Vanguard Balanced Index Fund

Transcription

1 Annual Report Vanguard Balanced Index Fund

2 Vanguard s Principles for Investing Success We want to give you the best chance of investment success. These principles, grounded in Vanguard s research and experience, can put you on the right path. Goals. Create clear, appropriate investment goals. Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost. Discipline. Maintain perspective and long-term discipline. A single theme unites these principles: Focus on the things you can control. We believe there is no wiser course for any investor. Contents Your Fund s Performance at a Glance Chairman s Perspective Results of Proxy Voting 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: Nautical images have been part of Vanguard s rich heritage since its start in For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first and light the way as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.

3 Your Fund s Performance at a Glance Vanguard Balanced Index Fund, which has about 60% of its assets invested in stocks and about 40% in bonds, returned about 14% for the 12 months ended. The fund closely tracked its composite index and trailed the average return of its mixed-asset target allocation 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 21.12%. 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 3.58%. Over the past ten years, the fund posted an average annual return of 7%, in line with its benchmark index and roughly 2 percentage points higher than its peer-fund average. Total Returns: Fiscal Year Ended Total Returns Vanguard Balanced Index Fund Investor Shares 13.75% Admiral Shares Institutional Shares Balanced Composite Index Mixed-Asset Target Allocation Growth Funds Average 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 7.00% Balanced Composite Index 7.26 Mixed-Asset Target Allocation Growth Funds Average 5.30 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 0.19% 0.07% 0.06% 0.92% The fund expense ratios shown are from the prospectus dated April 26, 2017, 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, Lately I ve been asked a lot about my legacy. And candidly, that phrase bugs me it isn t my legacy. Vanguard s success is a result of thousands of my colleagues committing to a clear mission: helping investors achieve their financial goals. Bill McNabb Chairman The reason the topic has come up is that on, I officially stepped down as Vanguard s CEO after almost a decade in that role. I ll remain chairman for a period to be determined by the board of directors. Tim Buckley, who was previously Vanguard s president and chief investment officer, was elected CEO. I can t think of a better successor. I ve spent 32 years at Vanguard almost my entire professional life and during that time I ve had the good fortune of working with smart, principled colleagues from across the world. I ve learned from each of them. In particular, I would like to thank Jack Bogle, our founder, who took a chance on me when I was a young business school graduate, and Jack Brennan, my predecessor as CEO, who constantly challenged me with new roles and responsibilities. 3

6 When you re just starting out, there is nothing quite like getting votes of confidence from people you respect. The short list A milestone like this naturally brings about some reflection. With that in mind, here s a tally by no means exhaustive of the accomplishments that we at Vanguard are proud of: Low costs. Over the last decade, we cut our average asset-weighted expense ratio by about 50%. 1 This isn t a result of some contrived price war. Since its founding, Vanguard has emphasized the benefits of low-cost investing. As Jack Bogle once said: The honest steward who charges least, wins most. But not for himself; for those investors who entrust their assets to his care. It is not all that complicated. Global diversification. Through our thought leadership and investment options, such as our target-date funds, Vanguard has encouraged clients to obtain exposure to international markets. Global diversification isn t just about helping to control risk it can also be a way of expanding your set of opportunities and harnessing the potential of all markets. Barometer Average Annual Total Returns Periods Ended One Year Three Years Five Years Stocks Russell 1000 Index (Large-caps) 21.69% 11.23% 15.71% 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) 3.54% 2.24% 2.10% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 2.11% 1.64% 1.43% 1 Source: Vanguard calculation, based on data from Morningstar, Inc., as of December 31,

