Vanguard Developed Markets Index Fund

Transcription

1 Annual Report Vanguard Developed s Index Fund

2 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 Chairman s Perspective Fund Profile Performance Summary Financial Statements Your Fund s After-Tax Returns About Your Fund s Expenses 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: 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.

3 Your Fund s Performance at a Glance Vanguard Developed s Index Fund returned about 2% for the 12 months ended. It closely tracked its target index and exceeded the average return of its international fund peers. The fund offers investors exposure to companies of all sizes in the developed markets outside the United States. Stocks from North America, where Canada is the lone representative, did much better than stocks from Europe and the Asia-Pacific region. From a country standpoint, Canada was the top contributor to the fund s return, followed by Australia. Switzerland and Italy were two of the fund s worst performers. The fund recorded positive returns in five of the ten market sectors and negative returns in four. Financial stocks were virtually flat. For the ten years ended, the fund posted an average annual return of about 1%, in line with its benchmark and a fraction ahead of its peers. Total Returns: Fiscal Year Ended Total Returns Vanguard Developed s Index Fund Investor 2.36% FTSE Developed s ETF Price 2.67 Net Asset 2.51 Admiral 2.45 Institutional 2.46 Institutional Plus 2.50 Spliced Developed ex US Index 2.29 International Funds Average 0.57 For a benchmark description, see the Glossary. International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Admiral carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional and Institutional Plus are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides ETF returns based on both the NYSE Arca 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, 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 ' 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 ' market price was above or below the NAV. 1

4 Total Returns: Ten Years Ended Average Annual Return Developed s Index Fund Admiral 1.03% Spliced Developed ex US Index 0.93 International Funds Average 0.54 For a benchmark description, see the Glossary. International 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. Expense Ratios Your Fund Compared With Its Peer Group Investor FTSE Developed s ETF Admiral Institutional Institutional Plus Peer Group Average Developed s Index Fund 0.20% 0.09% 0.09% 0.07% 0.06% 1.37% The fund expense ratios shown are from the prospectus dated August 10, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended, the fund s expense ratios were 0.17% for Investor, 0.07% for FTSE Developed s ETF, 0.07% for Admiral, 0.06% for Institutional, and 0.05% for Institutional Plus. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end Peer group: International Funds. 2

5 Chairman s Perspective 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? Bill McNabb Chairman and Chief Executive Officer 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, 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 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. 3

6 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-interestrate environment that has marked the global economy since the 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. Barometer Average Annual Total Returns Periods Ended One Three Five Year Years Years Stocks Russell 1000 Index (Large-caps) 12.05% 8.59% 14.69% 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) 2.65% 3.03% 2.23% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 2.07% 1.18% 1.36% 4

7 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 longterm-growth path of about 2% per year. That s lower than the historical average of 3.25% since 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 That, in turn, will support further interest rate hikes by the Federal Reserve, similar to the one at the end of 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 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 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 Outlook: Stabilization, Not Stagnation, available at vanguard.com/research. IMPORTANT: The projections and other information generated by the Vanguard Capital s 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, Results from the model may vary with each use and over time. For more information, see the note at the end of this letter. 5

8 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 blockbuster 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, IMPORTANT: The projections and other information generated by the Vanguard Capital s 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 s 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.

