Aa 2.1
A 8.8
Baa 20.2
Ba 2.2
B 0.4
Not Rated 6.0

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, 2018, and represent estimated costs for the current fiscal year. For the six months ended March 31, 2018, 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, 2018  
        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 1.96 -1.93 0.03 0.06
2018 1.35 -2.60 -1.25 -1.08

Note: For 2018, performance data reflect the six months ended March 31, 2018.

 

   

 

Average Annual Total Returns: Periods Ended March 31, 2018      
          Since Inception
  Inception Date One Year Income Capital Total
Investor Shares 3/28/2016 0.98% 2.14% -1.00% 1.14%
Admiral Shares 3/28/2016 1.10 2.26 -1.00 1.26

 

See Financial Highlights for dividend and capital gains information.

10


 

Core Bond Fund

Financial Statements (unaudited)

Statement of Net Assets

As of March 31, 2018

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 (55.2%)      
U. S. Government Securities (23.3%)        
United States Treasury Inflation Indexed Bonds 0.125% 4/15/19 31,250 33,031
United States Treasury Note/Bond 0.875% 5/31/18 50 50
United States Treasury Note/Bond 2.250% 7/31/18 44 44
United States Treasury Note/Bond 1.375% 9/30/18 11,000 10,969
United States Treasury Note/Bond 1.625% 3/31/19 600 597
United States Treasury Note/Bond 0.875% 4/15/19 150 148
United States Treasury Note/Bond 1.375% 12/15/19 600 591
United States Treasury Note/Bond 1.875% 12/31/19 2,920 2,901
United States Treasury Note/Bond 2.000% 1/31/20 1,100 1,095
United States Treasury Note/Bond 2.250% 2/29/20 1,100 1,099
United States Treasury Note/Bond 1.625% 3/15/20 5,200 5,134
United States Treasury Note/Bond 1.125% 3/31/20 2,500 2,443
United States Treasury Note/Bond 1.375% 3/31/20 2,200 2,160
United States Treasury Note/Bond 1.625% 6/30/20 2,000 1,969
United States Treasury Note/Bond 1.500% 7/15/20 5,650 5,545
United States Treasury Note/Bond 1.375% 8/31/20 1,025 1,001
United States Treasury Note/Bond 1.625% 10/15/20 20,000 19,638
United States Treasury Note/Bond 1.250% 3/31/21 1,000 967
United States Treasury Note/Bond 1.375% 4/30/21 9,756 9,456
United States Treasury Note/Bond 2.250% 4/30/21 2,300 2,289
United States Treasury Note/Bond 1.375% 5/31/21 5,000 4,839
United States Treasury Note/Bond 2.125% 6/30/21 420 416
United States Treasury Note/Bond 1.125% 7/31/21 800 766
United States Treasury Note/Bond 2.125% 8/15/21 6,600 6,527
United States Treasury Note/Bond 2.000% 8/31/21 900 886
United States Treasury Note/Bond 1.250% 10/31/21 4,000 3,833
United States Treasury Note/Bond 2.000% 12/31/21 5,000 4,911
United States Treasury Note/Bond 1.625% 8/31/22 200 192
United States Treasury Note/Bond 1.750% 9/30/22 7,000 6,764
United States Treasury Note/Bond 1.875% 9/30/22 1,800 1,749
United States Treasury Note/Bond 2.000% 11/30/22 5,076 4,953
United States Treasury Note/Bond 2.125% 12/31/22 2,800 2,745
United States Treasury Note/Bond 1.750% 1/31/23 500 481
United States Treasury Note/Bond 2.375% 1/31/23 7,500 7,436
United States Treasury Note/Bond 2.000% 2/15/23 2,400 2,338
United States Treasury Note/Bond 2.750% 11/15/23 244 246

 

11


 

Core Bond Fund        
 
 
 
