Vanguard Sector Bond Index Funds

Transcription

1 Annual Report August 31, 2017 Vanguard Sector Bond Index Funds Vanguard Short-Term Government Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund

2 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 Chairman s Perspective Short-Term Government Bond Index Fund Intermediate-Term Government Bond Index Fund Long-Term Government Bond Index Fund Short-Term Corporate Bond Index Fund Intermediate-Term Corporate Bond Index Fund Long-Term Corporate Bond Index Fund Mortgage-Backed Securities Index Fund About Your Fund s Expenses Trustees Approve Advisory Arrangements Glossary 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 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.

3 Your Fund s Performance at a Glance Bond yields across the maturity spectrum closed higher for the 12 months ended August 31, Federal Reserve rate hikes pushed up short-term yields, and longer-term yields climbed early in the fiscal year on optimism about stronger growth and higher inflation. The resulting decline in bond prices detracted from the returns of the funds in this report, which ranged from about 2% for Vanguard Intermediate-Term Corporate Bond Index Fund to about 5.6% for Vanguard Long-Term Government Bond Index Fund. The funds performed in line with their benchmarks but mostly lagged their peer groups. Please note that the names of the three Vanguard Government Bond Index Funds will change in the fourth quarter of 2017 to Vanguard Short-Term Treasury Index Fund, Vanguard Intermediate-Term Treasury Index Fund, and Vanguard Long-Term Treasury Index Fund. Their benchmarks will also change to reflect the funds narrower focus. Total Returns: Fiscal Year Ended August 31, Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Short-Term Government Bond Index Fund ETF Shares 1.28% Market Price 0.51% Net Asset Value 0.50 Admiral Shares % -0.43% 0.53 Institutional Shares Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index 0.56 Short U.S. Government Funds Average 0.51 Short U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Intermediate-Term Government Bond Index Fund ETF Shares 1.77% Market Price -0.22% Net Asset Value Admiral Shares % -1.75% Institutional Shares Bloomberg Barclays U.S Year Government Float Adjusted Index Intermediate U.S. Government Funds Average Intermediate U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 1

4 30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Long-Term Government Bond Index Fund ETF Shares 2.63% Market Price -5.65% Net Asset Value Admiral Shares % -8.03% Institutional Shares Bloomberg Barclays U.S. Long Government Float Adjusted Index General U.S. Government Funds Average General U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Short-Term Corporate Bond Index Fund ETF Shares 2.12% Market Price 1.75% Net Asset Value 1.84 Admiral Shares % -0.37% 1.83 Institutional Shares Bloomberg Barclays U.S. 1 5 Year Corporate Bond Index 2.03 Short-Intermediate Investment-Grade Debt Funds Average 1.28 Short-Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Intermediate-Term Corporate Bond Index Fund ETF Shares 3.09% Market Price 2.00% Net Asset Value 1.98 Admiral Shares % -1.25% 1.99 Institutional Shares Bloomberg Barclays U.S Year Corporate Bond Index 2.30 Core Bond Funds Average 0.85 Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Long-Term Corporate Bond Index Fund ETF Shares 4.14% Market Price 2.19% Net Asset Value 1.81 Admiral Shares % -2.37% 1.84 Institutional Shares Bloomberg Barclays U.S. 10+ Year Corporate Bond Index 2.08 Corporate Debt Funds BBB-Rated Average 1.93 Corporate Debt Funds BBB-Rated Average: Derived from data provided by Lipper, a Thomson Reuters Company. 2

5 30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Mortgage-Backed Securities Index Fund ETF Shares 2.26% Market Price 0.71% Net Asset Value 0.74 Admiral Shares % -1.18% 0.76 Institutional Shares Bloomberg Barclays U.S. MBS Float Adjusted Index 0.81 U.S. Mortgage Funds Average 1.62 U.S. Mortgage 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. Total Returns: Inception Through August 31, 2017 Average Annual Return Short-Term Government Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 0.83% Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index 0.93 Short U.S. Government Funds Average 0.82 Short U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Intermediate-Term Government Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 3.12% Bloomberg Barclays U.S Year Government Float Adjusted Index 3.22 Intermediate U.S. Government Funds Average 2.35 Intermediate U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Long-Term Government Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 6.75% Bloomberg Barclays U.S. Long Government Float Adjusted Index 6.84 General U.S. Government Funds Average 2.75 General U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 3