9 Developed s Index Fund Fund Profile As of Share-Class Characteristics Investor ETF Admiral Institutional Institutional Plus Ticker Symbol VDVIX VEA VTMGX VTMNX VDIPX Expense Ratio1 0.20% 0.09% 0.09% 0.07% 0.06% Portfolio Characteristics Fund FTSE Developed All Cap ex US Index FTSE Global All Cap ex US Index Number of Stocks 3,819 3,753 5,792 Median Cap $25.2B $25.2B $22.5B Price/Earnings Ratio 22.0x 21.8x 21.2x Price/Book Ratio 1.6x 1.6x 1.6x Return on Equity 13.5% 13.5% 14.1% Earnings Growth Rate 6.4% 6.4% 7.0% Dividend Yield 2.9% 2.9% 2.9% Turnover Rate 11% Short-Term Reserves -0.2% Sector Diversification (% of equity exposure) Fund FTSE Developed All Cap ex US Index FTSE Global All Cap ex US Index Basic Materials 8.0% 8.0% 7.9% Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecommunications Utilities Volatility Measures Spliced Developed ex US Index FTSE Global All Cap ex US Index R-Squared Beta These measures show the degree and timing of the fund s fluctuations compared with the indexes over 36 months. Ten Largest Holdings (% of total net assets) Royal Dutch Shell plc Integrated Oil & Gas 1.4% Nestle SA Food Products 1.4 Samsung Electronics Co. Consumer Ltd. Electronics 1.1 Novartis AG Pharmaceuticals 1.1 Roche Holding AG Pharmaceuticals 1.0 HSBC Holdings plc Banks 1.0 Toyota Motor Corp. Automobiles 1.0 BP plc Integrated Oil & Gas 0.7 Unilever Personal Products 0.7 TOTAL SA Integrated Oil & Gas 0.7 Top Ten 10.1% The holdings listed exclude any temporary cash investments and equity index products. Allocation by Region (% of portfolio) 53.8% Europe 36.9% Pacific 8.8% North America 0.5% Middle East 1 The expense ratios shown are from the prospectus dated August 10, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended, the expense ratios were 0.17% for Investor, 0.07% for FTSE Developed s ETF, 0.07% for Admiral, 0.06% for Institutional, and 0.05% for Institutional Plus. 7

10 Developed s Index Fund Diversification (% of equity exposure) FTSE Developed All Cap ex US Index FTSE Global All Cap ex US Index Fund Europe United Kingdom 16.2% 16.2% 13.1% France Germany Switzerland Sweden Spain Netherlands Italy Denmark Belgium Finland Other Subtotal 53.8% 53.6% 43.5% Pacific Japan 21.7% 21.9% 17.9% Australia South Korea Hong Kong Singapore Other Subtotal 36.9% 37.1% 30.0% Emerging s 0.0% 0.0% 18.9% North America Canada 8.8% 8.8% 7.2% Middle East 0.5% 0.5% 0.4% 8

11 Developed s 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: July 20, 2007, Through Initial Investment of $10,000 $13,000 9, ,000 Average Annual Total Returns Periods Ended One Year Five Years Since Inception (7/20/2007) Final of a $10,000 Investment FTSE Developed s ETF Net Asset 2.51% 6.91% -0.23% $9,788 FTSE Developed s ETF Price ,771 Spliced Developed ex US Index ,659 International Funds Average ,249 FTSE Global All Cap ex US Index ,900 For a benchmark description, see the Glossary. International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. "Since Inception" performance is calculated from the ETF inception date for both the fund and its comparative standards. One Year Since Inception (12/19/2013) Final of a $10,000 Investment Developed s Index Fund Investor 2.36% -0.20% $9,939 Spliced Developed ex US Index ,014 FTSE Global All Cap ex US Index ,957 "Since Inception" performance is calculated from the Investor inception date for both the fund and its comparative standards. See Financial Highlights for dividend and capital gains information. 9

12 Developed s Index Fund Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Developed s Index Fund Admiral 2.45% 6.90% 1.03% $11,082 Spliced Developed ex US Index ,971 FTSE Global All Cap ex US Index ,659 One Year Five Years Ten Years Final of a $5,000,000 Investment Developed s Index Fund Institutional 2.46% 6.93% 1.08% $5,564,455 Spliced Developed ex US Index ,485,522 FTSE Global All Cap ex US Index ,829,546 One Year Since Inception (4/1/2014) Final of a $100,000,000 Investment Developed s Index Fund Institutional Plus 2.50% -1.68% $95,458,352 Spliced Developed ex US Index ,964,396 FTSE Global All Cap ex US Index ,506,057 "Since Inception" performance is calculated from the Institutional Plus inception date for both the fund and its comparative standards. Cumulative Returns of ETF : July 20, 2007, Through One Year Five Years Since Inception (7/20/2007) FTSE Developed s ETF Price 2.67% 38.87% -2.29% FTSE Developed s ETF Net Asset Spliced Developed ex US Index "Since Inception" performance is calculated from the ETF inception date for both the fund and its comparative standards. 10

