Vanguard Bond Index Funds. Annual Report December 31, 2017

Transcription

1 Annual Report Vanguard Bond Index Funds Vanguard Short-Term Bond Index Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond 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 Short-Term Bond Index Fund Intermediate-Term Bond Index Fund Long-Term Bond Index Fund 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 For the 12 months ended, the returns of the three funds covered in this report ranged from 1.10% for Investor Shares of Vanguard Short-Term Bond Index Fund to 10.89% for ETF Shares of Vanguard Long-Term Bond Index Fund. The funds results were in line with their benchmarks and mixed versus their peer groups. The yield curve flattened over the period. Solid economic data and a strong labor market prompted the Federal Reserve to raise short-term interest rates three times in That pushed up short-term rates, while longer-term rates eased lower on dimmer longer-range prospects for faster economic growth and higher inflation. U.S. Treasuries returned about 2.3% and mortgage-backed securities slightly more than that. Corporate bonds returned about 6.4%, with their average yield over Treasuries narrowing a little amid the uptick in growth. Lower-quality investment-grade bonds outpaced higher-quality bonds. By maturity, long-term bonds significantly outpaced intermediate- and short-term ones. Total Returns: Fiscal Year Ended 30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Short-Term Bond Index Fund Investor Shares 2.00% 1.58% -0.48% 1.10% ETF Shares 2.08 Price 1.16 Net Asset 1.20 Admiral Shares Institutional Shares Institutional Plus Shares Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index Year Investment-Grade Debt Funds Average Year Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 1

4 30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Intermediate-Term Bond Index Fund Investor Shares 2.64% 2.59% 1.17% 3.76% ETF Shares 2.72 Price 3.53 Net Asset 3.80 Admiral Shares Institutional Shares Institutional Plus Shares Bloomberg Barclays U.S Year Government/Credit Float Adjusted Index 3.81 Core Bond Funds Average 3.56 Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Long-Term Bond Index Fund Investor Shares 3.41% 4.02% 6.74% 10.76% ETF Shares 3.49 Price Net Asset Institutional Shares Institutional Plus Shares Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index Corporate A-Rated Debt Funds Average 5.26 Corporate A-Rated Debt 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 and Institutional Plus Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF Shares shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV. Total Returns: Ten Years Ended Average Annual Return Short-Term Bond Index Fund Investor Shares 2.30% Spliced Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index Year Investment-Grade Debt Funds Average 2.01 For a benchmark description, see the Glossary. 1 5 Year Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 2

5 Average Annual Return Intermediate-Term Bond Index Fund Investor Shares 4.89% Spliced Bloomberg Barclays U.S Year Government/Credit Float Adjusted Index 5.00 Spliced Intermediate Investment-Grade Debt Funds Average 3.72 For a benchmark description, see the Glossary. Spliced Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Long-Term Bond Index Fund Investor Shares 7.17% Spliced Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index 7.26 Corporate A-Rated Debt Funds Average 4.33 For a benchmark description, see the Glossary. Corporate A-Rated Debt 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 ETF Shares Admiral Shares Institutional Shares Institutional Plus Shares Peer Group Average Short-Term Bond Index Fund 0.15% 0.07% 0.07% 0.05% 0.04% 0.73% Intermediate-Term Bond Index Fund Long-Term Bond Index Fund 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 funds expense ratios were: for the Short-Term Bond Index Fund, 0.15% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, 0.05% for Institutional Shares, and 0.04% for Institutional Plus Shares; for the Intermediate-Term Bond Index Fund, 0.15% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, 0.05% for Institutional Shares, and 0.04% for Institutional Plus Shares; and for the Long-Term Bond Index Fund, 0.15% for Investor Shares, 0.07% for ETF Shares, 0.05% for Institutional Shares, and 0.04% for Institutional Plus Shares. Peer-group expense ratios are derived from data provided by Lipper, a Thomson Reuters Company, and capture information through year-end Peer groups: For the Short-Term Bond Index Fund, 1 5 Year Investment-Grade Debt Funds; for the Intermediate-Term Bond Index Fund, Core Bond Funds; for the Long-Term Bond Index Fund, Corporate A-Rated Debt Funds. 3