7 I ve been glad to see more and more clients embracing global diversification. I believe this trend will continue as Vanguard s way of investing takes hold in international markets. Affordable advice. In the wake of the Global Financial Crisis, we began working on a new advice model. In 2015, we launched Vanguard Personal Advisor Services, a hybrid advice offering that delivers value through a combination of a professional advisor and powerful digital technology at a competitive price. Across the industry, we ve seen the cost of providing advice coming down. Traditional advisors are embracing low-cost investments, and that, in turn, helps them reduce costs for their own clients. This is a trend that all of us at Vanguard would like to see continue. Great people. I ve interacted with hundreds of companies of all sizes and in all industries, and the one quality that sets Vanguard apart from most of them is our emphasis on people. It s a testament to our culture that colleagues spend 15, 20, or, as in my case, more than 30 years of their professional lives here. Investors benefit because we have consistent, experienced fund management teams and a deep bench of talent that ensures that things go smoothly when it s time for a transition. We ve done a great job attracting new talent, too. We made some notable additions to senior management in the last two years, and we re continuously grooming our next generation of leaders. Ready for what comes next When I was contemplating coming to work at Vanguard, I sat down with my rowing coach at his home in Philadelphia. Over cheese steaks, he told me that the most important thing was to work for a company that had the same values I held deeply. He was like a second father to me, so I trusted his judgment at a time when I wasn t so sure about my own. Back then, I never could have anticipated the success Vanguard would have in the coming decades. I m no better at predicting the future now. Vanguard has enjoyed significant growth in the last few years, and that presents its own unique set of challenges and opportunities, such as the role we re playing in advocating for better corporate governance among companies our funds invest in. And the asset management industry is confronting significant changes brought on by technology, shifting demographics, and new regulations. Although the future is uncertain, I m confident that Vanguard is well-prepared to tackle whatever comes its way. And one thing I m sure of: There are big parts of the world that would be well-served by our way of investing. 5

8 It s humbling to think about the impact the work we do at Vanguard has on clients who are trying to raise a family, buy a first home, save for college, or prepare for retirement. I ve always tried to make decisions with investors best interests in mind. It has been a privilege working with people who hold to that same ideal. Thank you for entrusting us with your assets. Sincerely, F. William McNabb III Chairman January 1,

9 Results of Proxy Voting At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals: Proposal 1 Elect trustees for the fund.* The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting. Percentage Trustee For Withheld For Mortimer J. Buckley 740,774,465 27,890, % Emerson U. Fullwood 739,267,805 29,397, % Amy Gutmann 740,156,236 28,508, % JoAnn Heffernan Heisen 740,966,112 27,698, % F. Joseph Loughrey 740,120,082 28,544, % Mark Loughridge 740,538,702 28,126, % Scott C. Malpass 738,534,308 30,130, % F. William McNabb III 739,632,640 29,032, % Deanna Mulligan 740,080,563 28,584, % André F. Perold 737,932,030 30,732, % Sarah Bloom Raskin 739,894,979 28,769, % Peter F. Volanakis 739,352,549 29,312, % * Results are for all funds within the same trust. Proposal 2 Approve a manager-of-managers arrangement with third-party investment advisors. This arrangement enables the fund to enter into and materially amend investment advisory arrangements with third-party investment advisors, subject to the approval of the fund s board of trustees and certain conditions imposed by the Securities and Exchange Commission, while avoiding the costs and delays associated with obtaining future shareholder approval. Broker Percentage Vanguard Fund For Abstain Against Non-Votes For Balanced Index Fund 525,534,505 35,446,406 26,021, ,537, % 7

10 Proposal 3 Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard. This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC s approval of a pending application for an order of exemption. Broker Percentage Vanguard Fund For Abstain Against Non-Votes For Balanced Index Fund 532,314,559 33,969,507 20,718, ,537, % 8

11 Balanced Index Fund Fund Profile As of Share-Class Characteristics Investor Shares Equity and Portfolio Characteristics CRSP US Total Fund Index Number of Stocks 3,407 3,581 Median Cap $66.8B $66.8B Price/Earnings Ratio 22.9x 22.9x Price/Book Ratio 3.0x 3.0x Return on Equity 15.1% 15.1% Earnings Growth Rate 9.9% 9.9% Dividend Yield 1.7% 1.7% Foreign Holdings 0.0% 0.0% Turnover Rate 37% Short-Term Reserves 1.4% Fixed Income Characteristics Admiral Shares Institutional Shares Ticker Symbol VBINX VBIAX VBAIX Expense Ratio % 0.07% 0.06% 30-Day SEC Yield 1.91% 2.03% 2.04% Bloomberg Barclays U.S. Aggregate Float Adjusted Fund Index Number of Bonds 7,048 9,706 Yield to (before expenses) 2.7% 2.7% Average 3.0% 3.0% Average Duration 6.1 years 6.1 years Average Effective 8.4 years 8.3 years 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 2.8% Microsoft Corp. Software 2.4 Alphabet Inc. Internet 2.3 Amazon.com Inc. Broadline Retailers 1.7 book Inc. Internet 1.5 Berkshire Hathaway Inc. Reinsurance 1.4 Johnson & Johnson Pharmaceuticals 1.4 JPMorgan Chase & Co. Banks 1.4 Exxon Mobil Corp. Integrated Oil and Gas 1.3 Bank of America Corp. Banks 1.1 Top Ten 17.3% Top Ten as % of Total Net Assets 10.4% The holdings listed exclude any temporary cash investments and equity index products. Fund Asset Allocation 59.7% Stocks 38.9% Bonds 1.4% Short-Term Reserves 1 The expense ratios shown are from the prospectus dated April 26, 2017, 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. 9