13 Developed s Index Fund Fiscal-Year Total Returns (%): July 20, 2007, Through FTSE Developed s ETF Spliced Developed ex US Index For a benchmark description, see the Glossary. 11

14 Developed s Index Fund Financial Statements Statement of Net Assets Investments Summary As of 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 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). Percentage of Net Assets Common Stocks Australia Commonwealth Bank of Australia 7,180, , % Westpac Banking Corp. 13,902, , % Australia & New Zealand Banking Group Ltd. 12,178, , % National Australia Bank Ltd. 11,080, , % BHP Billiton Ltd. 13,442, , % 1 Australia Other 2,807, % 4,311, % Austria 182, % Belgium Anheuser-Busch InBev SA/NV 3,335, , % Belgium Other 397, % 750, % Canada Royal Bank of Canada 6,185, , % Toronto-Dominion Bank 7,707, , % Bank of Nova Scotia 5,049, , % Suncor Energy Inc. 6,960, , % 1 Canada Other 4,600, % 5,907, % Denmark Novo Nordisk A/S Class B 7,715, , % 1 Denmark Other 668, % 945, % Finland 643, % 12

15 Developed s Index Fund Percentage of Net Assets France TOTAL SA 9,081, , % Sanofi 4,663, , % BNP Paribas SA 4,082, , % AXA SA 8,064, , % LVMH Moet Hennessy Louis Vuitton SE 1,047, , % 1 France Other 3,772, % 5,278, % Germany Siemens AG 3,176, , % Bayer AG 3,458, , % BASF SE 3,854, , % SAP SE 3,735, , % Daimler AG 4,293, , % Allianz SE 1,902, , % Deutsche Telekom AG 13,461, , % 1 Germany Other 2,857, % 5,150, % Hong Kong AIA Group Ltd. 50,312, , % Hang Seng Bank Ltd. 3,218,920 59, % 1 Hong Kong Other 1,721, % 2,063, % Ireland 141, % Israel 340, % 1Italy 1,381, % Japan Toyota Motor Corp. 11,423, , % Mitsubishi UFJ Financial Group Inc. 56,912, , % SoftBank Group Corp. 3,588, , % Honda Motor Co. Ltd. 7,457, , % Sumitomo Mitsui Financial Group Inc. 5,424, , % Chugai Pharmaceutical Co. Ltd. 922,427 26, % Hino Motors Ltd. 1,135,285 11, % Japan Other 12,938, % 14,658, % Malta 0.0% Netherlands Unilever NV 6,505, , % ING Groep NV 16,182, , % 1 Netherlands Other 1,184, % 1,679, % New Zealand 194, % 1Norway 453, % 13

16 Developed s Index Fund Percentage of Net Assets Other % Portugal 106, % 1Singapore 776, % South Korea Samsung Electronics Co. Ltd. 383, , % Samsung Electronics Co. Ltd. Preference 77,753 92, % * Samsung Electronics Co. Ltd. GDR 73,872 54, % Hankook Shell Oil Co. Ltd. 3,414 1, % South Korea Other 2,017, % 2,736, % Spain Banco Santander SA 60,127, , % 1 Spain Other 1,442, % 1,755, % 1Sweden 1,798, % Switzerland Nestle SA 12,895, , % Novartis AG 9,872, , % Roche Holding AG 2,938, , % UBS Group AG 14,592, , % Roche Holding AG (Bearer) 111,852 26, % 1 Switzerland Other 2,253, % 4,819, % United Kingdom HSBC Holdings plc 83,832, , % BP plc 78,530, , % Royal Dutch Shell plc Class A (London ) 17,780, , % Royal Dutch Shell plc Class B 16,123, , % British American Tobacco plc 7,796, , % GlaxoSmithKline plc 20,298, , % AstraZeneca plc 5,275, , % Vodafone Group plc 110,952, , % Diageo plc 10,520, , % Reckitt Benckiser Group plc 2,627, , % Prudential plc 10,778, , % Lloyds Banking Group plc 267,537, , % Unilever plc 5,045, , % Royal Dutch Shell plc Class A 2, % 1 United Kingdom Other 6,174, % 10,810, % Total Common Stocks (Cost $65,053,865) 66,886, % 2 14

