valleyforge_final.htm - Generated by SEC Publisher for SEC Filing

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

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES


Investment Company Act file number:	811-58431
Name of Registrant:	Vanguard Valley Forge 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: December 31
Date of reporting period: January 1, 2016 – December 31, 2016
Item 1: Reports to Shareholders

A new format, unwavering commitment

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

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

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

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

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


Contents
Your Fund’s Performance at a Glance.	1
Chairman’s Perspective.	3
Fund Profile.	7
Performance Summary.	9
Financial Statements.	11
Your Fund’s After-Tax Returns.	30
About Your Fund’s Expenses.	31
Glossary.	33

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

Your Fund’s Performance at a Glance

• Vanguard Balanced Index Fund, which has about 60% of its assets invested in stocks and about 40% in bonds, returned almost 9% for the 12 months ended December 31, 2016.

• The fund closely tracked its composite index and easily outpaced the average return of its mixed-asset target growth fund peers.

• The equity portion of the fund, which offers investors exposure to every segment, size, and style of the U.S. equity market, returned 12.63%.

• The fund’s fixed income portfolio—which provides broad exposure to the U.S. bond market by investing in U.S. Treasury and agency bonds, government mortgage-backed securities, and investment-grade corporate bonds of all maturities—returned 2.55%.

• Over the past ten years, the fund posted an average annual return of about 6%, in line with its benchmark and nearly 2 percentage points higher than its peer-fund average.


Total Returns: Fiscal Year Ended December 31, 2016
	Total
	Returns
Vanguard Balanced Index Fund
Investor Shares	8.63%
Admiral™ Shares	8.77
Institutional Shares	8.81
Balanced Composite Index	8.89
Mixed-Asset Target Allocation Growth Funds Average	7.04

For a benchmark description, see the Glossary.
Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are
available to certain institutional investors who meet specific administrative, service, and account-size criteria.


Total Returns: Ten Years Ended December 31, 2016
	Average
	Annual Return
Balanced Index Fund Investor Shares	6.27%
Balanced Composite Index	6.52
Mixed-Asset Target Allocation Growth Funds Average	4.43

For a benchmark description, see the Glossary.
Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.


Expense Ratios
Your Fund Compared With Its Peer Group
	Investor	Admiral	Institutional	Peer Group
	Shares	Shares	Shares	Average
Balanced Index Fund	0.22%	0.08%	0.07%	0.90%

The fund expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the
fiscal year ended December 31, 2016, the fund’s expense ratios were 0.19% for Investor Shares, 0.07% for Admiral Shares, and 0.06% 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 2015.

Peer group: Mixed-Asset Target Allocation Growth Funds.

Chairman’s Perspective

Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

If you’re like most investors, a big question on your mind is: What’s in store for the markets and the economy in 2017?

At Vanguard, we’re just as curious about the immediate future. But our curiosity is tempered by our belief that forecasts should give a range of possible outcomes, not pinpoint predictions. After all, there are bound to be occurrences the experts won’t see coming.

What really matters for investors

In 2016, we saw two cases in point: The United Kingdom’s June vote to exit the European Union and the November election of Donald Trump as U.S. president. Both unexpected outcomes triggered swift market reactions. But despite some short-term volatility, the markets’ 12-month performance as of December 31, 2016, proved to be less dramatic. U.S. stocks posted healthy returns, and U.S. bonds provided returns close to their long-term averages. International stocks and bonds also advanced, although returns for U.S. investors were reduced by the strength of the U.S. dollar.

The surprises of 2016 remind us to be skeptical of overly precise short-term predictions about 2017. At the cusp of a new year, market prognosticators forecast where the Standard & Poor’s 500 Index or the yield on the 10-year Treasury note will end up in 12 months. Such predictions can be attention-getting. They can also be dead wrong.

Investors are better off taking note of long-term trends that stand to influence our economies and markets. We’re watching these trends closely, and we discuss our latest assessment in our 2017 economic and market outlook, which you can read at vanguard.com/research.

Our global economic outlook: Expect stabilization, not stagnation

One phenomenon in particular that we’re watching is the low-growth, low-interest-rate environment that has marked the global economy since the 2008–09 financial crisis. We don’t think this economic backdrop is simply the result of cyclically weak demand or long-term stagnation. Instead, certain structural forces are contributing: Falling technology costs are restraining the amounts businesses are spending on capital investment, an aging population is weighing on growth in the developed world, and the free movement of capital and products across the globe has restrained prices and wages.

In the near term, these forces will continue to dampen growth, inflation, and interest rates. They also make it unlikely that further monetary stimulus from central banks will do much to spur growth.

I realize this all may sound gloomy, but that’s not how we see it. We expect global growth to stabilize at more modest levels, not stagnate. The world isn’t headed for Japanese-style deflation, in which a widespread sustained drop in prices puts economic activity into hibernation.


Market Barometer
	Average Annual Total Returns
	Periods Ended December 31, 2016
	One	Three	Five
	Year	Years	Years
Stocks
Russell 1000 Index (Large-caps)	12.05%	8.59%	14.69%
Russell 2000 Index (Small-caps)	21.31	6.74	14.46
Russell 3000 Index (Broad U.S. market)	12.74	8.43	14.67
FTSE All-World ex US Index (International)	4.80	-1.16	5.52

Bonds
Bloomberg Barclays U.S. Aggregate Bond Index
(Broad taxable market)	2.65%	3.03%	2.23%
Bloomberg Barclays Municipal Bond Index
(Broad tax-exempt market)	0.25	4.14	3.28
Citigroup Three-Month U.S. Treasury Bill Index	0.27	0.09	0.08

CPI
Consumer Price Index	2.07%	1.18%	1.36%

In fact, we believe that global growth could pick up modestly over time. Our expectation is based on a potential rebound in productivity as new digital technologies are used more effectively. We also anticipate a slight recovery in the labor force as the baby boom generation finishes its transition to retirement, nudging up demand for workers.