12 Balanced Index Fund Sector Diversification (% of equity exposure) CRSP US Total Fund Index Basic Materials 2.7% 2.7% Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecommunications Utilities Sector categories are based on the Industry Classification Benchmark ( ICB ), except for the Other category (if applicable), which includes securities that have not been provided an ICB classification as of the effective reporting period. Distribution by Credit Quality (% of fixed income portfolio) U.S. Government 63.9% Aaa 5.5 Aa 3.4 A 12.4 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 Blend Growth Sector Diversification (% of fixed income portfolio) Medium Asset-Backed 2.4% Finance 8.7 Foreign 4.9 Government Mortgage-Backed 21.2 Industrial 17.2 Treasury/Agency 42.9 Utilities 2.0 Other 0.7 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. Small Fixed Income Investment Focus Average Credit Quality Treasury/ Agency Investment-Grade Corporate Below Investment-Grade Short Med. Long 10

13 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, 2007, Through Initial Investment of $10,000 $28,000 19, ,000 Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Balanced Index Fund Investor Shares 13.75% 9.94% 7.00% $19,676 Balanced Composite Index , Mixed-Asset Target Allocation Growth Funds Average ,761 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 Spliced Total Stock Index ,061 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 13.89% 10.09% 7.14% $19,926 Balanced Composite Index ,156 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 Spliced Total Stock Index ,061 See Financial Highlights for dividend and capital gains information. 11

14 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 13.86% 10.10% 7.16% $9,984,003 Balanced Composite Index ,078,214 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,422,440 Spliced Total Stock Index ,530,358 Fiscal-Year Total Returns (%): December 31, 2007, Through Balanced Index Fund Investor Shares Balanced Composite Index For a benchmark description, see the Glossary. 12

15 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 DowDuPont Inc. 1,897, , % Basic Materials Other 469, % 604, % Consumer Goods Procter & Gamble Co. 2,062, , % Coca-Cola Co. 3,109, , % PepsiCo Inc. 1,156, , % Philip Morris International Inc. 1,259, , % Altria Group Inc. 1,552, , % 1 Consumer Goods Other 1,287, % 2,002, % Consumer Services * Amazon.com Inc. 332, , % Home Depot Inc. 949, , % Comcast Corp. Class A 3,792, , % Walt Disney Co. 1,167, , % Wal-Mart Stores Inc. 1,214, , % McDonald s Corp. 648, , % 1 Consumer Services Other 1,772, % 2,850, % Financials JPMorgan Chase & Co. 2,822, , % * Berkshire Hathaway Inc. Class B 1,459, , % Bank of America Corp. 8,020, , % Wells Fargo & Co. 3,603, , % Visa Inc. Class A 1,476, , % 13

16 Balanced Index Fund Percentage of Net Shares Assets Citigroup Inc. 2,150, , % Mastercard Inc. Class A 764, , % 1 Financials Other 3,090, % 4,581, % Health Care Johnson & Johnson 2,183, , % Pfizer Inc. 4,839, , % UnitedHealth Group Inc. 785, , % AbbVie Inc. 1,297, , % Merck & Co. Inc. 2,215, , % Amgen Inc. 590, , % Medtronic plc 1,102,855 89, % 1 Health Care Other 1,705, % 2,800, % Industrials Boeing Co. 458, , % General Electric Co. 7,044, , % 3M Co. 483, , % Honeywell International Inc. 612,956 94, % Union Pacific Corp. 640,614 85, % Industrials Other 2,426, % 2,978, % Oil & Gas Exxon Mobil Corp. 3,436, , % Chevron Corp. 1,538, , % 1 Oil & Gas Other 793, % 1,273, % Technology Apple Inc. 3,755, , % Microsoft Corp. 6,260, , % * book Inc. Class A 1,935, , % * Alphabet Inc. Class C 245, , % * Alphabet Inc. Class A 237, , % Intel Corp. 3,805, , % Cisco Systems Inc. 4,019, , % Oracle Corp. 2,535, , % International Business Machines Corp. 714, , % NVIDIA Corp. 442,776 85, % Broadcom Ltd. 330,840 84, % Texas Instruments Inc. 802,519 83, % 1 Technology Other 1,291, % 4,124, % Telecommunications AT&T Inc. 4,986, , % Verizon Communications Inc. 3,310, , % 1 Telecommunications Other 52, % 421, % Utilities 669, % Total Common Stocks (Cost $9,711,518) 22,306, % 2 14