6 Average Annual Return Short-Term Corporate Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 3.07% Bloomberg Barclays U.S. 1 5 Year Corporate Bond Index 3.29 Short-Intermediate Investment-Grade Debt Funds Average 2.51 Short-Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Intermediate-Term Corporate Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 5.96% Bloomberg Barclays U.S Year Corporate Bond Index 6.08 Spliced Core Bond Funds Average 3.90 For a benchmark description, see the Glossary. Spliced Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Long-Term Corporate Bond Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 7.94% Bloomberg Barclays U.S. 10+ Year Corporate Bond Index 7.94 Corporate Debt Funds BBB-Rated Average 5.62 Corporate Debt Funds BBB-Rated Average: Derived from data provided by Lipper, a Thomson Reuters Company. Mortgage-Backed Securities Index Fund ETF Shares Net Asset Value (Returns since inception: 11/19/2009) 2.92% Bloomberg Barclays U.S. MBS Float Adjusted Index 2.95 U.S. Mortgage Funds Average 3.37 U.S. Mortgage Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 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. 4

7 Expense Ratios Your Fund Compared With Its Peer Group ETF Shares Admiral Shares Institutional Shares Peer Group Average Short-Term Government Bond Index Fund 0.07% 0.07% 0.05% 0.80% Intermediate-Term Government Bond Index Fund Long-Term Government Bond Index Fund Short-Term Corporate Bond Index Fund Intermediate-Term Corporate Bond Index Fund Long-Term Corporate Bond Index Fund Mortgage-Backed Securities Index Fund The fund expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended August 31, 2017, the funds expense ratios were: for the Short-Term Government Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; for the Intermediate-Term Government Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; for the Long-Term Government Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; for the Short-Term Corporate Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; for the Intermediate-Term Corporate Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; for the Long-Term Corporate Bond Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares; and for the Mortgage-Backed Securities Index Fund, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares. Peer-group expense ratios are derived from data provided by Lipper, a Thomson Reuters Company, and capture information through year-end Peer groups: For the Short-Term Government Bond Index Fund, Short U.S. Government Funds; for the Intermediate-Term Government Bond Index Fund, Intermediate U.S. Government Funds; for the Long-Term Government Bond Index Fund, General U.S. Government Funds; for the Short-Term Corporate Bond Index Fund, Short-Intermediate Investment-Grade Debt Funds; for the Intermediate-Term Corporate Bond Index Fund, Core Bond Funds; for the Long-Term Corporate Bond Index Fund, Corporate BBB-Rated Debt Funds; for the Mortgage-Backed Securities Index Fund, U.S. Mortgage Funds. 5

8 Chairman s Perspective Dear Shareholder, Bill McNabb Chairman and Chief Executive Officer Since mid-august we ve been reaching out to you about the proposals put forth by the Vanguard funds that, if approved, will enable us to manage the funds more efficiently and effectively. As the November deadline for voting approaches, I d like to offer some perspective on a few of the proposals that I believe are important to the way Vanguard operates and manages your investments. I hope you consider this information and promptly cast your ballot. Your biggest advocate The main driver for this proxy solicitation is to ask all our fund shareholders to elect a full slate of trustees who oversee each U.S.-based Vanguard mutual fund. These trustees serve an important role, making sure your funds are managed in your best interests. This includes monitoring fund performance, approving advisory agreements, and ensuring that we re keeping your investment costs as low as possible. Simply put, they are your biggest advocate. Each trustee brings a variety of skills and professional experiences that contribute to the board s strength and diversity. Of the 12 nominees, nine currently serve on the board, and three are new. If elected, the new board would include ten independent members, meaning they have no affiliation with Vanguard or the funds apart from any investments they may choose to make as private individuals. 6

9 These are the proposed new trustees: Sarah Bloom Raskin is a former member of the Federal Reserve Board of Governors and former deputy secretary of the U.S. Treasury Department. She is an expert in cybersecurity a critically important issue at Vanguard, as we place a premium on protecting clients assets and sensitive data. Deanna Mulligan is chief executive officer of The Guardian Life Insurance Company of America. It s rare to find a CEO such as Deanna who leads a company with a mutual ownership structure similar to Vanguard s. Tim Buckley is president and a director of Vanguard and will succeed me in January as CEO. (I ll remain chairman for a period to be determined by the board.) I interviewed Tim when he applied for his first job here in 1991 and again when he was graduating from Harvard Business School. I was thrilled he picked Vanguard as a place to build his career, and I ve been delighted to see him take on several leadership positions, including as head of our Retail Investor Group, chief information officer, and chief investment officer. I can think of no one better prepared to succeed me. Market Barometer Average Annual Total Returns Periods Ended August 31, 2017 One Year Three Years Five Years Stocks Russell 1000 Index (Large-caps) 16.16% 9.21% 14.37% Russell 2000 Index (Small-caps) Russell 3000 Index (Broad U.S. market) FTSE All-World ex US Index (International) Bonds Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) 0.49% 2.64% 2.19% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 1.94% 1.06% 1.28% 7