      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
United States Treasury Note/Bond 2.250% 12/31/23 2,300 2,253
1 United States Treasury Note/Bond 2.750% 2/15/24 1,900 1,911
United States Treasury Note/Bond 2.125% 9/30/24 1,800 1,741
United States Treasury Note/Bond 2.750% 2/28/25 15,000 15,054
United States Treasury Note/Bond 1.625% 2/15/26 3,268 3,013
United States Treasury Note/Bond 1.625% 5/15/26 5,035 4,628
United States Treasury Note/Bond 2.250% 8/15/27 950 911
United States Treasury Note/Bond 6.125% 8/15/29 1,500 1,988
United States Treasury Note/Bond 5.375% 2/15/31 3,000 3,838
United States Treasury Note/Bond 4.375% 2/15/38 8,000 9,829
United States Treasury Note/Bond 3.500% 2/15/39 350 384
United States Treasury Note/Bond 4.375% 11/15/39 630 779
United States Treasury Note/Bond 4.625% 2/15/40 425 543
United States Treasury Note/Bond 4.750% 2/15/41 2,000 2,607
United States Treasury Note/Bond 3.750% 8/15/41 650 739
United States Treasury Note/Bond 3.125% 11/15/41 600 618
United States Treasury Note/Bond 3.125% 2/15/42 650 670
United States Treasury Note/Bond 2.750% 8/15/42 130 125
United States Treasury Note/Bond 3.625% 8/15/43 2,200 2,457
United States Treasury Note/Bond 2.875% 8/15/45 1,550 1,518
2 United States Treasury Note/Bond 2.500% 2/15/46 4,746 4,308
United States Treasury Note/Bond 2.500% 5/15/46 2,800 2,540
United States Treasury Note/Bond 3.000% 5/15/47 4,850 4,861
United States Treasury Note/Bond 2.750% 11/15/47 5,000 4,766
United States Treasury Note/Bond 3.000% 2/15/48 251 252
        222,542
Agency Bonds and Notes (7.1%)        
3 AID-Iraq 2.149% 1/18/22 980 963
3 AID-Ukraine 1.844% 5/16/19 1,700 1,695
4 Fannie Mae Principal Strip 0.000% 2/1/19 800 786
5 Federal Home Loan Banks 0.625% 8/7/18 100 100
5 Federal Home Loan Banks 0.875% 10/1/18 2,500 2,486
5 Federal Home Loan Banks 1.250% 1/16/19 100 99
5 Federal Home Loan Banks 1.375% 3/18/19 1,150 1,141
5 Federal Home Loan Banks 1.375% 5/28/19 600 594
5 Federal Home Loan Banks 0.875% 8/5/19 2,100 2,062
5 Federal Home Loan Banks 2.375% 3/30/20 1,500 1,501
5 Federal Home Loan Banks 1.375% 9/28/20 1,300 1,268
4 Federal Home Loan Mortgage Corp. 0.875% 7/19/19 400 393
4 Federal Home Loan Mortgage Corp. 1.375% 8/15/19 3,700 3,657
4 Federal Home Loan Mortgage Corp. 2.375% 2/16/21 3,100 3,094
4 Federal National Mortgage Assn. 0.875% 8/2/19 450 442
4 Federal National Mortgage Assn. 0.000% 10/9/19 9,600 9,257
4 Federal National Mortgage Assn. 2.000% 10/5/22 1,000 974
4 Federal National Mortgage Assn. 2.375% 1/19/23 900 888
4 Federal National Mortgage Assn. 1.875% 9/24/26 5,600 5,158
5 Financing Corp. 0.000% 5/11/18 1,500 1,497
Private Export Funding Corp. 1.875% 7/15/18 250 250
Private Export Funding Corp. 4.375% 3/15/19 128 131
Private Export Funding Corp. 1.450% 8/15/19 2,715 2,681
Private Export Funding Corp. 2.250% 3/15/20 567 565
Private Export Funding Corp. 2.300% 9/15/20 150 149
Private Export Funding Corp. 3.550% 1/15/24 1,000 1,039

 