Put expansion in perspective

Looking to the United States, the world’s largest economy remains firmly on a long-term-growth path of about 2% per year. That’s lower than the historical average of 3.25% since 1950. We see such growth at this level as fundamentally sound, rather than abnormally low. Our evaluation takes into account lower U.S. population growth and the reality that the economic expansion from the 1980s until the financial crisis was fueled by debt, distorting the numbers.

Turning to prices, we think that core U.S. inflation should modestly exceed 2% in 2017. That, in turn, will support further interest rate hikes by the Federal Reserve, similar to the one at the end of 2016.

We expect the Fed to raise rates in 2017 before taking an extended pause, and we see the federal funds rate staying below 2% through at least 2018.

Prepare for muted returns

And what about prospects for the markets? Vanguard’s outlook for global stocks and bonds remains the most guarded in ten years, given fairly high stock valuations

Expect more modest returns, rely on time-tested principles

In Vanguard’s economic and market outlook for 2017, Global Chief Economist Joseph Davis

and his team offer a projection of more modest returns from the global stock and bond

markets. They caution that, over the next decade, returns for a balanced portfolio are likely

to be moderately below long-run historical averages.

The team’s simulations indicate that for the decade ending in 2026, the average annualized

return of a 60% stock/40% bond portfolio is likely to be centered in the 3%–5% range after

inflation. That’s below the actual average after-inflation return of 6% for the same portfolio

for the nine decades since 1926.

Ultimately, our global market outlook points toward a somewhat more challenging environment,

yet one in which, over time, investors with an appropriate level of discipline, diversification, and

patience are likely to be rewarded with reasonable inflation-adjusted returns.

For more information about our expectations and the probability of various outcomes, see 2017

Economic and Market Outlook: Stabilization, Not Stagnation, available at vanguard.com/research.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model^®(VCMM)

regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment

results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived

from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2016. Results from the

model may vary with each use and over time. For more information, see the note at the end of this letter.

and the low-interest-rate environment. We don’t expect global bond yields to increase materially from year-end 2016 levels.

Our outlook for global equities is annualized returns of 5%–8% over the next decade. This outlook isn’t bearish, but is actually fairly positive when you take into account the current low-rate environment. (See the box titled Expect more modest returns, rely on time-tested principles for more.)

Focus on the four keys to investment success

Significant trends often happen gradually. Like shifting tides, they’re sometimes barely noticeable at first but ultimately can change the landscape entirely. Other times, apparent trends can end up receding before they have much of a long-term impact. Given the future’s inherent unpredictability, it’s not reasonable to expect a surefire block-buster revelation from any prognosticator or investment firm.

What to conclude, then? No matter what scenario plays out, we believe investors have the best chance for success if they stay focused on what they can control: their goals, asset allocation, and investment costs, along with the discipline to stick to a plan. As Tim Buckley, our chief investment officer, likes to say, this can be easy to say but harder to do, especially in times of uncertainty. Investors who can stay focused on those four keys will find themselves well-positioned to weather any market.

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
January 16, 2017

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding
the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results,
and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the
historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios
unobserved in the historical period on which the model estimation is based.
The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard’s Investment Strategy Group.
The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S.
and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international
fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and
empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation
investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic
statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly
financial and economic data. Using a system of estimated equations, the model then applies a Monte Carlo simulation method
to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over
time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are
obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each
use and over time.

Balanced Index Fund

Fund Profile
As of December 31, 2016


Share-Class Characteristics
	Investor	Admiral	Institutional
	Shares	Shares	Shares
Ticker Symbol	VBINX	VBIAX	VBAIX
Expense Ratio¹	0.22%	0.08%	0.07%
30-Day SEC Yield	1.99%	2.08%	2.09%


Equity and Portfolio Characteristics
		CRSP US
		Total Market
	Fund	Index
Number of Stocks	3,347	3,589
Median Market Cap	$54.1B	$54.1B
Price/Earnings Ratio	24.4x	24.4x
Price/Book Ratio	2.8x	2.8x
Return on Equity	16.7%	16.4%
Earnings Growth
Rate	8.1%	8.3%
Dividend Yield	2.0%	2.0%
Foreign Holdings	0.0%	0.0%
Turnover Rate	44%	—
Short-Term Reserves	1.3%	—


Fixed Income Characteristics


		Bloomberg
		Barclays U.S.
		Aggregate
		Float Adjusted
	Fund	Index

Number of Bonds	6,884	10,054

Yield to Maturity
(before expenses)	2.6%	2.6%

Average Coupon	3.0%	3.0%

Average Duration	6.0 years	6.0 years

Average Effective
Maturity	8.3 years	8.2 years


Total Fund Volatility Measures
		CRSP US
	Balanced	Total
	Composite	Market
	Index	Index
R-Squared	1.00	0.96
Beta	1.00	0.58

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


Ten Largest Stocks (% of equity portfolio)
Apple Inc.	Computer Hardware	2.5%
Alphabet Inc.	Internet	2.0
Microsoft Corp.	Software	2.0
Exxon Mobil Corp.	Integrated Oil & Gas	1.6
Johnson & Johnson	Pharmaceuticals	1.4
Berkshire Hathaway Inc. Reinsurance		1.4
JPMorgan Chase & Co.	Banks	1.3
Amazon.com Inc.	Broadline Retailers	1.3
General Electric Co.	Diversified Industrials	1.2
Facebook Inc.	Internet	1.1
Top Ten		15.8%
Top Ten as % of Total Net Assets		9.5%

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

Fund Asset Allocation

1 The expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the fiscal
year ended December 31, 2016, the expense ratios were 0.19% for Investor Shares, 0.07% for Admiral Shares, and 0.06% for Institutional Shares.