10 Vanguard believes that diversity of thought, background, and experience, as well as diversity of personal characteristics, meaningfully contributes to the board s ability to effectively serve shareholders. If Sarah and Deanna are elected, women will account for 40% of the board s independent trustees. I should note that even as Vanguard is nominating three new board members, we re saying goodbye to trustee Rajiv Gupta. Rajiv was a legendary CEO of Rohm and Haas Co., and Vanguard and our clients have benefited greatly from his expertise. I wish him a happy retirement. Summarizing the proposals Among the trustees leading responsibilities is overseeing the funds internal and external investment advisory agreements. The trustees, in consultation with our Global Investment Committee and our Portfolio Review Department, choose the investment advisors that manage client assets. Over decades, we have built a strong track record of picking advisors whose portfolio management strategies have served clients well. Two proposals in the proxy focus on this oversight responsibility. Shareholders of 48 Vanguard funds have already voted to allow the board to make external advisor changes without obtaining prior shareholder approval. The new proposals would extend that policy across our entire U.S.-based fund lineup and expand it to include internal advisory agreements with Vanguard subsidiaries. Eliminating the need for shareholder approval removes a step that is costly and time-consuming if done frequently or on an individual fund basis. Although there are no current plans to employ the policy on any Vanguardmanaged funds, standardizing it enables the trustees to retain an advisory firm to diversify a fund s management team or ensure management continuity should a contingency arise. I also encourage shareholders of several specific Vanguard index funds to read the proxy proposals that affect those funds. One proposal would change the investment objective of Vanguard REIT Index Fund and Vanguard Variable Insurance Fund REIT Index Portfolio to include real estaterelated securities, aligning the funds with updated industry-sector classification methodology. Another proposal seeks to change the diversification status of the REIT Index Fund to enable it to better track its benchmark. Finally, we seek your approval of the Funds Service Agreement for Vanguard Institutional Index Fund and Vanguard Institutional Total Stock Market Index Fund. If approved, this arrangement would then be standardized across Vanguard s entire publicly available U.S. mutual fund lineup. It should also reduce costs and minimum initial investment requirements in select share classes. 8

11 At the ballot box We hope you ll make it a priority to cast your ballot. We want to avoid the added time and cost of soliciting sufficient votes should we not obtain a quorum by the shareholder meeting on November 15, when voting concludes. Ultimately, we believe the proposals I ve discussed are in your best interest as Vanguard fund shareholders, and the trustees recommend that you vote in favor of them. For more information, visit vanguard.com and enter the search term proxy. As always, thank you for investing with Vanguard. Sincerely, F. William McNabb III Chairman and Chief Executive Officer September 14,

12 Short-Term Government Bond Index Fund Fund Profile As of August 31, 2017 Share-Class Characteristics Financial Attributes ETF Shares Admiral Institutional Shares Shares Ticker Symbol VGSH VSBSX VSBIX Expense Ratio % 0.07% 0.05% 30-Day SEC Yield 1.28% 1.28% 1.31% Bloomberg Barclays Fund 1 3 Year Gov t Float Adj Index Bloomberg Barclays Aggregate FA Index Number of Bonds ,397 Yield to Maturity (before expenses) 1.3% 1.3% 2.4% Average Coupon 1.5% 1.6% 3.0% Average Duration 1.9 years 1.9 years 6.1 years Average Effective Maturity 2.0 years 2.0 years 8.2 years Short-Term Reserves 0.9% Sector Diversification (% of portfolio) Treasury/Agency 99.8% Other 0.2 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 Barclays 1 3 Year Gov t Float Adj Index Bloomberg Barclays Aggregate FA Index R-Squared Beta These measures show the degree and timing of the fund s fluctuations compared with the indexes over 36 months. Distribution by Effective Maturity (% of portfolio) Under 1 Year 0.6% 1-3 Years 99.4 Distribution by Credit Quality (% of portfolio) U.S. Government 99.8% Aaa 0.2 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. Investment Focus Average Maturity Credit Quality Treasury/ Agency Short Med. Long Investment-Grade Corporate Below Investment-Grade 1 The expense ratios shown are from the prospectus dated December 22, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended August 31, 2017, the expense ratios were 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.05% for Institutional Shares. 10