12


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  Residual Funding Corp. Principal Strip 0.000% 1/15/21 1,700 1,587
  Resolution Funding Corp. Interest Strip 0.000% 4/15/26 2,480 1,950
  Resolution Funding Corp. Interest Strip 0.000% 1/15/27 2,760 2,109
  Resolution Funding Corp. Interest Strip 0.000% 4/15/27 1,800 1,365
  Resolution Funding Corp. Interest Strip 0.000% 7/15/27 794 598
  Resolution Funding Corp. Interest Strip 0.000% 10/15/27 794 592
  Resolution Funding Corp. Interest Strip 0.000% 4/15/28 3,000 2,192
  Resolution Funding Corp. Principal Strip 0.000% 10/15/19 1,300 1,255
  Resolution Funding Corp. Principal Strip 0.000% 7/15/20 6,520 6,168
  Resolution Funding Corp. Principal Strip 0.000% 10/15/20 3,000 2,819
5 Tennessee Valley Authority 2.250% 3/15/20 1,700 1,695
5 Tennessee Valley Authority Principal Strip 0.000% 11/1/25 3,000 2,391
          67,591
Conventional Mortgage-Backed Securities (21.2%)      
4,6 Fannie Mae Pool 2.000% 1/1/32 2,231 2,133
4,6 Fannie Mae Pool 2.500% 2/1/28–10/1/31 10,976 10,763
4,6,7 Fannie Mae Pool 3.000% 2/1/27–5/1/48 27,823 27,408
4,6,7 Fannie Mae Pool 3.500% 3/1/27–4/1/48 20,419 20,543
4,6,7 Fannie Mae Pool 4.000% 8/1/39–4/1/48 19,651 20,230
4,6 Fannie Mae Pool 4.500% 1/1/41–7/1/47 6,160 6,504
4,6 Fannie Mae Pool 5.000% 3/1/38–8/1/47 6,362 6,894
4,6 Fannie Mae Pool 6.000% 5/1/37 759 848
4,6 Freddie Mac Gold Pool 2.500% 8/1/31–11/1/31 1,749 1,713
4,6,7 Freddie Mac Gold Pool 3.000% 4/1/33–12/1/47 7,799 7,650
4,6,7 Freddie Mac Gold Pool 3.500% 3/1/45–4/1/48 22,259 22,333
4,6,7 Freddie Mac Gold Pool 4.000% 1/1/46–4/1/48 7,973 8,185
4,6,7 Freddie Mac Gold Pool 4.500% 6/1/47–4/1/48 7,376 7,760
6 Ginnie Mae I Pool 3.000% 4/15/45 516 508
6 Ginnie Mae I Pool 3.500% 6/15/47 1,898 1,925
6 Ginnie Mae I Pool 4.000% 7/15/45–8/15/45 233 240
6 Ginnie Mae I Pool 4.500% 2/15/39–9/15/46 1,318 1,400
6 Ginnie Mae I Pool 5.000% 3/15/38–2/15/40 2,919 3,111
6,7 Ginnie Mae II Pool 3.000% 5/20/43–4/1/48 13,306 13,091
6,7 Ginnie Mae II Pool 3.500% 10/20/43–4/1/48 23,380 23,646
6,7 Ginnie Mae II Pool 4.000% 11/20/42–4/1/48 11,589 11,965
6 Ginnie Mae II Pool 4.500%  11/20/44–8/20/47 3,510 3,695
          202,545
Nonconventional Mortgage-Backed Securities (3.6%)      
4,6 Fannie Mae Grantor Trust 2017-T1 2.898% 6/25/27 20 19
*,4,6 Fannie Mae Pool 3.395% 12/1/40 173 182
^,4,6 Fannie Mae REMICS 2005-45 2.242% 6/25/35 105 106
^,4,6 Fannie Mae REMICS 2005-95 2.282% 11/25/35 139 140
^,4,6 Fannie Mae REMICS 2006-46 2.192% 6/25/36 392 394
^,4,6 Fannie Mae REMICS 2007-4 2.316% 2/25/37 49 50
^,4,6 Fannie Mae REMICS 2012-122 2.271% 11/25/42 143 144
4,6,8,9 Fannie Mae REMICS 2012-125E 3.500% 11/25/42 31,507 6,468
^,4,6 Fannie Mae REMICS 2013-19 2.171% 9/25/41 197 197
^,4,6 Fannie Mae REMICS 2013-39 2.221% 5/25/43 185 186
^,4,6 Fannie Mae REMICS 2015-22 2.171% 4/25/45 156 157
4,6,8,9 Fannie Mae REMICS 2015-8 4.228% 3/25/45 20,693 4,074
^,4,6 Fannie Mae REMICS 2016-55 2.372% 8/25/46 313 318
^,4,6 Fannie Mae REMICS 2016-60 2.122% 9/25/46 635 635
^,4,6 Fannie Mae REMICS 2016-62 2.271% 9/25/46 631 636

 

13


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
^,4,6 Fannie Mae REMICS 2016-93 2.221% 12/25/46 1,280 1,287
*,4,6 Freddie Mac Non Gold Pool 3.332% 7/1/35 677 714
*,4,6 Freddie Mac Non Gold Pool 3.364% 9/1/37 565 596
4,6 Freddie Mac Non Gold Pool 3.630% 7/1/33 90 95
^,4,6 Freddie Mac REMICS 2.127% 11/15/36–8/15/43 291 293
^,4,6 Freddie Mac REMICS 2.137% 11/15/36 103 104
^,4,6 Freddie Mac REMICS 2.227% 6/15/42 55 55
4,6,8,9 Freddie Mac REMICS 4.373% 9/15/47 36,656 6,663
6,8 Government National Mortgage Association        
  GNR_15-106D 4.000% 1/20/45 1,777 329
6,8 Government National Mortgage Association        
  GNR_15-62C 4.500% 5/20/45 19,625 4,128
6,8 Government National Mortgage Association        
  GNR_17-125D 4.000% 8/20/46 30,244 5,612
6,8,9 Government National Mortgage Association        
  GNR_17-85A 4.328% 6/20/47 5,098 937
          34,519
Total U.S. Government and Agency Obligations (Cost $538,650)   527,197
Asset-Backed/Commercial Mortgage-Backed Securities (13.7%)    
6 Ally Auto Receivables Trust 2017-5 2.220% 10/17/22 180 176
6 Ally Master Owner Trust Series 2017-3 2.040% 6/15/22 350 344
6,10 American Homes 4 Rent 2014-SFR3 3.678% 12/17/36 94 96
6 AmeriCredit Automobile Receivables        
  Trust 2014-1 2.150% 3/9/20 43 43
6 AmeriCredit Automobile Receivables        
  Trust 2014-2 2.180% 6/8/20 45 45
6 AmeriCredit Automobile Receivables        
  Trust 2015-3 3.340% 8/8/21 285 287
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