17 Balanced Index Fund Percentage of Net Assets U.S. Government and Agency Obligations U.S. Government Securities United States Treasury Note/Bond 1.000% 11/15/19 163, , % United States Treasury Note/Bond 1.750% 11/15/20 128, , % 3 United States Treasury Note/Bond 0.750% 9.125% 5/15/18 11/15/47 5,639,846 5,692, % 5,980, % Agency Bonds and Notes 4 Federal Home Loan Mortgage Corp % 6.750% 3/27/19 7/15/32 68,137 68, % 4 Federal National Mortgage Assn % 7.250% 12/14/18 7/15/37 97, , % Agency Bonds and Notes Other 96, % 266, % Conventional Mortgage-Backed Securities 4,5,6 Fannie Mae Pool 2.000% % 1/1/18 1/1/48 1,256,347 1,298, % 4,5,6 Freddie Mac Gold Pool 2.000% % 1/1/18 1/1/48 805, , % 5,6 Ginnie Mae I Pool 3.000% % 3/15/18 1/1/48 94, , % 5,6 Ginnie Mae II Pool 3.500% 1/1/48 81,495 84, % 5,6 Ginnie Mae II Pool 2.500% 7.000% 3/20/18 1/1/48 756, , % 3,095, % Nonconventional Mortgage-Backed Securities 4,5 Fannie Mae Pool 2.124% 5.860% 11/1/33 12/1/43 10,058 10, % 4,5 Freddie Mac Non Gold Pool 2.386% 4.865% 11/1/34 11/1/43 2,663 2, % 5 Ginnie Mae II Pool 2.250% 3.500% 7/20/38 12/20/43 4,483 4, % 17, % Total U.S. Government and Agency Obligations (Cost $9,372,811) 9,359, % Asset-Backed/Commercial Mortgage-Backed Securities 5 Bear Stearns Commercial Mortgage Securities Trust 2007-TOP % 1/12/ % 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 % 3/15/ % 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 2012-C % 5/15/ % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2012-C % 10/15/45 1,658 1, % 5 JP Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX 3.483% 6/15/ % 15

18 Balanced Index Fund Percentage of Net Assets 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 2015-JP % 1/15/ % 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 JP Morgan Chase Commercial Mortgage Securities Trust 2017-JP % 3.744% 7/15/ % 5 JPMCC Commercial Mortgage Securities Trust 2017-JP % 3/15/50 1,250 1, % 7 Asset-Backed/Commercial Mortgage-Backed Securities Other 340, % Total Asset-Backed/Commercial Mortgage-Backed Securities (Cost $357,171) 357, % Corporate Bonds Finance Banking 5 JPMorgan Chase & Co % 6.400% 1/28/19 11/15/48 79,730 83, % JPMorgan Chase Bank NA 1.650% 9/23/19 1, % 7 Banking Other 821, % Brokerage 33, % Finance Companies 38, % 7 Insurance 181, % Other Finance 1, % Real Estate Investment Trusts 103, % 1,264, % 16

19 Balanced Index Fund Percentage of Net Assets Industrial 7 Basic Industry 137, % 7 Capital Goods 204, % 7 Communication 378, % Consumer Cyclical 7 Amazon.com Inc % 5.200% 12/5/19 8/22/57 18,625 19, % 7 Consumer Cyclical Other 286, % 7 Consumer Noncyclical 634, % 7 Energy 377, % Other Industrial 13, % Technology Alphabet Inc % 3.625% 5/19/21 8/15/26 1,850 1, % Apple Inc % 4.650% 2/8/19 11/13/47 62,363 63, % Microsoft Corp % 5.300% 6/1/19 2/6/57 55,149 57, % 7 Technology Other 232, % 7 Transportation 94, % 2,502, % Utilities 7 Electric 263, % Natural Gas 20, % Other Utility 4, % 288, % Total Corporate Bonds (Cost $3,920,599) 4,055, % 7Sovereign Bonds (Cost $ 708,279) 714, % Taxable Municipal Bonds (Cost $ 94,280) 106, % Temporary Cash Investments U.S. Government and Agency Obligations United States Cash Management Bill 1.028% 1/2/18 5,000 5, % 8 United States Treasury Bill 1.087% 1.169% 3/1/18 3/22/18 5,000 4, % 9, % Shares Money Funds 9,10 Vanguard Liquidity Fund 1.458% 6,654, , % Total Temporary Cash Investments (Cost $675,490) 675, % 2 11Total Investments (Cost $24,840,148) 37,576, % 17