13 Short-Term Government Bond 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: November 19, 2009, Through August 31, 2017 Initial Investment of $10,000 $15,000 10, ,000 Average Annual Total Returns Periods Ended August 31, 2017 One Year Five Years Since Inception (11/19/2009) Final Value of a $10,000 Investment Short-Term Government Bond Index Fund ETF Shares Net Asset Value 0.50% 0.59% 0.83% $10,661 Short-Term Government Bond Index Fund ETF Shares Market Price ,666 Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index ,750 Short U.S. Government Funds Average ,657 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,206 For a benchmark description, see the Glossary. Short U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. "Since Inception" performance is calculated from the ETF Shares inception date for both the fund and its comparative standards. See Financial Highlights for dividend and capital gains information. 11

14 Short-Term Government Bond Index Fund Average Annual Total Returns Periods Ended August 31, 2017 One Year Five Years Since Inception (12/28/2009) Final Value of a $10,000 Investment Short-Term Government Bond Index Fund Admiral Shares 0.53% 0.59% 0.90% $10,712 Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index ,796 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,343 "Since Inception" performance is calculated from the Admiral Shares inception date for both the fund and its comparative standards. One Year Five Years Since Inception (8/23/2010) Final Value of a $5,000,000 Investment Short-Term Government Bond Index Fund Institutional Shares 0.56% 0.62% 0.71% $5,256,067 Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index ,280,904 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,200,031 "Since Inception" performance is calculated from the Institutional Shares inception date for both the fund and its comparative standards. Cumulative Returns of ETF Shares: November 19, 2009, Through August 31, 2017 One Year Five Years Since Inception (11/19/2009) Short-Term Government Bond Index Fund ETF Shares Market Price 0.51% 2.99% 6.66% Short-Term Government Bond Index Fund ETF Shares Net Asset Value Bloomberg Barclays U.S. 1 3 Year Government Float Adjusted Index "Since Inception" performance is calculated from the ETF Shares inception date for both the fund and its comparative standards. 12

15 Short-Term Government Bond Index Fund Fiscal-Year Total Returns (%): November 19, 2009, Through August 31, 2017 Bloomberg Barclays 1 3 Year Gov t Float Adj ETF Shares Net Asset Value Index Fiscal Year Total Returns Total Returns % 1.83% Average Annual Total Returns: Periods Ended June 30, 2017 This table presents returns through the latest calendar quarter rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information. Since Inception Inception Date One Year Five Years Income Capital Total ETF Shares 11/19/2009 Market Price -0.12% 0.56% 0.80% Net Asset Value Admiral Shares 12/28/ % 0.29% 0.86 Institutional Shares 8/23/

16 Short-Term Government Bond Index Fund Financial Statements Statement of Net Assets As of August 31, 2017 The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund s Forms N-Q on the SEC s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC s Public Reference Room (see the back cover of this report for further information). Face Market Maturity Amount Value Coupon Date U.S. Government and Agency Obligations (99.5%) U.S. Government Securities (91.6%) United States Treasury Note/Bond 4.250% 11/15/17 1,860 1,872 United States Treasury Note/Bond 3.500% 2/15/18 7,850 7,933 United States Treasury Note/Bond 0.750% 9/30/18 10,855 10,796 United States Treasury Note/Bond 1.375% 9/30/18 48,065 48,117 United States Treasury Note/Bond 0.875% 10/15/18 15,485 15,417 United States Treasury Note/Bond 0.750% 10/31/18 32,580 32,386 United States Treasury Note/Bond 1.250% 10/31/18 41,702 41,689 United States Treasury Note/Bond 1.750% 10/31/18 3,688 3,709 United States Treasury Note/Bond 1.250% 11/15/18 40,307 40,301 United States Treasury Note/Bond 3.750% 11/15/18 16,071 16,541 United States Treasury Note/Bond 1.000% 11/30/18 13,635 13,590 United States Treasury Note/Bond 1.250% 11/30/18 21,500 21,493 United States Treasury Note/Bond 1.375% 11/30/18 12,700 12,716 United States Treasury Note/Bond 1.250% 12/15/18 51,884 51,868 United States Treasury Note/Bond 1.250% 12/31/18 45,975 45,961 United States Treasury Note/Bond 1.375% 12/31/18 14,400 14,416 United States Treasury Note/Bond 1.500% 12/31/18 54,803 54,957 United States Treasury Note/Bond 1.125% 1/15/19 36,872 36,791 United States Treasury Note/Bond 1.125% 1/31/19 21,000 20,951 United States Treasury Note/Bond 1.250% 1/31/19 10,000 9,994 United States Treasury Note/Bond 1.500% 1/31/19 26,750 26,825 United States Treasury Note/Bond 0.750% 2/15/19 54,298 53,874 United States Treasury Note/Bond 2.750% 2/15/19 11,000 11,229 United States Treasury Note/Bond 1.125% 2/28/19 17,125 17,085 United States Treasury Note/Bond 1.375% 2/28/19 10,000 10,011 United States Treasury Note/Bond 1.500% 2/28/19 19,000 19,053 United States Treasury Note/Bond 1.000% 3/15/19 20,506 20,416 United States Treasury Note/Bond 1.250% 3/31/19 16,000 15,985 United States Treasury Note/Bond 1.500% 3/31/19 5,500 5,517 United States Treasury Note/Bond 1.625% 3/31/19 52,020 52,288 United States Treasury Note/Bond 0.875% 4/15/19 21,380 21,230 United States Treasury Note/Bond 1.250% 4/30/19 11,925 11,912 United States Treasury Note/Bond 1.625% 4/30/19 51,025 51,296 United States Treasury Note/Bond 0.875% 5/15/19 61,234 60,785 United States Treasury Note/Bond 3.125% 5/15/19 12,980 13,376 United States Treasury Note/Bond 1.125% 5/31/19 5,000 4,984 United States Treasury Note/Bond 1.250% 5/31/19 29,400 29,368 14