17 Developed s Index Fund Percentage of Net Coupon Assets Temporary Cash Investments Money Fund 3,4 Vanguard Liquidity Fund 0.823% 9,805, , % 5,6U.S. Government and Agency Obligations 72, % Total Temporary Cash Investments (Cost $1,052,938) 1,053, % 2 7Total Investments (Cost $66,106,803) 67,939, % Amount Other Assets and Liabilities Other Assets Investment in Vanguard 4,799 Receivables for Investment Securities Sold 45 Receivables for Accrued Income 179,919 Receivables for Capital Issued 44,435 Other Assets 4 92,378 Total Other Assets 321, % Liabilities Payables for Investment Securities Purchased (63,254) Collateral for Securities on Loan (775,417) Payables for Capital Redeemed (24,619) Payables to Vanguard (23,886) Other Liabilities (17,998) Total Liabilities (905,174) (1.4%) Net Assets 67,355, % At, net assets consisted of: Amount Paid-in Capital 68,173,095 Overdistributed Net Investment Income (98,236) Accumulated Net Realized Losses (2,536,476) Unrealized Appreciation (Depreciation) Investment Securities 1,832,558 Futures Contracts 7,651 Forward Currency Contracts (14,718) Foreign Currencies (8,111) Net Assets 67,355,763 15

18 Developed s Index Fund Amount Investor Net Assets Applicable to 96,271,838 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 874,946 Net Asset Per Share Investor $9.09 ETF Net Assets Applicable to 1,102,229,208 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 40,242,870 Net Asset Per Share ETF $36.51 Admiral Net Assets Applicable to 826,581,893 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 9,702,486 Net Asset Per Share Admiral $11.74 Institutional Net Assets Applicable to 773,569,266 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 9,091,654 Net Asset Per Share Institutional $11.75 Institutional Plus Net Assets Applicable to 405,170,477 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 7,443,807 Net Asset Per Share Institutional Plus $ 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 Certain of the fund s securities are exempt from registration under Rule 144A of the Securities Act of Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At, the aggregate value of these securities was $439,071,000, representing 0.7% of net assets. 2 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund s effective common stock and temporary cash investment positions represent 99.9% and 1.0%, respectively, of net assets. 3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. 4 Includes collateral received for securities on loan, which consists of $774,060,000 in securities and $1,357,000 in cash. 5 Securities with a value of $21,481,000 have been segregated as initial margin for open futures contracts. 6 Securities with a value of $19,464,000 and cash of $1,582,000 have been segregated as collateral for open forward currency contracts. 7 The total value of securities on loan is $742,106,000. See accompanying Notes, which are an integral part of the Financial Statements.

19 Developed s Index Fund Statement of Operations Year Ended Investment Income Income Dividends 1 1,807,844 Interest 2 1,903 Securities Lending Net 61,727 Total Income 1,871,474 Expenses The Vanguard Group Note B Investment Advisory Services 4,771 Management and Administrative Investor 1,138 Management and Administrative ETF 13,624 Management and Administrative Admiral 3,313 Management and Administrative Institutional 3,031 Management and Administrative Institutional Plus 2,036 ing and Distribution Investor 228 ing and Distribution ETF 2,207 ing and Distribution Admiral 962 ing and Distribution Institutional 242 ing and Distribution Institutional Plus 108 Custodian Fees 7,617 Auditing Fees 56 Shareholders Reports Investor 13 Shareholders Reports ETF 578 Shareholders Reports Admiral 74 Shareholders Reports Institutional 26 Shareholders Reports Institutional Plus 6 Trustees Fees and Expenses 40 Total Expenses 40,070 Net Investment Income 1,831,404 Realized Net Gain (Loss) Investment Securities Sold 2 (1,709,175) Futures Contracts 37,132 Foreign Currencies and Forward Currency Contracts (40,950) Realized Net Gain (Loss) (1,712,993) Change in Unrealized Appreciation (Depreciation) Investment Securities 1,624,733 Futures Contracts (2,494) Foreign Currencies and Forward Currency Contracts (10,661) Change in Unrealized Appreciation (Depreciation) 1,611,578 Net Increase (Decrease) in Net Assets Resulting from Operations 1,729,989 1 Dividends are net of foreign withholding taxes of $164,911, Interest income and realized net gain (loss) from an affiliated company of the fund were $1,664,000 and $81,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 17