Balanced Index Fund


Sector Diversification (% of equity exposure)
		CRSP US
		Total Market
	Fund	Index
Basic Materials	2.5%	2.6%
Consumer Goods	9.6	9.6
Consumer Services	13.1	13.0
Financials	20.7	20.7
Health Care	12.3	12.3
Industrials	13.0	12.9
Oil & Gas	6.9	7.0
Technology	16.3	16.3
Telecommunications	2.4	2.4
Utilities	3.2	3.2


Sector Diversification (% of fixed income
portfolio)
Asset-Backed	2.5%
Finance	8.7
Foreign	4.9
Government Mortgage-Backed	20.8
Industrial	17.0
Treasury/Agency	43.1
Utilities	2.1
Other	0.9

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


Distribution by Credit Quality (% of fixed
income portfolio)
U.S. Government	63.9%
Aaa	5.1
Aa	4.4
A	11.8
Baa	14.8

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.

Equity Investment Focus

Fixed Income Investment Focus

Balanced 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.

Cumulative Performance: December 31, 2006, Through December 31, 2016
Initial Investment of $10,000


		Average Annual Total Returns
		Periods Ended December 31, 2016

					Final Value
		One	Five	Ten	of a $10,000
		Year	Years	Years	Investment

	Balanced Index Fund Investor Shares	8.63%	9.47%	6.27%	$18,363

• • • • • • • •	Balanced Composite Index	8.89	9.79	6.52	18,804

– – – –	Mixed-Asset Target Allocation Growth
	Funds Average	7.04	8.42	4.43	15,428
	Spliced Bloomberg Barclays U.S.
- - - - - -

	Aggregate Float Adjusted Index	2.75	2.24	4.36	15,323
	Spliced Total Stock Market Index	12.68	14.64	7.23	20,093

For a benchmark description, see the Glossary.
Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.


				Final Value
	One	Five	Ten	of a $10,000
	Year	Years	Years	Investment
Balanced Index Fund Admiral Shares	8.77%	9.62%	6.40%	$18,599
Balanced Composite Index	8.89	9.79	6.52	18,804
Spliced Bloomberg Barclays U.S. Aggregate
Float Adjusted Index	2.75	2.24	4.36	15,323
Spliced Total Stock Market Index	12.68	14.64	7.23	20,093

See Financial Highlights for dividend and capital gains information.

Balanced Index Fund

Financial Statements

Statement of Net Assets—Investments Summary
As of December 31, 2016

This Statement summarizes the fund’s holdings by asset type. Details are reported for each of the fund’s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the fund’s net assets. The total value of smaller holdings is reported as a single amount within each category.

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 complete listing of the fund’s holdings is available electronically on vanguard.com and on the Securities and Exchange Commission’s website (sec.gov), or you can have it mailed to you without charge by calling 800-662-7447. For the first and third fiscal quarters, the fund files the lists with the SEC on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website. 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	Percentage
		Value^•	of Net
	Shares	($000)	Assets
Common Stocks
Basic Materials †		465,016	1.5%

Consumer Goods
Procter & Gamble Co.	2,014,086	169,344	0.6%
Coca-Cola Co.	3,049,763	126,443	0.4%
PepsiCo Inc.	1,129,470	118,176	0.4%
Philip Morris International Inc.	1,151,117	105,316	0.3%
Altria Group Inc.	1,551,149	104,889	0.3%
Consumer Goods—Other †		1,124,830	3.7%
		1,748,998	5.7%
Consumer Services
* Amazon.com Inc.	315,124	236,302	0.8%
Comcast Corp. Class A	1,875,263	129,487	0.4%
Home Depot Inc.	961,716	128,947	0.4%
Walt Disney Co.	1,128,542	117,617	0.4%
McDonald’s Corp.	661,769	80,551	0.3%
Wal-Mart Stores Inc.	1,107,374	76,542	0.2%
Consumer Services—Other †		1,613,332	5.3%
		2,382,778	7.8%
Financials
JPMorgan Chase & Co.	2,829,566	244,163	0.8%
* Berkshire Hathaway Inc. Class B	1,395,805	227,488	0.7%
Wells Fargo & Co.	3,541,371	195,165	0.6%
Bank of America Corp.	7,608,839	168,155	0.6%
Citigroup Inc.	2,201,807	130,853	0.4%
Visa Inc. Class A	1,472,869	114,913	0.4%
Mastercard Inc. Class A	759,286	78,396	0.3%
Financials—Other †		2,623,375	8.6%
		3,782,508	12.4%


Balanced Index Fund



			Market	Percentage
			Value^•	of Net
		Shares	($000)	Assets
Health Care
	Johnson & Johnson	2,142,573	246,846	0.8%
	Pfizer Inc.	4,762,361	154,681	0.5%
	Merck & Co. Inc.	2,165,907	127,507	0.4%
	UnitedHealth Group Inc.	744,656	119,175	0.4%
	Amgen Inc.	583,589	85,327	0.3%
	AbbVie Inc.	1,271,598	79,627	0.3%
	Medtronic plc	1,091,776	77,767	0.3%
	Bristol-Myers Squibb Co.	1,306,933	76,377	0.3%
	Gilead Sciences Inc.	1,029,570	73,727	0.2%
*	Celgene Corp.	605,932	70,137	0.2%
	Health Care—Other †		1,135,069	3.7%
			2,246,240	7.4%
Industrials
	General Electric Co.	6,989,620	220,872	0.7%
	3M Co.	474,668	84,761	0.3%
	Boeing Co.	463,141	72,102	0.3%
	Honeywell International Inc.	596,518	69,107	0.2%
	Industrials—Other †		1,924,985	6.3%
			2,371,827	7.8%
Oil & Gas
	Exxon Mobil Corp.	3,242,584	292,676	1.0%
	Chevron Corp.	1,477,783	173,935	0.6%
	Schlumberger Ltd.	1,087,887	91,328	0.3%
	Oil & Gas—Other †		708,424	2.3%
			1,266,363	4.2%
Technology
	Apple Inc.	3,981,868	461,180	1.5%
	Microsoft Corp.	5,781,277	359,249	1.2%
*	Facebook Inc. Class A	1,819,218	209,301	0.7%
*	Alphabet Inc. Class A	227,904	180,603	0.6%
*	Alphabet Inc.	232,031	179,086	0.6%
	Intel Corp.	3,704,855	134,375	0.4%
	Cisco Systems Inc.	3,932,691	118,846	0.4%
	International Business Machines Corp.	672,258	111,588	0.4%
	Oracle Corp.	2,419,948	93,047	0.3%
	QUALCOMM Inc.	1,153,957	75,238	0.2%
	Technology—Other †		1,048,958	3.4%
			2,971,471	9.7%
Telecommunications
	AT&T Inc.	4,846,692	206,130	0.7%
	Verizon Communications Inc.	3,033,601	161,934	0.5%
	Telecommunications—Other †		69,912	0.2%
			437,976	1.4%

