Annual Report December 31, Vanguard Balanced Index Fund

Transcription

1 Annual Report Vanguard Balanced 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 Balanced Index Fund, which has about 60% of its assets invested in stocks and about 40% in bonds, returned almost 9% for the 12 months ended. The fund closely tracked its composite index and easily outpaced the average return of its mixed-asset target growth fund peers. The equity portion of the fund, which offers investors exposure to every segment, size, and style of the U.S. equity market, returned 12.63%. The fund s fixed income portfolio which provides broad exposure to the U.S. bond market by investing in U.S. Treasury and agency bonds, government mortgage-backed securities, and investment-grade corporate bonds of all maturities returned 2.55%. Over the past ten years, the fund posted an average annual return of about 6%, in line with its benchmark and nearly 2 percentage points higher than its peer-fund average. Total Returns: Fiscal Year Ended Total Returns Vanguard Balanced Index Fund Investor Shares 8.63% Admiral Shares 8.77 Institutional Shares 8.81 Balanced Composite Index 8.89 Mixed-Asset Target Allocation Growth Funds Average 7.04 For a benchmark description, see the Glossary. Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. 1

4 Total Returns: Ten Years Ended Average Annual Return Balanced Index Fund Investor Shares 6.27% Balanced Composite Index 6.52 Mixed-Asset Target Allocation Growth Funds Average 4.43 For a benchmark description, see the Glossary. Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 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 Shares Admiral Shares Institutional Shares Peer Group Average Balanced Index Fund 0.22% 0.08% 0.07% 0.90% The fund expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended, the fund s expense ratios were 0.19% for Investor Shares, 0.07% for Admiral Shares, and 0.06% for Institutional Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end Peer group: Mixed-Asset Target Allocation Growth 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 Balanced Index Fund Fund Profile As of Share-Class Characteristics Investor Shares Equity and Portfolio Characteristics CRSP US Total Fund Index Number of Stocks 3,347 3,589 Median Cap $54.1B $54.1B Price/Earnings Ratio 24.4x 24.4x Price/Book Ratio 2.8x 2.8x Return on Equity 16.7% 16.4% Earnings Growth Rate 8.1% 8.3% Dividend Yield 2.0% 2.0% Foreign Holdings 0.0% 0.0% Turnover Rate 44% Short-Term Reserves 1.3% Fixed Income Characteristics Admiral Shares Institutional Shares Ticker Symbol VBINX VBIAX VBAIX Expense Ratio1 0.22% 0.08% 0.07% 30-Day SEC Yield 1.99% 2.08% 2.09% Total Fund Volatility Measures Balanced Composite Index CRSP US Total 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 Stocks (% of equity portfolio) Apple Inc. Computer Hardware 2.5% Alphabet Inc. Internet 2.0 Microsoft Corp. Software 2.0 Exxon Mobil Corp. Integrated Oil & Gas 1.6 Johnson & Johnson Pharmaceuticals 1.4 Berkshire Hathaway Inc. Reinsurance 1.4 JPMorgan Chase & Co. Banks 1.3 Amazon.com Inc. Broadline Retailers 1.3 General Electric Co. Diversified Industrials 1.2 book Inc. Internet 1.1 Top Ten 15.8% Top Ten as % of Total Net Assets 9.5% The holdings listed exclude any temporary cash investments and equity index products. Bloomberg Barclays U.S. Aggregate Float Adjusted Fund Index Number of Bonds 6,884 10,054 Yield to (before expenses) 2.6% 2.6% Average 3.0% 3.0% Average Duration 6.0 years 6.0 years Average Effective 8.3 years 8.2 years Fund Asset Allocation 59.2% Stocks 39.5% Bonds 1.3% Short-Term Reserves 1 The expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended, the expense ratios were 0.19% for Investor Shares, 0.07% for Admiral Shares, and 0.06% for Institutional Shares. 7