20 Developed s Index Fund Statement of Changes in Net Assets Year Ended December 31, Increase (Decrease) in Net Assets Operations Net Investment Income 1,831,404 1,453,520 Realized Net Gain (Loss) (1,712,993) 573,191 Change in Unrealized Appreciation (Depreciation) 1,611,578 (2,519,734) Net Increase (Decrease) in Net Assets Resulting from Operations 1,729,989 (493,023) Distributions Net Investment Income Investor (27,425) (31,768) ETF (1,078,670) (765,004) Admiral (278,418) (202,028) Institutional (269,559) (226,831) Institutional Plus (230,942) (199,383) Realized Capital Gain Investor ETF Admiral Institutional Institutional Plus Total Distributions (1,885,014) (1,425,014) Capital Share Transactions Investor (155,754) (268,886) ETF 11,051,278 6,197,663 Admiral 1,786,338 2,148,455 Institutional 1,016, ,195 Institutional Plus 217,224 1,597,860 Net Increase (Decrease) from Capital Share Transactions 13,915,590 10,298,287 Total Increase (Decrease) 13,760,565 8,380,250 Net Assets Beginning of Period 53,595,198 45,214,948 End of Period 1 67,355,763 53,595,198 1 Net Assets End of Period includes undistributed (overdistributed) net investment income of ($98,236,000) and ($28,115,000). 18 See accompanying Notes, which are an integral part of the Financial Statements.

21 Developed s Index Fund Financial Highlights Investor Dec. 19, to Year Ended December 31, Dec. 31, For a Share Outstanding Throughout Each Period Net Asset, Beginning of Period $9.15 $9.42 $10.34 $10.00 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.054) (.276) (.919).332 Total from Investment Operations.208 (.015) (.582).340 Distributions Dividends from Net Investment Income (.268) (.255) (.338) Distributions from Realized Capital Gains Total Distributions (.268) (.255) (.338) Net Asset, End of Period $9.09 $9.15 $9.42 $10.34 Total Return % -0.29% -5.82% 3.40% Ratios/Supplemental Data Net Assets, End of Period (Millions) $875 $1,040 $1,331 $0.1 Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20% 3 Ratio of Net Investment Income to Average Net Assets 3.00% 2.73% 3.22% 2.80% 3 Portfolio Turnover Rate 4 11% 3% 4% 13% 1 Inception. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Annualized. 4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Developed s Index Fund Financial Highlights FTSE Developed s ETF For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $36.75 $37.85 $41.53 $35.02 $30.44 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.216) (1.125) (3.681) Total from Investment Operations.874 (.029) (2.286) Distributions Dividends from Net Investment Income (1.114) (1.071) (1.394) (1.083) (1.046) Distributions from Realized Capital Gains Total Distributions (1.114) (1.071) (1.394) (1.083) (1.046) Net Asset, End of Period $36.51 $36.75 $37.85 $41.53 $35.02 Total Return 2.51% -0.21% -5.71% 22.12% 18.60% Ratios/Supplemental Data Net Assets, End of Period (Millions) $40,243 $29,288 $24,155 $19,021 $10,979 Ratio of Total Expenses to Average Net Assets 0.07% 0.09% 0.09% 0.09% 0.10% Ratio of Net Investment Income to Average Net Assets 3.10% 2.84% 3.33% 2.91% 3.40% Portfolio Turnover Rate 1 11% 3% 4% 13% 7% 1 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. 20 See accompanying Notes, which are an integral part of the Financial Statements.