6 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. 4

7 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,

8 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. 6

9 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,

10 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 26,722,274, ,483, % Emerson U. Fullwood 26,714,366, ,392, % Amy Gutmann 26,712,915, ,842, % JoAnn Heffernan Heisen 26,721,561, ,196, % F. Joseph Loughrey 26,717,701, ,057, % Mark Loughridge 26,720,437, ,321, % Scott C. Malpass 26,702,773, ,985, % F. William McNabb III 26,712,434, ,323, % Deanna Mulligan 26,719,931, ,827, % André F. Perold 26,676,518, ,240, % Sarah Bloom Raskin 26,713,372, ,385, % Peter F. Volanakis 26,706,957, ,800, % * 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 Intermediate-Term Bond Index Fund 1,006,546,878 40,310,784 39,747, ,030, % Long-Term Bond Index Fund 317,787,816 27,896,564 10,367,707 34,955, % Short-Term Bond Index Fund 1,581,902,470 55,436,958 48,926, ,900, % 8

11 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 Intermediate-Term Bond Index Fund 1,019,718,002 38,281,589 28,605, ,030, % Long-Term Bond Index Fund 320,874,518 27,275,451 7,902,118 34,955, % Short-Term Bond Index Fund 1,589,595,759 52,256,377 44,413, ,900, % Shareholders of the Intermediate-Term Bond Index Fund and the Short-Term Bond Index Fund did not approve the following proposal: Proposal 7 Institute transparent procedures to avoid holding investments in companies that, in management s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed. The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders best interests if those constraints are unrelated to a fund s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company s capitalization. Broker Percentage Vanguard Fund For Abstain Against Non-Votes For Intermediate-Term Bond Index Fund 272,457,485 55,597, ,549, ,030, % Short-Term Bond Index Fund 226,436,682 71,285,153 1,388,544, ,900, % 9

12 Short-Term Bond Index Fund Fund Profile As of Share-Class Characteristics Investor Shares ETF Shares Admiral Shares Institutional Shares Institutional Plus Shares Ticker Symbol VBISX BSV VBIRX VBITX VBIPX Expense Ratio % 0.07% 0.07% 0.05% 0.04% 30-Day SEC Yield 2.00% 2.08% 2.08% 2.10% 2.11% Financial Attributes Bloomberg Barclays Fund 1 5 Year Gov/ Credit Float Adj Index Bloomberg Barclays Aggregate Float Adj Index Number of Bonds 2,503 2,829 9,706 Yield to (before expenses) 2.2% 2.2% 2.7% Average 2.0% 2.2% 3.0% Average Duration 2.7 years 2.7 years 6.1 years Average Effective 2.8 years 2.8 years 8.3 years Short-Term Reserves 2.0% Sector Diversification (% of portfolio) Finance 11.3% Foreign 7.9 Industrial 15.2 Treasury/Agency 64.2 Utilities 1.2 Other 0.2 The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government. Volatility Measures Bloomberg Barclays 1 5 Year Gov/ Credit Float Adj Index Bloomberg Barclays Aggregate Float Adj Index R-Squared Beta These measures show the degree and timing of the fund s fluctuations compared with the indexes over 36 months. Distribution by Credit Quality (% of portfolio) U.S. Government 64.2% Aaa 5.9 Aa 4.6 A 13.2 Baa 12.1 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. Distribution by Effective (% of portfolio) Under 1 Year 0.6% 1-3 Years Years Years 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 0.15% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, 0.05% for Institutional Shares, and 0.04% for Institutional Plus Shares. 10

13 Short-Term Bond Index Fund Investment Focus Average Short Med. Long Credit Quality Treasury/ Agency Investment-Grade Corporate Below Investment-Grade 11