17 Short-Term Government Bond Index Fund Face Market Maturity Amount Value Coupon Date United States Treasury Note/Bond 1.500% 5/31/19 15,000 15,047 United States Treasury Note/Bond 0.875% 6/15/19 14,000 13,893 United States Treasury Note/Bond 1.000% 6/30/19 13,000 12,927 United States Treasury Note/Bond 1.250% 6/30/19 1,820 1,818 United States Treasury Note/Bond 1.625% 6/30/19 49,800 50,072 United States Treasury Note/Bond 0.750% 7/15/19 22,950 22,706 United States Treasury Note/Bond 0.875% 7/31/19 2,500 2,479 United States Treasury Note/Bond 1.375% 7/31/19 22,000 22,021 United States Treasury Note/Bond 1.625% 7/31/19 51,205 51,493 United States Treasury Note/Bond 0.750% 8/15/19 45,630 45,124 United States Treasury Note/Bond 3.625% 8/15/19 15,000 15,663 United States Treasury Note/Bond 1.000% 8/31/19 9,950 9,886 United States Treasury Note/Bond 1.250% 8/31/19 19,000 18,970 United States Treasury Note/Bond 1.625% 8/31/19 40,135 40,361 United States Treasury Note/Bond 0.875% 9/15/19 16,315 16,167 United States Treasury Note/Bond 1.000% 9/30/19 12,000 11,919 United States Treasury Note/Bond 1.750% 9/30/19 22,635 22,822 United States Treasury Note/Bond 1.000% 10/15/19 17,000 16,880 United States Treasury Note/Bond 1.250% 10/31/19 9,100 9,082 United States Treasury Note/Bond 1.500% 10/31/19 52,420 52,584 United States Treasury Note/Bond 1.000% 11/15/19 15,625 15,508 United States Treasury Note/Bond 3.375% 11/15/19 15,000 15,659 United States Treasury Note/Bond 1.000% 11/30/19 54,080 53,674 United States Treasury Note/Bond 1.500% 11/30/19 17,010 17,066 United States Treasury Note/Bond 1.375% 12/15/19 56,415 56,442 United States Treasury Note/Bond 1.125% 12/31/19 10,000 9,947 United States Treasury Note/Bond 1.625% 12/31/19 19,200 19,314 United States Treasury Note/Bond 1.375% 1/15/20 58,755 58,773 United States Treasury Note/Bond 1.250% 1/31/20 18,125 18,077 United States Treasury Note/Bond 1.375% 1/31/20 8,070 8,071 United States Treasury Note/Bond 1.375% 2/15/20 55,006 55,006 United States Treasury Note/Bond 3.625% 2/15/20 15,000 15,816 United States Treasury Note/Bond 1.250% 2/29/20 15,000 14,953 United States Treasury Note/Bond 1.375% 2/29/20 44,300 44,300 United States Treasury Note/Bond 1.625% 3/15/20 19,718 19,838 United States Treasury Note/Bond 1.125% 3/31/20 8,000 7,948 United States Treasury Note/Bond 1.375% 3/31/20 52,260 52,252 United States Treasury Note/Bond 1.500% 4/15/20 58,430 58,594 United States Treasury Note/Bond 1.125% 4/30/20 10,000 9,931 United States Treasury Note/Bond 1.375% 4/30/20 10,000 9,995 United States Treasury Note/Bond 1.500% 5/15/20 20,440 20,494 United States Treasury Note/Bond 3.500% 5/15/20 36,095 38,108 United States Treasury Note/Bond 1.375% 5/31/20 10,000 9,994 United States Treasury Note/Bond 1.500% 5/31/20 45,700 45,814 United States Treasury Note/Bond 1.500% 6/15/20 34,000 34,085 United States Treasury Note/Bond 1.625% 6/30/20 30,000 30,173 United States Treasury Note/Bond 1.875% 6/30/20 14,000 14,182 United States Treasury Note/Bond 1.500% 7/15/20 50,920 51,032 United States Treasury Note/Bond 1.625% 7/31/20 25,500 25,643 United States Treasury Note/Bond 2.000% 7/31/20 10,000 10,162 United States Treasury Note/Bond 1.500% 8/15/20 50,000 50,101 United States Treasury Note/Bond 2.625% 8/15/20 20,000 20,684 United States Treasury Note/Bond 1.375% 8/31/20 23,000 22,957 United States Treasury Note/Bond 2.125% 8/31/20 20,000 20,400 2,333,639 15