Utilities †			577,003	1.9%
Total Common Stocks (Cost $9,018,338)			18,250,180	59.8%¹


Balanced Index Fund



					Face	Market	Percentage
				Maturity	Amount	Value^•	of Net
			Coupon	Date	($000)	($000)	Assets
U.S. Government and Agency Obligations
U.S. Government Securities
	United States Treasury Note/Bond		1.000%	11/15/19	158,585	156,628	0.5%
2	United States Treasury Note/Bond		0.875%	5/31/18	139,961	139,698	0.5%
	United States Treasury Note/Bond		1.000%	3/15/19	76,767	76,359	0.2%
	United States Treasury
	Note/Bond	0.625%–9.125%		1/31/18–11/15/46	4,524,675	4,561,133	14.9%
						4,933,818	16.1%
Agency Bonds and Notes
3	Federal Home Loan
	Mortgage Corp.	0.750%–6.750%		1/12/18–7/15/32	64,560	65,510	0.2%
3	Federal National Mortgage
	Assn.	0.000%–7.250%		2/8/18–7/15/37	101,811	105,670	0.4%
	Agency Bonds and Notes—Other †					102,968	0.3%
						274,148	0.9%
Conventional Mortgage-Backed Securities
^3,4,5Fannie Mae Pool		2.000%–9.500%		1/1/17–1/1/47	1,031,225	1,069,695	3.5%
^3,4,5Freddie Mac Gold Pool		2.000%–9.000%		1/1/17–1/1/47	654,501	675,939	2.2%
^4,5	Ginnie Mae I Pool	3.000%–9.500%		5/15/17–1/1/47	103,584	111,272	0.4%
^4,5	Ginnie Mae II Pool	2.500%–7.000%		3/20/18–1/1/47	646,671	674,991	2.2%
						2,531,897	8.3%
Nonconventional Mortgage-Backed Securities
^3,5,6Fannie Mae Pool		2.102%–5.860%		11/1/33–12/1/43	15,613	16,167	0.1%
^3,5,6Freddie Mac Non Gold Pool		2.235%–5.791%		11/1/34–11/1/43	3,962	4,123	0.0%
^5,6	Ginnie Mae II Pool	2.000%–4.000%		7/20/38–12/20/43	6,341	6,545	0.0%
						26,835	0.1%
Total U.S. Government and Agency Obligations (Cost $7,799,449)						7,766,698	25.4%
Asset-Backed/Commercial Mortgage-Backed Securities
5	Bear Stearns Commercial Mortgage
	Securities Trust 2007-PWR18		5.700%	6/11/50	903	922	0.0%
5	Bear Stearns Commercial
	Mortgage Securities Trust
	2007-TOP26	5.471%–5.513%		1/12/45	486	488	0.0%
5	Bear Stearns Commercial
	Mortgage Securities Trust
	2007-TOP28		5.742%	9/11/42	1,082	1,098	0.0%
5	Chase Issuance Trust 2012-A4		1.580%	8/16/21	600	596	0.0%
5	Chase Issuance Trust 2012-A7		2.160%	9/16/24	1,314	1,291	0.0%
5	Chase Issuance Trust 2013-A1		1.300%	2/18/20	1,050	1,049	0.0%
5	Chase Issuance Trust 2014-A1		1.150%	1/15/19	2,450	2,450	0.0%
5	Chase Issuance Trust 2014-A2		2.770%	3/15/23	900	920	0.0%
5	Chase Issuance Trust 2014-A6		1.260%	7/15/19	1,075	1,076	0.0%
5	Chase Issuance Trust 2014-A7		1.380%	11/15/19	800	801	0.0%
5	Chase Issuance Trust 2015-A2		1.590%	2/18/20	1,830	1,834	0.0%
5	Chase Issuance Trust 2015-A4		1.840%	4/15/22	600	597	0.0%
5	Chase Issuance Trust 2015-A5		1.360%	4/15/20	1,225	1,224	0.0%
5	Chase Issuance Trust 2016-A2		1.370%	6/15/21	775	767	0.0%
5	Chase Issuance Trust 2016-A4		1.490%	7/15/22	700	686	0.0%
5	Chase Issuance Trust 2016-A5		1.270%	7/15/21	775	765	0.0%
5	JP Morgan Chase Commercial
	Mortgage Securities Trust
	2006-LDP7		5.925%	4/17/45	15	15	0.0%