14 Short-Term Bond Index Fund Performance Summary All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares. Cumulative Performance: December 31, 2007, Through Initial Investment of $10,000 $18,000 12, ,000 Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Short-Term Bond Index Fund Investor Shares 1.10% 0.92% 2.30% $12,551 Spliced Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index , Year Investment-Grade Debt Funds Average ,200 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 For a benchmark description, see the Glossary. 1 5 Year Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. One Year Five Years Ten Years Final of a $10,000 Investment Short-Term Bond Index Fund ETF Shares Net Asset 1.20% 1.01% 2.39% $12,663 Spliced Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index ,751 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 See Financial Highlights for dividend and capital gains information. 12

15 Short-Term Bond Index Fund Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Short-Term Bond Index Fund Admiral Shares 1.18% 1.00% 2.39% $12,668 Spliced Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index ,751 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 One Year Five Years Since Inception (9/27/2011) Final of a $5,000,000 Investment Short-Term Bond Index Fund Institutional Shares 1.20% 1.03% 1.23% $5,396,799 Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index ,422,172 Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,877,886 "Since Inception" performance is calculated from the Institutional Shares inception date for both the fund and its comparative standards. One Year Five Years Since Inception (9/29/2011) Final of a $100,000,000 Investment Short-Term Bond Index Fund Institutional Plus Shares 1.21% 1.04% 1.25% $108,048,710 Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index ,350,233 Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,242,023 "Since Inception" performance is calculated from the Institutional Plus Shares inception date for both the fund and its comparative standards. 13

16 Short-Term Bond Index Fund Cumulative Returns of ETF Shares: December 31, 2007, Through One Year Five Years Ten Years Short-Term Bond Index Fund ETF Shares Price 1.16% 5.07% 26.41% Short-Term Bond Index Fund ETF Shares Net Asset Spliced Bloomberg Barclays U.S. 1 5 Year Government/Credit Float Adjusted Index Fiscal-Year Total Returns (%): December 31, 2007, Through Spliced Bloomberg Barclays 1 5 Year Gov/Credit Investor Shares FA Index Fiscal Year Income Returns Capital Returns Total Returns Total Returns % 1.48% 5.43% 5.12% For a benchmark description, see the Glossary. 14

17 Short-Term Bond Index Fund Financial Statements Statement of Net Assets Investments Summary As of This Statement summarizes the fund s holdings by asset type. Details are reported for each of the fund s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the fund s net assets. The total value of smaller holdings is reported as a single amount within each category. The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the complete listing of the fund s holdings is available electronically on vanguard.com and on the Securities and Exchange Commission s website (sec.gov), or you can have it mailed to you without charge by calling For the first and third fiscal quarters, the fund files the lists with the SEC on Form N-Q. Shareholders can look up the fund s Forms N-Q on the SEC s website. Forms N-Q may also be reviewed and copied at the SEC s Public Reference Room (see the back cover of this report for further information). Percentage of Net Assets U.S. Government and Agency Obligations U.S. Government Securities Note/Bond 1.375% 8/31/20 1,060,845 1,045, % Note/Bond 1.250% 10/31/21 923, , % Note/Bond 1.500% 11/30/19 885, , % Note/Bond 2.125% 12/31/22 756, , % Note/Bond 1.375% 3/31/20 725, , % Note/Bond 1.125% 9/30/21 700, , % Note/Bond 1.875% 1/31/22 671, , % Note/Bond 1.625% 11/30/20 662, , % Note/Bond 1.625% 3/31/19 647, , % Note/Bond 1.250% 3/31/21 657, , % Note/Bond 1.125% 8/31/21 653, , % Note/Bond 1.375% 5/31/21 613, , % Note/Bond 1.625% 8/31/22 614, , % Note/Bond 2.000% 11/30/22 603, , % 15