18 Short-Term Government Bond Index Fund Face Market Maturity Amount Value Coupon Date Agency Bonds and Notes (7.9%) 1 AID-Jordan 1.945% 6/23/ AID-Ukraine 1.844% 5/16/ Federal Farm Credit Banks 5.150% 11/15/ Federal Home Loan Banks 0.875% 10/1/18 10,035 9,988 2 Federal Home Loan Banks 1.250% 1/16/19 6,325 6,316 2 Federal Home Loan Banks 1.500% 3/8/19 1,000 1,002 2 Federal Home Loan Banks 1.875% 3/8/19 1,070 1,078 2 Federal Home Loan Banks 1.375% 3/18/19 2,500 2,501 2 Federal Home Loan Banks 1.375% 5/28/19 2,500 2,501 2 Federal Home Loan Banks 1.125% 6/21/19 19,040 18,957 2 Federal Home Loan Banks 0.875% 8/5/19 4,000 3,960 2 Federal Home Loan Banks 1.000% 9/26/19 1,500 1,487 2 Federal Home Loan Banks 1.375% 11/15/19 4,875 4,869 2 Federal Home Loan Banks 1.875% 3/13/ Federal Home Loan Banks 4.125% 3/13/20 8,760 9,339 2 Federal Home Loan Banks 3.375% 6/12/ Federal Home Loan Mortgage Corp % 10/12/18 7,900 7,862 3 Federal Home Loan Mortgage Corp % 3/27/19 22,025 22,841 3 Federal Home Loan Mortgage Corp % 4/15/19 4,300 4,284 3 Federal Home Loan Mortgage Corp % 5/30/ Federal Home Loan Mortgage Corp % 7/19/19 6,500 6,438 3 Federal Home Loan Mortgage Corp % 8/1/19 3,450 3,440 3 Federal Home Loan Mortgage Corp % 8/15/19 3,000 2,999 3 Federal Home Loan Mortgage Corp % 10/2/19 3,229 3,218 3 Federal Home Loan Mortgage Corp % 1/17/20 2,000 2,002 3 Federal Home Loan Mortgage Corp % 4/20/ Federal Home Loan Mortgage Corp % 5/1/20 1,773 1,769 3 Federal National Mortgage Assn % 9/18/18 4,992 5,022 3 Federal National Mortgage Assn % 10/19/18 1,200 1,198 3 Federal National Mortgage Assn % 11/27/18 5,350 5,371 3 Federal National Mortgage Assn % 12/14/18 5,667 5,652 3 Federal National Mortgage Assn % 1/28/19 1,000 1,000 3 Federal National Mortgage Assn % 2/19/19 1,750 1,763 3 Federal National Mortgage Assn % 2/26/19 10,455 10,401 3 Federal National Mortgage Assn % 6/20/ Federal National Mortgage Assn % 8/2/19 8,500 8,416 3 Federal National Mortgage Assn % 8/28/19 4,000 3,969 3 Federal National Mortgage Assn % 9/12/19 5,350 5,386 3 Federal National Mortgage Assn % 10/9/19 2,585 2,499 3 Federal National Mortgage Assn % 10/24/19 6,000 5,947 3 Federal National Mortgage Assn % 11/26/ Federal National Mortgage Assn % 1/21/20 15,870 15,935 3 Federal National Mortgage Assn % 2/28/20 2,340 2,342 3 Federal National Mortgage Assn % 6/22/20 1,200 1,201 3 Federal National Mortgage Assn % 7/30/20 2,000 2,001 2 Financing Corp % 4/5/ NCUA Guaranteed Notes 3.000% 6/12/ Private Export Funding Corp % 3/15/ Private Export Funding Corp % 8/15/ Tennessee Valley Authority 1.750% 10/15/ ,103 Total U.S. Government and Agency Obligations (Cost $2,536,490) 2,533,742 16