10 Balanced Index Fund Sector Diversification (% of equity exposure) CRSP US Total Fund Index Basic Materials 2.5% 2.6% Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecommunications Utilities Sector Diversification (% of fixed income portfolio) Asset-Backed 2.5% Finance 8.7 Foreign 4.9 Government Mortgage-Backed 20.8 Industrial 17.0 Treasury/Agency 43.1 Utilities 2.1 Other 0.9 The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government. Distribution by Credit Quality (% of fixed income portfolio) U.S. Government 63.9% Aaa 5.1 Aa 4.4 A 11.8 Baa 14.8 Credit-quality ratings are obtained from Barclays and are from Moody's, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. For more information about these ratings, see the Glossary entry for Credit Quality. Equity Investment Focus Style Cap Large Medium Small Fixed Income Investment Focus Average Credit Quality Treasury/ Agency Investment-Grade Corporate Below Investment-Grade Short Blend Growth Med. Long 8

11 Balanced Index Fund Performance Summary All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares. Cumulative Performance: December 31, 2006, Through Initial Investment of $10,000 $25,000 18, ,000 Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Balanced Index Fund Investor Shares 8.63% 9.47% 6.27% $18,363 Balanced Composite Index , Mixed-Asset Target Allocation Growth Funds Average ,428 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,323 Spliced Total Stock Index ,093 For a benchmark description, see the Glossary. Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. One Year Five Years Ten Years Final of a $10,000 Investment Balanced Index Fund Admiral Shares 8.77% 9.62% 6.40% $18,599 Balanced Composite Index ,804 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,323 Spliced Total Stock Index ,093 See Financial Highlights for dividend and capital gains information. 9

12 Balanced Index Fund Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $5,000,000 Investment Balanced Index Fund Institutional Shares 8.81% 9.64% 6.43% $9,324,661 Balanced Composite Index ,401,954 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,661,602 Spliced Total Stock Index ,046,266 Fiscal-Year Total Returns (%): December 31, 2006, Through Balanced Index Fund Investor Shares Balanced Composite Index For a benchmark description, see the Glossary. 10

13 Balanced 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 Shares Assets Common Stocks Basic Materials 465, % Consumer Goods Procter & Gamble Co. 2,014, , % Coca-Cola Co. 3,049, , % PepsiCo Inc. 1,129, , % Philip Morris International Inc. 1,151, , % Altria Group Inc. 1,551, , % Consumer Goods Other 1,124, % 1,748, % Consumer Services * Amazon.com Inc. 315, , % Comcast Corp. Class A 1,875, , % Home Depot Inc. 961, , % Walt Disney Co. 1,128, , % McDonald s Corp. 661,769 80, % Wal-Mart Stores Inc. 1,107,374 76, % Consumer Services Other 1,613, % 2,382, % Financials JPMorgan Chase & Co. 2,829, , % * Berkshire Hathaway Inc. Class B 1,395, , % Wells Fargo & Co. 3,541, , % Bank of America Corp. 7,608, , % Citigroup Inc. 2,201, , % Visa Inc. Class A 1,472, , % Mastercard Inc. Class A 759,286 78, % Financials Other 2,623, % 3,782, % 11

14 Balanced Index Fund Percentage of Net Shares Assets Health Care Johnson & Johnson 2,142, , % Pfizer Inc. 4,762, , % Merck & Co. Inc. 2,165, , % UnitedHealth Group Inc. 744, , % Amgen Inc. 583,589 85, % AbbVie Inc. 1,271,598 79, % Medtronic plc 1,091,776 77, % Bristol-Myers Squibb Co. 1,306,933 76, % Gilead Sciences Inc. 1,029,570 73, % * Celgene Corp. 605,932 70, % Health Care Other 1,135, % 2,246, % Industrials General Electric Co. 6,989, , % 3M Co. 474,668 84, % Boeing Co. 463,141 72, % Honeywell International Inc. 596,518 69, % Industrials Other 1,924, % 2,371, % Oil & Gas Exxon Mobil Corp. 3,242, , % Chevron Corp. 1,477, , % Schlumberger Ltd. 1,087,887 91, % Oil & Gas Other 708, % 1,266, % Technology Apple Inc. 3,981, , % Microsoft Corp. 5,781, , % * book Inc. Class A 1,819, , % * Alphabet Inc. Class A 227, , % * Alphabet Inc. 232, , % Intel Corp. 3,704, , % Cisco Systems Inc. 3,932, , % International Business Machines Corp. 672, , % Oracle Corp. 2,419,948 93, % QUALCOMM Inc. 1,153,957 75, % Technology Other 1,048, % 2,971, % Telecommunications AT&T Inc. 4,846, , % Verizon Communications Inc. 3,033, , % Telecommunications Other 69, % 437, % Utilities 577, % Total Common Stocks (Cost $9,018,338) 18,250, % 1 12