18 Short-Term Bond Index Fund Percentage of Net Assets Note/Bond 1.625% 7/31/20 575, , % Note/Bond 1.375% 2/29/20 540, , % Note/Bond 1.375% 10/31/20 541, , % Note/Bond 1.125% 6/30/21 549, , % Note/Bond 1.625% 8/31/19 511, , % Note/Bond 1.875% 12/15/20 495, , % Note/Bond 1.750% 5/31/22 493, , % Note/Bond 1.500% 10/31/19 487, , % Note/Bond 1.125% 2/28/21 454, , % Note/Bond 1.500% 5/31/20 445, , % Note/Bond 1.875% 3/31/22 444, , % Note/Bond 1.375% 9/30/20 442, , % Note/Bond 0.750% 2/15/19 434, , % Note/Bond 1.750% 9/30/19 406, , % Note/Bond 1.250% 1/31/20 409, , % Note/Bond 1.750% 4/30/22 392, , % Note/Bond 1.500% 2/28/19 383, , % Note/Bond 1.625% 6/30/19 383, , % Note/Bond 1.500% 5/31/19 382, , % Note/Bond 1.625% 4/30/19 347, , % Note/Bond 1.000% 10/15/19 348, , % Note/Bond 0.875% 5/15/19 345, , % Note/Bond 1.125% 1/15/19 342, , % Note/Bond 1.500% 5/15/20 340, , % Note/Bond 1.375% 1/31/21 321, , % Note/Bond 1.375% 4/30/20 314, , % Note/Bond 1.625% 7/31/19 309, , % 16

19 Short-Term Bond Index Fund Percentage of Net Assets Note/Bond 1.750% 11/30/21 312, , % Note/Bond 1.500% 4/15/20 293, , % Note/Bond 0.875% 4/15/19 292, , % Note/Bond 1.500% 1/31/19 287, , % Note/Bond 1.625% 6/30/20 277, , % Note/Bond 1.875% 8/31/22 269, , % Note/Bond 2.000% 12/31/21 264, , % Note/Bond 1.875% 7/31/22 258, , % Note/Bond 0.875% 9/15/19 258, , % Note/Bond 0.750% 8.875% 12/31/18 1/31/23 7,375,057 7,293, % 31,088, % Agency Bonds and Notes 1 Federal Home Loan Banks 0.875% 5.625% 1/16/19 11/29/21 515, , % 2,3 Federal National Mortgage Assn. 0.00% 2.000% 12/14/18 10/5/22 766, , % Agency Bonds and Notes Other 618, % 1,890, % Total U.S. Government and Agency Obligations (Cost $33,396,751) 32,978, % Corporate Bonds Finance 4 Banking 4,710, % Brokerage 108, % Finance Companies 203, % Insurance 461, % Other Finance 3, % Real Estate Investment Trusts 268, % 5,754, % Industrial Basic Industry 365, % Capital Goods 723, % Communication 869, % 4 Consumer Cyclical 1,127, % 4 Consumer Noncyclical 2,163, % 4 Energy 1,053, % Other Industrial 5, % 4 Technology 1,273, % Transportation 177, % 7,758, % 17

20 Short-Term Bond Index Fund Percentage of Net Assets Utilities 4 Electric 566, % Natural Gas 37, % 604, % Total Corporate Bonds (Cost $14,152,932) 14,117, % Sovereign Bonds European Investment Bank 1.125% 4.000% 3/15/19 12/15/22 566, , % 5 FMS Wertmanagement AoeR 1.000% 2.000% 8/16/19 8/1/22 62,235 61, % International Bank for Reconstruction & Development 0.875% 2.250% 3/15/19 10/7/22 471, , % International Finance Corp % 1.750% 9/16/19 7/20/21 66,185 65, % 5 KFW 1.000% 4.875% 2/6/19 10/4/22 651, , % 4 Sovereign Bonds Other 2,220, % Total Sovereign Bonds (Cost $4,057,468) 4,023, % Taxable Municipal Bonds (Cost $ 61,735) 61, % Shares Temporary Cash Investment Money Fund 6 Vanguard Liquidity Fund (Cost $1,025,823) 1.458% 10,257,266 1,025, % Total Investments (Cost $52,694,709) 52,207, % Other Assets and Liabilities Other Assets Investment in Vanguard 2,828 Receivables for Investment Securities Sold 48,017 Receivables for Accrued Income 276,034 Receivables for Capital Shares Issued 327,829 Other Assets 3,280 Total Other Assets 657, % Liabilities Payables for Investment Securities Purchased (1,206,576) Payables for Capital Shares Redeemed (42,478) Payables for Distributions (4,188) Payables to Vanguard (17,645) Other Liabilities (1,717) Total Liabilities (1,272,604) (2.5%) Net Assets 51,592, % 18