19 Short-Term Government Bond Index Fund Market Value Coupon Shares Temporary Cash Investment (0.9%) Money Market Fund (0.9%) 4 Vanguard Market Liquidity Fund (Cost $21,807) 1.224% 218,028 21,807 Total Investments (100.4%) (Cost $2,558,297) 2,555,549 Other Assets and Liabilities (-0.4%) Other Assets 124,742 Liabilities (134,092) 9,350 Net Assets (100%) 2,546,199 Amount Statement of Assets and Liabilities Assets Investments in Securities, at Value Unaffiliated Issuers 2,533,742 Affiliated Vanguard Funds 21,807 Total Investments in Securities 2,555,549 Investment in Vanguard 149 Receivables for Investment Securities Sold 115,785 Receivables for Accrued Income 8,238 Receivables for Capital Shares Issued 570 Total Assets 2,681,291 Liabilities Payables for Investment Securities Purchased 133,115 Payables for Capital Shares Redeemed 283 Payables for Distributions 160 Payables to Vanguard 412 Other Liabilities 122 Total Liabilities 134,092 Net Assets 2,546,199 At August 31, 2017, net assets consisted of: Amount Paid-in Capital 2,548,795 Undistributed Net Investment Income 1,839 Accumulated Net Realized Losses (1,687) Unrealized Appreciation (Depreciation) (2,748) Net Assets 2,546,199 17

20 Short-Term Government Bond Index Fund Amount ETF Shares Net Assets Applicable to 30,097,516 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 1,831,820 Net Asset Value Per Share ETF Shares $60.86 Admiral Shares Net Assets Applicable to 24,978,444 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 506,713 Net Asset Value Per Share Admiral Shares $20.29 Institutional Shares Net Assets Applicable to 8,148,506 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 207,666 Net Asset Value Per Share Institutional Shares $25.49 See Note A in Notes to Financial Statements. 1 U.S. government-guaranteed. 2 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. 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 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. 18