Balanced Index Fund



			Face	Market	Percentage
		Maturity	Amount	Value^•	of Net
	Coupon	Date	($000)	($000)	Assets
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2007-CIBC20	5.794%	2/12/51	958	973	0.0%
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2007-LDP12	5.882%	2/15/51	1,393	1,407	0.0%
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2012-C6	3.507%	5/15/45	550	574	0.0%
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2012-C8	2.829%	10/15/45	1,735	1,757	0.0%
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2012-CIBX	3.483%	6/15/45	433	448	0.0%
5 JP Morgan Chase Commercial
Mortgage Securities Trust
2013-C10	3.142%–3.372%	12/15/47	255	257	0.0%
5 JP Morgan Chase
Commercial Mortgage
Securities Trust
2013-C16	3.674%–4.910%	12/15/46	950	1,014	0.0%
5 JP Morgan Chase
Commercial Mortgage
Securities Trust 2013-LC11	2.960%	4/15/46	673	672	0.0%
5 JP Morgan Chase
Commercial Mortgage
Securities Trust
2014-C20	2.872%–3.805%	7/15/47	250	258	0.0%
5 JP Morgan Chase
Commercial Mortgage
Securities Trust 2016-JP3	2.870%	8/15/49	975	944	0.0%
5 JP Morgan Chase
Commercial Mortgage
Securities Trust 2016-JP4	3.648%–3.870%	12/15/49	725	740	0.0%
5 JPMCC Commercial
Mortgage Securities Trust
2015-JP1	3.914%	1/15/49	325	340	0.0%
7 Asset-Backed/Commercial Mortgage-Backed Securities—Other †				281,367	1.0%
Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $306,995)				307,330	1.0%
Corporate Bonds
Finance
Banking
Bear Stearns Cos. LLC	4.650%–7.250%	10/2/17–7/2/18	3,425	3,594	0.0%
JPMorgan Chase & Co.	1.625%–6.400%	1/15/18–6/1/45	65,440	67,533	0.2%
JPMorgan Chase Bank NA	1.450%–6.000%	10/1/17–9/23/19	2,805	2,847	0.0%
7 Banking—Other †				664,258	2.2%
Brokerage †				26,295	0.1%
7 Finance Companies †				39,933	0.1%
Insurance †				165,059	0.6%
7 Real Estate Investment Trusts †				84,658	0.3%
				1,054,177	3.5%


Balanced Index Fund



					Face	Market	Percentage
				Maturity	Amount	Value^•	of Net
			Coupon	Date	($000)	($000)	Assets
Industrial
7	Basic Industry †					116,671	0.4%
7	Capital Goods †					171,012	0.6%
7	Communication †					319,656	1.1%
	Consumer Cyclical †					250,140	0.8%
7	Consumer Noncyclical †					548,173	1.8%
	Energy
	Exxon Mobil Corp.	1.305%–4.114%		3/1/18–3/1/46	15,300	15,286	0.1%
	XTO Energy Inc.		5.500%	6/15/18	400	422	0.0%
	Energy—Other †					306,005	1.0%
	Other Industrial †					11,117	0.0%
	Technology
	Alphabet Inc.	1.998%–3.625%		5/19/21–8/15/26	1,350	1,284	0.0%
	Apple Inc.	1.000%–4.650%		5/3/18–8/4/46	41,795	41,747	0.1%
	Microsoft Corp.	1.000%–5.300%		5/1/18–8/8/56	38,824	38,303	0.1%
7	Technology—Other †					174,529	0.6%
	Transportation †					74,785	0.2%
						2,069,130	6.8%
Utilities
7	Electric †					237,530	0.7%
	Natural Gas †					18,513	0.1%
	Other Utility †					3,400	0.0%
						259,443	0.8%
Total Corporate Bonds (Cost $3,336,809)						3,382,750	11.1%
⁷Sovereign Bonds (Cost $601,073) †						598,314	1.9%
Taxable Municipal Bonds (Cost $102,961) †						111,346	0.4%
Convertible Bonds (Cost $0) †						55	0.0%
Temporary Cash Investments
U.S. Government and Agency Obligations
8	United States Treasury Bill	0.454%–0.607%		3/9/17–5/25/17	2,300	2,296	0.0%

					Shares
Money Market Funds
^9,10Vanguard Market Liquidity Fund			0.823%		4,499,340	449,979	1.5%
Total Temporary Cash Investments (Cost $452,239)						452,275	1.5%¹
¹¹Total Investments (Cost $21,617,864)						30,868,948	101.1%


Balanced Index Fund



	Amount
	($000)
Investor Shares—Net Assets
Applicable to 107,458,197 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)	3,343,366
Net Asset Value Per Share—Investor Shares	$31.11

Admiral Shares—Net Assets
Applicable to 600,873,972 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)	18,695,074
Net Asset Value Per Share—Admiral Shares	$31.11

Institutional Shares—Net Assets
Applicable to 273,001,938 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)	8,494,705
Net Asset Value Per Share—Institutional Shares	$31.12

• See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Represents the aggregate value, by category, of securities that are not among the 50 largest holdings and, in total for any issuer,
represent 1% or less of net assets.
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 59.8% and 1.5%,
respectively, of net assets.
2 Securities with a value of $693,000 have been segregated as collateral for certain open To Be Announced (TBA) transactions.
3 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed
by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth,
in exchange for senior preferred stock.
4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of
December 31, 2016.
5 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
6 Adjustable-rate security.
7 Certain of the fund’s securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be
sold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2016, the aggregate value
of these securities was $61,689,000, representing 0.2% of net assets.
8 Securities with a value of $2,296,000 have been segregated as initial margin for open futures contracts.
9 Includes $42,574,000 of collateral received for securities on loan.
10 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is
the 7-day yield.
11 The total value of securities on loan is $39,640,000.
See accompanying Notes, which are an integral part of the Financial Statements.