21 Short-Term Bond Index Fund At, net assets consisted of: Paid-in Capital 52,099,776 Undistributed Net Investment Income 136 Accumulated Net Realized Losses (19,819) Unrealized Appreciation (Depreciation) (487,264) Net Assets 51,592,829 Investor Shares Net Assets Applicable to 148,818,940 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 1,544,680 Net Asset Per Share Investor Shares $10.38 ETF Shares Net Assets Applicable to 302,212,541 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 23,902,378 Net Asset Per Share ETF Shares $79.09 Admiral Shares Net Assets Applicable to 1,544,767,544 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 16,034,033 Net Asset Per Share Admiral Shares $10.38 Institutional Shares Net Assets Applicable to 484,938,644 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 5,033,405 Net Asset Per Share Institutional Shares $10.38 Institutional Plus Shares Net Assets Applicable to 489,257,840 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 5,078,333 Net Asset Per Share Institutional Plus Shares $10.38 See Note A in Notes to Financial Statements. 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 issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. 2 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. 3 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. 4 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 $318,092,000, representing 0.6% of net assets. 5 Guaranteed by the Federal Republic of Germany. 6 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Short-Term Bond Index Fund Statement of Operations Year Ended Investment Income Income Interest 1 848,317 Total Income 848,317 Expenses The Vanguard Group Note B Investment Advisory Services 1,564 Management and Administrative Investor Shares 2,046 Management and Administrative ETF Shares 12,074 Management and Administrative Admiral Shares 8,094 Management and Administrative Institutional Shares 2,106 Management and Administrative Institutional Plus Shares 1,548 ing and Distribution Investor Shares 356 ing and Distribution ETF Shares 1,188 ing and Distribution Admiral Shares 1,358 ing and Distribution Institutional Shares 155 ing and Distribution Institutional Plus Shares 60 Custodian Fees 232 Auditing Fees 50 Shareholders Reports and Proxy Investor Shares 134 Shareholders Reports and Proxy ETF Shares 1,562 Shareholders Reports and Proxy Admiral Shares 1,015 Shareholders Reports and Proxy Institutional Shares 51 Shareholders Reports and Proxy Institutional Plus Shares 66 Trustees Fees and Expenses 39 Total Expenses 33,698 Net Investment Income 814,619 Realized Net Gain (Loss) Investment Securities Sold 1 (15,252) Futures Contracts (109) Realized Net Gain (Loss) (15,361) Change in Unrealized Appreciation (Depreciation) Investment Securities 1 (231,853) Futures Contracts 72 Change in Unrealized Appreciation (Depreciation) (231,781) Net Increase (Decrease) in Net Assets Resulting from Operations 567,477 1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $2,066,000, ($8,000), and $6,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Short-Term Bond Index Fund Statement of Changes in Net Assets Year Ended December 31, Increase (Decrease) in Net Assets Operations Net Investment Income 814, ,870 Realized Net Gain (Loss) (15,361) 30,697 Change in Unrealized Appreciation (Depreciation) (231,781) (90,945) Net Increase (Decrease) in Net Assets Resulting from Operations 567, ,622 Distributions Net Investment Income Investor Shares (27,151) (31,484) ETF Shares (365,424) (273,260) Admiral Shares (260,776) (223,480) Institutional Shares (83,522) (71,972) Institutional Plus Shares (77,791) (57,728) Realized Capital Gain 1 Investor Shares (52) (350) ETF Shares (622) (3,210) Admiral Shares (450) (2,498) Institutional Shares (141) (808) Institutional Plus Shares (126) (660) Total Distributions (816,055) (665,450) Capital Share Transactions Investor Shares (314,174) (440,155) ETF Shares 4,443,947 2,206,833 Admiral Shares 776, ,272 Institutional Shares 93, ,961 Institutional Plus Shares 766, ,693 Net Increase (Decrease) from Capital Share Transactions 5,766,306 3,763,604 Total Increase (Decrease) 5,517,728 3,695,776 Net Assets Beginning of Period 46,075,101 42,379,325 End of Period 2 51,592,829 46,075,101 1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $3,541,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 2 Net Assets End of Period includes undistributed (overdistributed) net investment income of $136,000 and $133,000. See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Short-Term Bond Index Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.43 $10.43 $10.48 $10.49 $10.63 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.050).002 (.040).005 (.109) Total from Investment Operations Distributions Dividends from Net Investment Income (.164) (.146) (.130) (.116) (.116) Distributions from Realized Capital Gains (.000) 2 (.002) (.010) (.015) (.031) Total Distributions (.164) (.148) (.140) (.131) (.147) Net Asset, End of Period $10.38 $10.43 $10.43 $10.48 $10.49 Total Return % 1.41% 0.85% 1.16% 0.07% Ratios/Supplemental Data Net Assets, End of Period (Millions) $1,545 $1,865 $2,307 $2,667 $3,003 Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.16% 0.20% 0.20% Ratio of Net Investment Income to Average Net Assets 1.57% 1.38% 1.23% 1.10% 1.09% Portfolio Turnover Rate 4 50% 51% 52% 45% 50% 1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share. 3 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. 4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Short-Term Bond Index Fund Financial Highlights ETF Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $79.44 $79.49 $79.87 $79.89 $80.94 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.362) (.037) (.303).094 (.813) Total from Investment Operations Distributions Dividends from Net Investment Income (1.300) (1.172) (1.039) (.959) (.950) Distributions from Realized Capital Gains (.002) (.013) (.077) (.114) (.237) Total Distributions (1.302) (1.185) (1.116) (1.073) (1.187) Net Asset, End of Period $79.09 $79.44 $79.49 $79.87 $79.89 Total Return 1.20% 1.42% 0.92% 1.32% 0.17% Ratios/Supplemental Data Net Assets, End of Period (Millions) $23,902 $19,576 $17,402 $15,655 $13,926 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.09% 0.10% 0.10% Ratio of Net Investment Income to Average Net Assets 1.65% 1.46% 1.30% 1.20% 1.19% Portfolio Turnover Rate 2 50% 51% 52% 45% 50% 1 Calculated based on average shares outstanding. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 23