15 Balanced Index Fund Percentage of Net Assets U.S. Government and Agency Obligations U.S. Government Securities United States Treasury Note/Bond 1.000% 11/15/19 158, , % 2 United States Treasury Note/Bond 0.875% 5/31/18 139, , % United States Treasury Note/Bond 1.000% 3/15/19 76,767 76, % United States Treasury Note/Bond 0.625% 9.125% 1/31/18 11/15/46 4,524,675 4,561, % 4,933, % Agency Bonds and Notes 3 Federal Home Loan Mortgage Corp % 6.750% 1/12/18 7/15/32 64,560 65, % 3 Federal National Mortgage Assn % 7.250% 2/8/18 7/15/37 101, , % Agency Bonds and Notes Other 102, % 274, % Conventional Mortgage-Backed Securities 3,4,5 Fannie Mae Pool 2.000% 9.500% 1/1/17 1/1/47 1,031,225 1,069, % 3,4,5 Freddie Mac Gold Pool 2.000% 9.000% 1/1/17 1/1/47 654, , % 4,5 Ginnie Mae I Pool 3.000% 9.500% 5/15/17 1/1/47 103, , % 4,5 Ginnie Mae II Pool 2.500% 7.000% 3/20/18 1/1/47 646, , % 2,531, % Nonconventional Mortgage-Backed Securities 3,5,6 Fannie Mae Pool 2.102% 5.860% 11/1/33 12/1/43 15,613 16, % 3,5,6 Freddie Mac Non Gold Pool 2.235% 5.791% 11/1/34 11/1/43 3,962 4, % 5,6 Ginnie Mae II Pool 2.000% 4.000% 7/20/38 12/20/43 6,341 6, % 26, % Total U.S. Government and Agency Obligations (Cost $7,799,449) 7,766, % Asset-Backed/Commercial Mortgage-Backed Securities 5 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR % 6/11/ % 5 Bear Stearns Commercial Mortgage Securities Trust 2007-TOP % 5.513% 1/12/ % 5 Bear Stearns Commercial Mortgage Securities Trust 2007-TOP % 9/11/42 1,082 1, % 5 Chase Issuance Trust 2012-A % 8/16/ % 5 Chase Issuance Trust 2012-A % 9/16/24 1,314 1, % 5 Chase Issuance Trust 2013-A % 2/18/20 1,050 1, % 5 Chase Issuance Trust 2014-A % 1/15/19 2,450 2, % 5 Chase Issuance Trust 2014-A % 3/15/ % 5 Chase Issuance Trust 2014-A % 7/15/19 1,075 1, % 5 Chase Issuance Trust 2014-A % 11/15/ % 5 Chase Issuance Trust 2015-A % 2/18/20 1,830 1, % 5 Chase Issuance Trust 2015-A % 4/15/ % 5 Chase Issuance Trust 2015-A % 4/15/20 1,225 1, % 5 Chase Issuance Trust 2016-A % 6/15/ % 5 Chase Issuance Trust 2016-A % 7/15/ % 5 Chase Issuance Trust 2016-A % 7/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2006-LDP % 4/17/ % 13