Balanced Index Fund

Statement of Operations


	Year Ended
	December 31, 2016
	($000)
Investment Income
Income
Dividends¹	356,739
Interest²	272,017
Securities Lending—Net	3,278
Total Income	632,034
Expenses
The Vanguard Group—Note B
Investment Advisory Services	3,054
Management and Administrative—Investor Shares	4,868
Management and Administrative—Admiral Shares	8,124
Management and Administrative—Institutional Shares	3,507
Marketing and Distribution—Investor Shares	765
Marketing and Distribution—Admiral Shares	1,651
Marketing and Distribution—Institutional Shares	166
Custodian Fees	390
Auditing Fees	25
Shareholders’ Reports—Investor Shares	56
Shareholders’ Reports—Admiral Shares	93
Shareholders’ Reports—Institutional Shares	55
Trustees’ Fees and Expenses	23
Total Expenses	22,777
Net Investment Income	609,257
Realized Net Gain (Loss)
Investment Securities Sold²	6,018
Futures Contracts	13,279
Realized Net Gain (Loss)	19,297
Change in Unrealized Appreciation (Depreciation)
Investment Securities	1,753,795
Futures Contracts	(1,009)
Change in Unrealized Appreciation (Depreciation)	1,752,786
Net Increase (Decrease) in Net Assets Resulting from Operations	2,381,340

1 Dividends are net of foreign withholding taxes of $32,000.
2 Interest income and realized net gain (loss) from an affiliated company of the fund were $2,610,000 and $14,000, respectively.

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

Balanced Index Fund

Statement of Changes in Net Assets


	Year Ended December 31,
	2016	2015
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	609,257	531,943
Realized Net Gain (Loss)	19,297	191,247
Change in Unrealized Appreciation (Depreciation)	1,752,786	(612,511)
Net Increase (Decrease) in Net Assets Resulting from Operations	2,381,340	110,679
Distributions
Net Investment Income
Investor Shares	(65,129)	(60,568)
Admiral Shares	(371,977)	(315,875)
Institutional Shares	(172,637)	(156,644)
Realized Capital Gain
Investor Shares	—	—
Admiral Shares	—	—
Institutional Shares	—	—
Total Distributions	(609,743)	(533,087)
Capital Share Transactions
Investor Shares	50,339	(34,234)
Admiral Shares	1,896,999	1,868,658
Institutional Shares	546,339	177,768
Net Increase (Decrease) from Capital Share Transactions	2,493,677	2,012,192
Total Increase (Decrease)	4,265,274	1,589,784
Net Assets
Beginning of Period	26,267,871	24,678,087
End of Period¹	30,533,145	26,267,871
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($14,503,000) and ($14,017,000).

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

Balanced Index Fund

Financial Highlights


Investor Shares

For a Share Outstanding	Year Ended December 31,
Throughout Each Period	2016	2015	2014	2013	2012
Net Asset Value, Beginning of Period	$29.22	$29.68	$27.52	$23.76	$21.78
Investment Operations
Net Investment Income	. 613	. 570	. 531	. 473	. 486
Net Realized and Unrealized Gain (Loss)
on Investments	1.889	(.459)	2.160	3.754	1.971
Total from Investment Operations	2.502	.111	2.691	4.227	2.457
Distributions
Dividends from Net Investment Income	(. 612)	(. 571)	(. 531)	(. 467)	(. 477)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(. 612)	(. 571)	(. 531)	(. 467)	(. 477)
Net Asset Value, End of Period	$31.11	$29.22	$29.68	$27.52	$23.76

Total Return¹	8.63%	0.37%	9.84%	17.91%	11.33%

Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$3,343	$3,090	$3,174	$2,974	$2,844
Ratio of Total Expenses to Average Net Assets	0.19%	0.22%	0.23%	0.24%	0.24%
Ratio of Net Investment Income to
Average Net Assets	2.06%	1.92%	1.87%	1.84%	2.13%
Portfolio Turnover Rate	44%^2,3	61%²	53%²	47%²	43%²

1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable account service fees.
2 Includes 12%, 24%, 27%, 27%, and 25% attributable to mortgage-dollar-roll activity.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares.

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

Balanced Index Fund

Financial Highlights


Admiral Shares

For a Share Outstanding	Year Ended December 31,
Throughout Each Period	2016	2015	2014	2013	2012
Net Asset Value, Beginning of Period	$29.22	$29.68	$27.52	$23.76	$21.78
Investment Operations
Net Investment Income	. 649	. 612	.572	.513	.520
Net Realized and Unrealized Gain (Loss)
on Investments	1.890	(.460)	2.158	3.755	1.970
Total from Investment Operations	2.539	.152	2.730	4.268	2.490
Distributions
Dividends from Net Investment Income	(. 649)	(. 612)	(. 570)	(. 508)	(. 510)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(. 649)	(. 612)	(. 570)	(. 508)	(. 510)
Net Asset Value, End of Period	$31.11	$29.22	$29.68	$27.52	$23.76

Total Return¹	8.77%	0.51%	9.99%	18.10%	11.49%

Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$18,695	$15,726	$14,112	$9,688	$7,407
Ratio of Total Expenses to Average Net Assets	0.07%	0.08%	0.09%	0.09%	0.10%
Ratio of Net Investment Income to
Average Net Assets	2.18%	2.06%	2.01%	1.99%	2.27%
Portfolio Turnover Rate	44%^2,3	61%²	53%²	47%²	43%²

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

Balanced Index Fund

Financial Highlights


Institutional Shares

For a Share Outstanding	Year Ended December 31,
Throughout Each Period	2016	2015	2014	2013	2012
Net Asset Value, Beginning of Period	$29.22	$29.68	$27.52	$23.76	$21.78
Investment Operations
Net Investment Income	. 653	. 615	.574	.515	.523
Net Realized and Unrealized Gain (Loss)
on Investments	1.899	(.460)	2.159	3.755	1.971
Total from Investment Operations	2.552	.155	2.733	4.270	2.494
Distributions
Dividends from Net Investment Income	(. 652)	(. 615)	(. 573)	(. 510)	(. 514)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(. 652)	(. 615)	(. 573)	(. 510)	(. 514)
Net Asset Value, End of Period	$31.12	$29.22	$29.68	$27.52	$23.76

Total Return	8.81%	0.52%	10.00%	18.11%	11.51%

Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$8,495	$7,452	$7,392	$6,938	$5,554
Ratio of Total Expenses to Average Net Assets	0.06%	0.07%	0.08%	0.08%	0.08%
Ratio of Net Investment Income to
Average Net Assets	2.19%	2.07%	2.02%	2.00%	2.29%
Portfolio Turnover Rate	44%^1,2	61%¹	53%¹	47%¹	43%¹

1 Includes 12%, 24%, 27%, 27%, and 25% attributable to mortgage-dollar-roll activity.
2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares.