21 Short-Term Government Bond Index Fund Statement of Operations Year Ended August 31, 2017 Investment Income Income Interest 1 20,304 Total Income 20,304 Expenses The Vanguard Group Note B Investment Advisory Services 62 Management and Administrative ETF Shares 694 Management and Administrative Admiral Shares 218 Management and Administrative Institutional Shares 71 Marketing and Distribution ETF Shares 82 Marketing and Distribution Admiral Shares 42 Marketing and Distribution Institutional Shares 9 Custodian Fees 10 Auditing Fees 49 Shareholders Reports and Proxy ETF Shares 41 Shareholders Reports and Proxy Admiral Shares 10 Shareholders Reports and Proxy Institutional Shares Trustees Fees and Expenses 1 Total Expenses 1,289 Net Investment Income 19,015 Realized Net Gain (Loss) on Investment Securities Sold 1 (1,507) Change in Unrealized Appreciation (Depreciation) of Investment Securities (4,467) Net Increase (Decrease) in Net Assets Resulting from Operations 13,041 1 Interest income and realized net gain (loss) from an affiliated company of the fund were $58,000 and $1,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Short-Term Government Bond Index Fund Statement of Changes in Net Assets Year Ended August 31, Increase (Decrease) in Net Assets Operations Net Investment Income 19,015 9,251 Realized Net Gain (Loss) (1,507) 1,013 Change in Unrealized Appreciation (Depreciation) (4,467) 1,216 Net Increase (Decrease) in Net Assets Resulting from Operations 13,041 11,480 Distributions Net Investment Income ETF Shares (11,818) (5,809) Admiral Shares (4,153) (2,541) Institutional Shares (1,921) (547) Realized Capital Gain 1 ETF Shares (153) (269) Admiral Shares (62) (106) Institutional Shares (28) (24) Total Distributions (18,135) (9,296) Capital Share Transactions ETF Shares 926, ,434 Admiral Shares 144, ,241 Institutional Shares 116,737 24,698 Net Increase (Decrease) from Capital Share Transactions 1,187, ,373 Total Increase (Decrease) 1,182, ,557 Net Assets Beginning of Period 1,363, ,076 End of Period 2 2,546,199 1,363,633 1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $36,000 and $200,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 2 Net Assets End of Period includes undistributed (overdistributed) net investment income of $1,839,000 and $716,000. See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Short-Term Government Bond Index Fund Financial Highlights ETF Shares For a Share Outstanding Year Ended August 31, Throughout Each Period Net Asset Value, Beginning of Period $61.14 $61.03 $60.95 $60.75 $60.98 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.311) (.134) Total from Investment Operations Distributions Dividends from Net Investment Income (.573) (.462) (.340) (.177) (.158) Distributions from Realized Capital Gains (.010) (.024) (.033) (.048) (.096) Total Distributions (.583) (.486) (.373) (.225) (.254) Net Asset Value, End of Period $60.86 $61.14 $61.03 $60.95 $60.75 Total Return 0.50% 0.98% 0.75% 0.70% 0.04% Ratios/Supplemental Data Net Assets, End of Period (Millions) $1,832 $908 $635 $497 $307 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.10% 0.12% 0.12% Ratio of Net Investment Income to Average Net Assets 1.01% 0.80% 0.59% 0.34% 0.26% Portfolio Turnover Rate 2 60% 73% 64% 64% 73% 1 Calculated based on average shares outstanding. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Short-Term Government Bond Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended August 31, Throughout Each Period Net Asset Value, Beginning of Period $20.38 $20.35 $20.33 $20.27 $20.35 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.096) (.048) Total from Investment Operations Distributions Dividends from Net Investment Income (.193) (.160) (.116) (.066) (.053) Distributions from Realized Capital Gains (.003) (.008) (.011) (.016) (.032) Total Distributions (.196) (.168) (.127) (.082) (.085) Net Asset Value, End of Period $20.29 $20.38 $20.35 $20.33 $20.27 Total Return % 0.98% 0.72% 0.70% 0.02% Ratios/Supplemental Data Net Assets, End of Period (Millions) $507 $364 $221 $126 $53 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.10% 0.12% 0.12% Ratio of Net Investment Income to Average Net Assets 1.01% 0.80% 0.59% 0.34% 0.26% Portfolio Turnover Rate 3 60% 73% 64% 64% 73% Signal Shares were renamed Admiral Shares in October Prior periods Financial Highlights are for the Signal class. 1 Calculated based on average shares outstanding. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Short-Term Government Bond Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended August 31, Throughout Each Period Net Asset Value, Beginning of Period $25.60 $25.57 $25.54 $25.47 $25.57 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.117) (.059) Total from Investment Operations Distributions Dividends from Net Investment Income (.249) (.209) (.155) (.093) (.075) Distributions from Realized Capital Gains (.004) (.010) (.014) (.020) (.041) Total Distributions (.253) (.219) (.169) (.113) (.116) Net Asset Value, End of Period $25.49 $25.60 $25.57 $25.54 $25.47 Total Return 0.56% 0.98% 0.78% 0.72% 0.06% Ratios/Supplemental Data Net Assets, End of Period (Millions) $208 $92 $67 $49 $17 Ratio of Total Expenses to Average Net Assets 0.05% 0.05% 0.07% 0.09% 0.09% Ratio of Net Investment Income to Average Net Assets 1.03% 0.82% 0.62% 0.37% 0.29% Portfolio Turnover Rate 2 60% 73% 64% 64% 73% 1 Calculated based on average shares outstanding. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 23

26 Short-Term Government Bond Index Fund Notes to Financial Statements Vanguard Short-Term Government Bond Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers three classes of shares: ETF Shares, Admiral Shares, and Institutional Shares. 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. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund s tax positions taken for all open federal income tax years (August 31, ), and has concluded that no provision for federal income tax is required in the fund s financial statements. 3. Distributions: Distributions to shareholders are recorded on the ex-dividend date. 4. 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 August 31, 2017, or at any time during the period then ended. 5. Other: Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 24

27 Short-Term Government Bond Index Fund Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses), 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 Assets and Liabilities. Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At August 31, 2017, the fund had contributed to Vanguard capital in the amount of $149,000, representing 0.01% of the fund s net assets and 0.06% 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 August 31, 2017, based on the inputs used to value them: Level 1 Level 2 Level 3 Investments U.S. Government and Agency Obligations 2,533,742 Temporary Cash Investments 21,807 Total 21,807 2,533,742 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. 25