16 Balanced Index Fund Percentage of Net Assets 5 JP Morgan Chase Commercial Mortgage Securities Trust 2007-CIBC % 2/12/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2007-LDP % 2/15/51 1,393 1, % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2012-C % 5/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2012-C % 10/15/45 1,735 1, % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX 3.483% 6/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2013-C % 3.372% 12/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2013-C % 4.910% 12/15/ , % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2013-LC % 4/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2014-C % 3.805% 7/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2016-JP % 8/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2016-JP % 3.870% 12/15/ % 5 JPMCC Commercial Mortgage Securities Trust 2015-JP % 1/15/ % 7 Asset-Backed/Commercial Mortgage-Backed Securities Other 281, % Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $306,995) 307, % Corporate Bonds Finance Banking Bear Stearns Cos. LLC 4.650% 7.250% 10/2/17 7/2/18 3,425 3, % JPMorgan Chase & Co % 6.400% 1/15/18 6/1/45 65,440 67, % JPMorgan Chase Bank NA 1.450% 6.000% 10/1/17 9/23/19 2,805 2, % 7 Banking Other 664, % Brokerage 26, % 7 Finance Companies 39, % Insurance 165, % 7 Real Estate Investment Trusts 84, % 1,054, % 14

17 Balanced Index Fund Percentage of Net Assets Industrial 7 Basic Industry 116, % 7 Capital Goods 171, % 7 Communication 319, % Consumer Cyclical 250, % 7 Consumer Noncyclical 548, % Energy Exxon Mobil Corp % 4.114% 3/1/18 3/1/46 15,300 15, % XTO Energy Inc % 6/15/ % Energy Other 306, % Other Industrial 11, % Technology Alphabet Inc % 3.625% 5/19/21 8/15/26 1,350 1, % Apple Inc % 4.650% 5/3/18 8/4/46 41,795 41, % Microsoft Corp % 5.300% 5/1/18 8/8/56 38,824 38, % 7 Technology Other 174, % Transportation 74, % 2,069, % Utilities 7 Electric 237, % Natural Gas 18, % Other Utility 3, % 259, % Total Corporate Bonds (Cost $3,336,809) 3,382, % 7Sovereign Bonds (Cost $601,073) 598, % Taxable Municipal Bonds (Cost $102,961) 111, % Convertible Bonds (Cost $0) % Temporary Cash Investments U.S. Government and Agency Obligations 8 United States Treasury Bill 0.454% 0.607% 3/9/17 5/25/17 2,300 2, % Shares Money Funds 9,10 Vanguard Liquidity Fund 0.823% 4,499, , % Total Temporary Cash Investments (Cost $452,239) 452, % 1 11Total Investments (Cost $21,617,864) 30,868, % 15

18 Balanced Index Fund Percentage of Net Assets Other Assets and Liabilities Other Assets Investment in Vanguard 2,257 Receivables for Investment Securities Sold 105,507 Receivables for Accrued Income 99,453 Receivables for Capital Shares Issued 130,517 Other Assets 7,246 Total Other Assets 344, % Liabilities Payables for Investment Securities Purchased (409,296) Collateral for Securities on Loan (42,574) Payables for Capital Shares Redeemed (207,757) Payables to Vanguard (19,558) Other Liabilities (1,598) Total Liabilities (680,783) (2.2%) Net Assets 30,533, % At, net assets consisted of: Paid-in Capital 21,447,301 Overdistributed Net Investment Income (14,503) Accumulated Net Realized Losses (150,385) Unrealized Appreciation (Depreciation) Investment Securities 9,251,084 Futures Contracts (352) Net Assets 30,533,145 16