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

Balanced Index Fund

Notes to Financial Statements

Vanguard Balanced Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries. The fund offers three classes of shares: Investor Shares, Admiral Shares, and Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. 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. 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. Bonds and temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Securities for which market quotations are not readily available, or whose values have been 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.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

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

Balanced Index Fund

During the year ended December 31, 2016, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements.

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

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

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 (December 31, 2013–2016), 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

Balanced Index Fund

only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

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 December 31, 2016, or at any time during the period then ended.

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

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

B. 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.

Balanced Index Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At December 31, 2016, the fund had contributed to Vanguard capital in the amount of $2,257,000, representing 0.01% of the fund’s net assets and 0.90% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

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

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

The following table summarizes the market value of the fund’s investments as of December 31, 2016, based on the inputs used to value them:


	Level 1	Level 2	Level 3
Investments	($000)	($000)	($000)
Common Stocks	18,249,786	3	391
U.S. Government and Agency Obligations	—	7,766,698	—
Asset-Backed/Commercial Mortgage-Backed Securities	—	307,330	—
Corporate Bonds	—	3,382,750	—
Sovereign Bonds	—	598,314	—
Taxable Municipal Bonds	—	111,346	—
Convertible Bonds	—	55	—
Temporary Cash Investments	449,979	2,296	—
Futures Contracts—Liabilities¹	(208)	—	—
Total	18,699,557	12,168,792	391
1 Represents variation margin on the last day of the reporting period.

D. At December 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:


			($000)
			Aggregate
		Number of	Settlement	Unrealized
		Long (Short)	Value	Appreciation
Futures Contracts	Expiration	Contracts	Long (Short)	(Depreciation)
E-mini Russell 2000 Index	March 2017	134	9,091	(199)
E-mini S&P MidCap 400 Index	March 2017	48	7,964	(153)
				(352)

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

Balanced Index Fund

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

During the year ended December 31, 2016, the fund realized $114,656,000 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.

For tax purposes, at December 31, 2016, the fund had $4,176,000 of ordinary income available for distribution. At December 31, 2016, the fund had available capital losses totaling $150,736,000 to offset future net capital gains. Of this amount, $15,654,000 is subject to expiration and may be used to offset future net capital gains through December 31, 2017. Capital losses of $135,082,000 realized beginning in fiscal 2011 may be carried forward indefinitely under the Regulated Investment Company Modernization Act of 2010, but must be used before any expiring loss carryforwards.

At December 31, 2016, the cost of investment securities for tax purposes was $21,618,133,000. Net unrealized appreciation of investment securities for tax purposes was $9,250,815,000, consisting of unrealized gains of $9,438,395,000 on securities that had risen in value since their purchase and $187,580,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the year ended December 31, 2016, the fund purchased $3,909,673,000 of investment securities and sold $2,559,204,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $11,194,452,000 and $9,954,667,000, respectively. Total purchases and sales include $0 and $200,413,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

Balanced Index Fund


G. Capital share transactions for each class of shares were:
	Year Ended December 31,
	2016		2015
	Amount	Shares	Amount	Shares
	($000)	(000)	($000)	(000)
Investor Shares
Issued	848,157	28,237	818,847	27,504
Issued in Lieu of Cash Distributions	62,207	2,051	58,336	1,976
Redeemed	(860,025)	(28,588)	(911,417)	(30,665)
Net Increase (Decrease)—Investor Shares	50,339	1,700	(34,234)	(1,185)
Admiral Shares
Issued	4,359,328	144,656	4,007,705	134,626
Issued in Lieu of Cash Distributions	347,026	11,437	295,192	10,002
Redeemed	(2,809,355)	(93,372)	(2,434,239)	(81,938)
Net Increase (Decrease) —Admiral Shares	1,896,999	62,721	1,868,658	62,690
Institutional Shares
Issued	1,372,138	45,563	936,232	31,483
Issued in Lieu of Cash Distributions	168,133	5,541	152,359	5,160
Redeemed	(993,932)	(33,085)	(910,823)	(30,700)
Net Increase (Decrease)—Institutional Shares	546,339	18,019	177,768	5,943

H. Management has determined that no material events or transactions occurred subsequent to December 31, 2016, that would require recognition or disclosure in these financial statements.

Report of Independent Registered
Public Accounting Firm

To the Board of Trustees of Vanguard Valley Forge Funds and the Shareholders of Vanguard Balanced Index Fund:

In our opinion, the accompanying statement of net assets—investments summary and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Balanced Index Fund (constituting a separate portfolio of Vanguard Valley Forge Funds, hereafter referred to as the “Fund”) at December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 17, 2017

Special 2016 tax information (unaudited) for Vanguard Balanced Index Fund

This information for the fiscal year ended December 31, 2016, is included pursuant to provisions of
the Internal Revenue Code.

The fund distributed $324,688,000 of qualified dividend income to shareholders during the fiscal year

For corporate shareholders, 50.7% of investment income (dividend income plus short-term gains,
if any) qualifies for the dividends-received deduction.

Your Fund’s After-Tax Returns

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.


Average Annual Total Returns: Balanced Index Fund Investor Shares
Periods Ended December 31, 2016

	One	Five	Ten
	Year	Years	Years
Returns Before Taxes	8.63%	9.47%	6.27%
Returns After Taxes on Distributions	7.92	8.83	5.57
Returns After Taxes on Distributions and Sale of Fund Shares	5.09	7.29	4.78

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.

Glossary

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

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

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

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

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

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from 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.