20 Balanced Index Fund Percentage of Net Assets Other Assets and Liabilities Other Assets Investment in Vanguard 2,030 Receivables for Investment Securities Sold 72,882 Receivables for Accrued Income 108,922 Receivables for Capital Shares Issued 57,347 Other Assets 4,776 Total Other Assets 245, % Liabilities Payables for Investment Securities Purchased (629,888) Collateral for Securities on Loan (40,050) Payables for Capital Shares Redeemed (27,763) Payables to Vanguard (18,429) Variation Margin Payable Future Contracts (424) Other Liabilities (998) Total Liabilities (717,552) (2.0%) Net Assets 37,104, % At, net assets consisted of: Paid-in Capital 24,403,295 Overdistributed Net Investment Income (8,197) Accumulated Net Realized Losses (27,207) Unrealized Appreciation (Depreciation) Investment Securities 12,736,169 Futures Contracts 662 Net Assets 37,104,722 18

21 Balanced Index Fund Investor Shares Net Assets Applicable to 100,054,487 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 3,473,781 Net Asset Per Share Investor Shares $34.72 Admiral Shares Net Assets Applicable to 678,485,972 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 23,555,625 Net Asset Per Share Admiral Shares $34.72 Institutional Shares Net Assets Applicable to 290,155,632 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 10,075,316 Net Asset Per Share Institutional Shares $34.72 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 valued using significant unobservable inputs. 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 60.3% and 1.6%, respectively, of net assets. 3 Securities with a value of $685,000 have been segregated as collateral for certain open To Be Announced (TBA) transactions. 4 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. 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 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of. 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 $138,938,000, representing 0.4% of net assets. 8 Securities with a value of $3,240,000 have been segregated as initial margin for open futures contracts. 9 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. 10 Includes $40,050,000 of collateral received for securities on loan. 11 The total value of securities on loan is $36,909,