19 Balanced Index Fund Investor Shares Net Assets Applicable to 107,458,197 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 3,343,366 Net Asset Per Share Investor Shares $31.11 Admiral Shares Net Assets Applicable to 600,873,972 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 18,695,074 Net Asset Per Share Admiral Shares $31.11 Institutional Shares Net Assets Applicable to 273,001,938 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 8,494,705 Net Asset Per Share Institutional Shares $31.12 See Note A in Notes to Financial Statements. * Non-income-producing security. Represents the aggregate value, by category, of securities that are not among the 50 largest holdings and, in total for any issuer, represent 1% or less of net assets. 1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund s effective common stock and temporary cash investment positions represent 59.8% and 1.5%, respectively, of net assets. 2 Securities with a value of $693,000 have been segregated as collateral for certain open To Be Announced (TBA) transactions. 3 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock. 4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of. 5 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments and prepayments or the possibility of the issue being called. 6 Adjustable-rate security. 7 Certain of the fund s securities are exempt from registration under Rule 144A of the Securities Act of Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At, the aggregate value of these securities was $61,689,000, representing 0.2% of net assets. 8 Securities with a value of $2,296,000 have been segregated as initial margin for open futures contracts. 9 Includes $42,574,000 of collateral received for securities on loan. 10 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. 11 The total value of securities on loan is $39,640,000. See accompanying Notes, which are an integral part of the Financial Statements. 17

20 Balanced Index Fund Statement of Operations Year Ended Investment Income Income Dividends 1 356,739 Interest 2 272,017 Securities Lending Net 3,278 Total Income 632,034 Expenses The Vanguard Group Note B Investment Advisory Services 3,054 Management and Administrative Investor Shares 4,868 Management and Administrative Admiral Shares 8,124 Management and Administrative Institutional Shares 3,507 ing and Distribution Investor Shares 765 ing and Distribution Admiral Shares 1,651 ing and Distribution Institutional Shares 166 Custodian Fees 390 Auditing Fees 25 Shareholders Reports Investor Shares 56 Shareholders Reports Admiral Shares 93 Shareholders Reports Institutional Shares 55 Trustees Fees and Expenses 23 Total Expenses 22,777 Net Investment Income 609,257 Realized Net Gain (Loss) Investment Securities Sold 2 6,018 Futures Contracts 13,279 Realized Net Gain (Loss) 19,297 Change in Unrealized Appreciation (Depreciation) Investment Securities 1,753,795 Futures Contracts (1,009) Change in Unrealized Appreciation (Depreciation) 1,752,786 Net Increase (Decrease) in Net Assets Resulting from Operations 2,381,340 1 Dividends are net of foreign withholding taxes of $32, Interest income and realized net gain (loss) from an affiliated company of the fund were $2,610,000 and $14,000, respectively. 18 See accompanying Notes, which are an integral part of the Financial Statements.

21 Balanced Index Fund Statement of Changes in Net Assets Year Ended December 31, Increase (Decrease) in Net Assets Operations Net Investment Income 609, ,943 Realized Net Gain (Loss) 19, ,247 Change in Unrealized Appreciation (Depreciation) 1,752,786 (612,511) Net Increase (Decrease) in Net Assets Resulting from Operations 2,381, ,679 Distributions Net Investment Income Investor Shares (65,129) (60,568) Admiral Shares (371,977) (315,875) Institutional Shares (172,637) (156,644) Realized Capital Gain Investor Shares Admiral Shares Institutional Shares Total Distributions (609,743) (533,087) Capital Share Transactions Investor Shares 50,339 (34,234) Admiral Shares 1,896,999 1,868,658 Institutional Shares 546, ,768 Net Increase (Decrease) from Capital Share Transactions 2,493,677 2,012,192 Total Increase (Decrease) 4,265,274 1,589,784 Net Assets Beginning of Period 26,267,871 24,678,087 End of Period 1 30,533,145 26,267,871 1 Net Assets End of Period includes undistributed (overdistributed) net investment income of ($14,503,000) and ($14,017,000). See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Balanced Index Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $29.22 $29.68 $27.52 $23.76 $21.78 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.459) Total from Investment Operations Distributions Dividends from Net Investment Income (.612) (.571) (.531) (.467) (.477) Distributions from Realized Capital Gains Total Distributions (.612) (.571) (.531) (.467) (.477) Net Asset, End of Period $31.11 $29.22 $29.68 $27.52 $23.76 Total Return % 0.37% 9.84% 17.91% 11.33% Ratios/Supplemental Data Net Assets, End of Period (Millions) $3,343 $3,090 $3,174 $2,974 $2,844 Ratio of Total Expenses to Average Net Assets 0.19% 0.22% 0.23% 0.24% 0.24% Ratio of Net Investment Income to Average Net Assets 2.06% 1.92% 1.87% 1.84% 2.13% Portfolio Turnover Rate 44% 2,3 61% 2 53% 2 47% 2 43% 2 1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 2 Includes 12%, 24%, 27%, 27%, and 25% attributable to mortgage-dollar-roll activity. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares. 20 See accompanying Notes, which are an integral part of the Financial Statements.