23 Developed s Index Fund Financial Highlights Admiral For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $11.82 $12.17 $13.35 $11.26 $9.79 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.071) (.358) (1.180) Total from Investment Operations.279 (.006) (.730) Distributions Dividends from Net Investment Income (.359) (.344) (.450) (.348) (.336) Distributions from Realized Capital Gains Total Distributions (.359) (.344) (.450) (.348) (.336) Net Asset, End of Period $11.74 $11.82 $12.17 $13.35 $11.26 Total Return % -0.18% -5.66% 22.06% 18.56% Ratios/Supplemental Data Net Assets, End of Period (Millions) $9,702 $7,921 $6,068 $2,060 $1,425 Ratio of Total Expenses to Average Net Assets 0.07% 0.09% 0.09% 0.09% 0.10% Ratio of Net Investment Income to Average Net Assets 3.10% 2.84% 3.33% 2.91% 3.40% Portfolio Turnover Rate 2 11% 3% 4% 13% 7% The fund s original Investor were renamed Admiral as of the close of business on May 13, The Investor recommenced on December 19, 2013, and are presented separately. 1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees. 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 Developed s Index Fund Financial Highlights Institutional For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $11.83 $12.18 $13.37 $11.27 $9.79 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.072) (.358) (1.190) Total from Investment Operations.280 (.004) (.738) Distributions Dividends from Net Investment Income (.360) (.346) (.452) (.350) (.339) Distributions from Realized Capital Gains Total Distributions (.360) (.346) (.452) (.350) (.339) Net Asset, End of Period $11.75 $11.83 $12.18 $13.37 $11.27 Total Return % -0.17% -5.72% 22.15% 18.70% Ratios/Supplemental Data Net Assets, End of Period (Millions) $9,092 $8,093 $7,743 $482 $332 Ratio of Total Expenses to Average Net Assets 0.06% 0.07% 0.07% 0.07% 0.07% Ratio of Net Investment Income to Average Net Assets 3.11% 2.86% 3.35% 2.93% 3.43% Portfolio Turnover Rate 2 11% 3% 4% 13% 7% 1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees. 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. 22 See accompanying Notes, which are an integral part of the Financial Statements.

25 Developed s Index Fund Financial Highlights Institutional Plus April 1, Year Ended to For a Share Outstanding December 31, Dec. 31, Throughout Each Period Net Asset, Beginning of Period $18.49 $19.05 $20.90 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.107) (.573) (1.798) Total from Investment Operations.445 (.015) (1.360) Distributions Dividends from Net Investment Income (.565) (.545) (.490) Distributions from Realized Capital Gains Total Distributions (.565) (.545) (.490) Net Asset, End of Period $18.37 $18.49 $19.05 Total Return 2.50% -0.21% -6.67% Ratios/Supplemental Data Net Assets, End of Period (Millions) $7,444 $7,253 $5,918 Ratio of Total Expenses to Average Net Assets 0.05% 0.06% 0.06% 2 Ratio of Net Investment Income to Average Net Assets 3.12% 2.87% 2.92% 2 Portfolio Turnover Rate 3 11% 3% 4% 1 Inception. 2 Annualized. 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. 23

26 Developed s Index Fund Notes to Financial Statements Vanguard Developed s Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. The fund offers five classes of shares: Investor, ETF, Admiral, Institutional, and Institutional Plus. Investor are available to any investor who meets the fund s minimum purchase requirements. ETF are listed for trading on NYSE Arca; they can be purchased and sold through a broker. Admiral, Institutional, and Institutional Plus 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. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund s pricing time but after the close of the securities primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchangetraded funds), between the time the foreign markets close and the fund s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Liquidity Fund are valued at that fund s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. 2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses). 3. Futures and Forward Currency 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 24

27 Developed s Index Fund 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. The fund also enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts. The fund s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. The master netting arrangements provide that, in the event of a counterparty s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days. Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts. During the year ended, 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. The fund s average investment in forward currency contracts represented 1% of net assets, based on the average of notional amounts at each quarter-end during the period. 25

28 Developed s Index Fund 4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund s tax positions taken for all open federal income tax years (December 31, ), and has concluded that no provision for federal income tax is required in the fund s financial statements. 5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. 6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard 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. 7. 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, or at any time during the period then ended. 8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard 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. 26