Dividend Yield. The current, annualized rate of dividends paid on a share of stock, divided by its current share price. For a fund, the weighted average yield for stocks it holds. The index yield is based on the current annualized rate of dividends paid on stocks in the index.

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.

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.

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

Benchmark Information

Balanced Composite Index: Weighted 60% Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) and 40% Lehman Brothers U.S. Aggregate Bond Index through May 31, 2005; 60% MSCI US Broad Market Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009; 60% MSCI US Broad Market Index and 40% Bloomberg Barclays U.S. Aggregate Float Adjusted Index through January 14, 2013; and 60% CRSP US Total Market Index and 40% Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index: Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009; Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

Spliced Total Stock Market Index: Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) through April 22, 2005; MSCI US Broad Market Index through June 2, 2013; and CRSP US Total Market Index thereafter.

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

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

© 2017 Barclays. Used with Permission.

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

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 198 Vanguard funds.

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

InterestedTrustee¹

F. William McNabb III

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

IndependentTrustees

Emerson U. Fullwood

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

Rajiv L. Gupta

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

Amy Gutmann

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

JoAnn Heffernan Heisen

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

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

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

Scott C. Malpass

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

André F. Perold

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

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

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

Thomas J. Higgins

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

Peter Mahoney

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

Anne E. Robinson

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


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

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

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

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


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



Connect with Vanguard® > vanguard.com



Fund Information > 800-662-7447
Direct Investor Account Services > 800-662-2739
Institutional Investor Services > 800-523-1036
Text Telephone for People
Who Are Deaf or Hard of Hearing > 800-749-7273

This material may be used in conjunction
with the offering of shares of any Vanguard
fund only if preceded or accompanied by
the fund’s current prospectus.

All comparative mutual fund data are from Lipper, a
Thomson Reuters Company, or Morningstar, Inc., unless
otherwise noted.

You can obtain a free copy of Vanguard’s proxy voting
guidelines by visiting vanguard.com/proxyreporting or by
calling Vanguard at 800-662-2739. The guidelines are
also available from the SEC’s website, sec.gov. In
addition, you may obtain a free report on how your fund
voted the proxies for securities it owned during the 12
months ended June 30. To get the report, visit either
vanguard.com/proxyreporting or sec.gov.

You can review and copy information about your fund at
the SEC’s Public Reference Room in Washington, D.C. To
find out more about this public service, call the SEC at
202-551-8090. Information about your fund is also
available on the SEC’s website, and you can receive
copies of this information, for a fee, by sending a
request in either of two ways: via email addressed to
publicinfo@sec.gov or via regular mail addressed to the
Public Reference Section, Securities and Exchange
Commission, Washington, DC 20549-1520.

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

	Q020 022017

A new format, unwavering commitment

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

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

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

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

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


Contents
Your Fund’s Performance at a Glance.	1
Chairman’s Perspective.	2
Advisor’s Report.	6
Fund Profile.	9
Performance Summary.	10
Financial Statements.	12
Your Fund’s After-Tax Returns.	24
About Your Fund’s Expenses.	25
Glossary.	27

Your Fund’s Performance at a Glance

• For the year ended December 31, 2016, Vanguard Managed Payout Fund returned 7.55%, slightly less than its composite benchmark index but more than its long-term target of 4% plus inflation.

• Managed Payout Fund invests in nine underlying Vanguard funds and has a small stake in commodity-linked investments. It benefited from an overweight position in emerging markets stocks, which returned more than 11% for the year. The fund also got a boost from the advisor’s decision in September to overweight value stocks, as these surged during the final quarter.

• An underweight position in U.S. equities, which returned more than 12%, detracted from performance. So did an underweight allocation to fixed income in favor of alternative strategies.

• Since its inception in May 2008, the fund has posted an average annual return of 4.50%, more than its benchmark but a bit short of its target return.


Total Returns: Fiscal Year Ended December 31, 2016
	Total
	Returns
Vanguard Managed Payout Fund	7.55%
Managed Payout Composite Index	7.80
For a benchmark description, see the Glossary.
Vanguard owns a pending patent application for its Managed Payout Fund under U.S. Patent Application No. 2009-0076980-A1.


Total Returns: Inception Through December 31, 2016
	Average
	Annual Return
Managed Payout Fund (Returns since inception: 5/2/2008)	4.50%
Managed Payout Composite Index	3.66
For a benchmark description, see the Glossary.

The figures shown represent past performance, which is not a guarantee of future results. (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.
On January 17, 2014, Vanguard Managed Payout Growth Focus Fund and Vanguard Managed Payout
Distribution Focus Fund were merged into Vanguard Managed Payout Growth and Distribution Fund, which
was then renamed Vanguard Managed Payout Fund. Returns before the merger reflect the performance of the
former Managed Payout Growth and Distribution Fund.

Chairman’s Perspective

Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

If you’re like most investors, a big question on your mind is: What’s in store for the markets and the economy in 2017?

What really matters for investors

Our global economic outlook: Expect stabilization, not stagnation

In the near term, these forces will continue to dampen growth, inflation, and interest rates. They also make it unlikely that further monetary stimulus from central banks will do much to spur growth.


Market Barometer
	Average Annual Total Returns
	Periods Ended December 31, 2016
	One	Three	Five
	Year	Years	Years
Stocks
Russell 1000 Index (Large-caps)	12.05%	8.59%	14.69%
Russell 2000 Index (Small-caps)	21.31	6.74	14.46
Russell 3000 Index (Broad U.S. market)	12.74	8.43	14.67
FTSE All-World ex US Index (International)	4.80	-1.16	5.52

Bonds
Bloomberg Barclays U.S. Aggregate Bond Index
(Broad taxable market)	2.65%	3.03%	2.23%
Bloomberg Barclays Municipal Bond Index
(Broad tax-exempt market)	0.25	4.14	3.28
Citigroup Three-Month U.S. Treasury Bill Index	0.27	0.09	0.08

CPI
Consumer Price Index	2.07%	1.18%	1.36%