23 Balanced Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $29.22 $29.68 $27.52 $23.76 $21.78 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.460) Total from Investment Operations Distributions Dividends from Net Investment Income (.649) (.612) (.570) (.508) (.510) Distributions from Realized Capital Gains Total Distributions (.649) (.612) (.570) (.508) (.510) Net Asset, End of Period $31.11 $29.22 $29.68 $27.52 $23.76 Total Return % 0.51% 9.99% 18.10% 11.49% Ratios/Supplemental Data Net Assets, End of Period (Millions) $18,695 $15,726 $14,112 $9,688 $7,407 Ratio of Total Expenses to Average Net Assets 0.07% 0.08% 0.09% 0.09% 0.10% Ratio of Net Investment Income to Average Net Assets 2.18% 2.06% 2.01% 1.99% 2.27% Portfolio Turnover Rate 44% 2,3 61% 2 53% 2 47% 2 43% 2 1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 2 Includes 12%, 24%, 27%, 27%, and 25% attributable to mortgage-dollar-roll activity. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares. See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Balanced Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $29.22 $29.68 $27.52 $23.76 $21.78 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.460) Total from Investment Operations Distributions Dividends from Net Investment Income (.652) (.615) (.573) (.510) (.514) Distributions from Realized Capital Gains Total Distributions (.652) (.615) (.573) (.510) (.514) Net Asset, End of Period $31.12 $29.22 $29.68 $27.52 $23.76 Total Return 8.81% 0.52% 10.00% 18.11% 11.51% Ratios/Supplemental Data Net Assets, End of Period (Millions) $8,495 $7,452 $7,392 $6,938 $5,554 Ratio of Total Expenses to Average Net Assets 0.06% 0.07% 0.08% 0.08% 0.08% Ratio of Net Investment Income to Average Net Assets 2.19% 2.07% 2.02% 2.00% 2.29% Portfolio Turnover Rate 44% 1,2 61% 1 53% 1 47% 1 43% 1 1 Includes 12%, 24%, 27%, 27%, and 25% attributable to mortgage-dollar-roll activity. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares. 22 See accompanying Notes, which are an integral part of the Financial Statements.

25 Balanced Index Fund Notes to Financial Statements Vanguard Balanced Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund s investments are in corporate debt instruments; the issuers abilities to meet their obligations may be affected by economic developments in their respective industries. The fund offers three classes of shares: Investor Shares, Admiral Shares, and Institutional Shares. Investor Shares are available to any investor who meets the fund s minimum purchase requirements. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. 1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Bonds and temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Liquidity Fund are valued at that fund s net asset value. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund s pricing time but after the close of the securities primary markets, are valued by methods deemed by the board of trustees to represent fair value. 2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses). 23

26 Balanced Index Fund 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. 3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgagebacked securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgagebacked securities market or in order to sell mortgage-backed securities it owns under delayeddelivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. 4. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund s portfolio turnover rate. s to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities Purchased in the Statement of Net Assets. 5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund s tax positions taken for all open federal income tax years (December 31, ), and has concluded that no provision for federal income tax is required in the fund s financial statements. 6. Distributions: Distributions to shareholders are recorded on the ex-dividend date. 7. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions 24

27 Balanced Index Fund only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities. 8. Credit Facility: The fund and certain other funds managed by The Vanguard Group ( Vanguard ) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund s board of trustees and included in Management and Administrative expenses on the fund s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread. The fund had no borrowings outstanding at, or at any time during the period then ended. 9. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. ing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets. B. In accordance with the terms of a Funds Service Agreement (the FSA ) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets. 25