22 Balanced Index Fund Derivative Financial Instruments Outstanding as of Period End Futures Contracts and Number of Unrealized Long (Short) Notional Appreciation Expiration Contracts (Depreciation) Long Futures Contracts E-mini S&P 500 Index March , E-mini Russell 2000 Index March , E-mini S&P Mid-Cap 400 Index March , Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes. See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Balanced Index Fund Statement of Operations Year Ended Investment Income Income Dividends 1 386,498 Interest 2 344,935 Securities Lending Net 2,854 Total Income 734,287 Expenses The Vanguard Group Note B Investment Advisory Services 3,219 Management and Administrative Investor Shares 5,294 Management and Administrative Admiral Shares 10,162 Management and Administrative Institutional Shares 4,149 ing and Distribution Investor Shares 670 ing and Distribution Admiral Shares 1,622 ing and Distribution Institutional Shares 201 Custodian Fees 434 Auditing Fees 23 Shareholders Reports and Proxy Investor Shares 289 Shareholders Reports and Proxy Admiral Shares 591 Shareholders Reports and Proxy Institutional Shares 201 Trustees Fees and Expenses 28 Total Expenses 26,883 Net Investment Income 707,404 Realized Net Gain (Loss) Investment Securities Sold 2 199,100 Futures Contracts 20,262 Realized Net Gain (Loss) 219,362 Change in Unrealized Appreciation (Depreciation) Investment Securities 2 3,485,085 Futures Contracts 1,014 Change in Unrealized Appreciation (Depreciation) 3,486,099 Net Increase (Decrease) in Net Assets Resulting from Operations 4,412,865 1 Dividends are net of foreign withholding taxes of $24, Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $5,970,000, ($1,000), and ($3,000), respectively. See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Balanced Index Fund Statement of Changes in Net Assets Year Ended December 31, Increase (Decrease) in Net Assets Operations Net Investment Income 707, ,257 Realized Net Gain (Loss) 219,362 19,297 Change in Unrealized Appreciation (Depreciation) 3,486,099 1,752,786 Net Increase (Decrease) in Net Assets Resulting from Operations 4,412,865 2,381,340 Distributions Net Investment Income Investor Shares (67,370) (65,129) Admiral Shares (439,718) (371,977) Institutional Shares (194,010) (172,637) Realized Capital Gain Investor Shares Admiral Shares Institutional Shares Total Distributions (701,098) (609,743) Capital Share Transactions Investor Shares (251,348) 50,339 Admiral Shares 2,554,479 1,896,999 Institutional Shares 556, ,339 Net Increase (Decrease) from Capital Share Transactions 2,859,810 2,493,677 Total Increase (Decrease) 6,571,577 4,265,274 Net Assets Beginning of Period 30,533,145 26,267,871 End of Period 1 37,104,722 30,533,145 1 Net Assets End of Period includes undistributed (overdistributed) net investment income of ($8,197,000) and ($14,503,000). See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Balanced Index Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $31.11 $29.22 $29.68 $27.52 $23.76 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.459) Total from Investment Operations Distributions Dividends from Net Investment Income (.637) (.612) (.571) (.531) (.467) Distributions from Realized Capital Gains Total Distributions (.637) (.612) (.571) (.531) (.467) Net Asset, End of Period $34.72 $31.11 $29.22 $29.68 $27.52 Total Return % 8.63% 0.37% 9.84% 17.91% Ratios/Supplemental Data Net Assets, End of Period (Millions) $3,474 $3,343 $3,090 $3,174 $2,974 Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.22% 0.23% 0.24% Ratio of Net Investment Income to Average Net Assets 1.97% 2.06% 1.92% 1.87% 1.84% Portfolio Turnover Rate 3 37% 4 44% 4 61% 53% 47% 1 Calculated based on average shares outstanding. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Includes 11%, 12%, 24%, 27%, and 27% attributable to mortgage-dollar-roll activity. 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. See accompanying Notes, which are an integral part of the Financial Statements. 23

26 Balanced Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $31.11 $29.22 $29.68 $27.52 $23.76 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.460) Total from Investment Operations Distributions Dividends from Net Investment Income (.678) (.649) (.612) (.570) (.508) Distributions from Realized Capital Gains Total Distributions (.678) (.649) (.612) (.570) (.508) Net Asset, End of Period $34.72 $31.11 $29.22 $29.68 $27.52 Total Return % 8.77% 0.51% 9.99% 18.10% Ratios/Supplemental Data Net Assets, End of Period (Millions) $23,556 $18,695 $15,726 $14,112 $9,688 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.08% 0.09% 0.09% Ratio of Net Investment Income to Average Net Assets 2.09% 2.18% 2.06% 2.01% 1.99% Portfolio Turnover Rate 3 37% 4 44% 4 61% 53% 47% 1 Calculated based on average shares outstanding. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Includes 11%, 12%, 24%, 27%, and 27% attributable to mortgage-dollar-roll activity. 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. See accompanying Notes, which are an integral part of the Financial Statements. 24

27 Balanced Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $31.12 $29.22 $29.68 $27.52 $23.76 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.460) Total from Investment Operations Distributions Dividends from Net Investment Income (.679) (.652) (.615) (.573) (.510) Distributions from Realized Capital Gains Total Distributions (.679) (.652) (.615) (.573) (.510) Net Asset, End of Period $34.72 $31.12 $29.22 $29.68 $27.52 Total Return 13.86% 8.81% 0.52% 10.00% 18.11% Ratios/Supplemental Data Net Assets, End of Period (Millions) $10,075 $8,495 $7,452 $7,392 $6,938 Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.07% 0.08% 0.08% Ratio of Net Investment Income to Average Net Assets 2.10% 2.19% 2.07% 2.02% 2.00% Portfolio Turnover Rate 2 37% 3 44% 3 61% 53% 47% 1 Calculated based on average shares outstanding. 2 Includes 11%, 12%, 24%, 27%, and 27% 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. 25

28 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, 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 primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses). 26

29 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 the notional amounts at each quarter-end during the period. 3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. 4. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgagedollar-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 mortgagebacked 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-dollarroll 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. 27

30 Balanced Index Fund 7. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard 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), shareholder reporting, and the proxy. 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. 28