26 Short-Term Bond Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.43 $10.43 $10.48 $10.49 $10.63 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.050).002 (.040).005 (.109) Total from Investment Operations Distributions Dividends from Net Investment Income (.172) (.154) (.137) (.126) (.127) Distributions from Realized Capital Gains (.000) 2 (.002) (.010) (.015) (.031) Total Distributions (.172) (.156) (.147) (.141) (.158) Net Asset, End of Period $10.38 $10.43 $10.43 $10.48 $10.49 Total Return % 1.49% 0.92% 1.26% 0.17% Ratios/Supplemental Data Net Assets, End of Period (Millions) $16,034 $15,335 $14,662 $13,212 $5,035 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.09% 0.10% 0.10% Ratio of Net Investment Income to Average Net Assets 1.65% 1.46% 1.30% 1.20% 1.19% Portfolio Turnover Rate 4 50% 51% 52% 45% 50% 1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share. 3 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. 4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 24

27 Short-Term Bond Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.43 $10.43 $10.48 $10.49 $10.63 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.050).002 (.040).005 (.109) Total from Investment Operations Distributions Dividends from Net Investment Income (.174) (.156) (.140) (.130) (.130) Distributions from Realized Capital Gains (.000) 2 (.002) (.010) (.015) (.031) Total Distributions (.174) (.158) (.150) (.145) (.161) Net Asset, End of Period $10.38 $10.43 $10.43 $10.48 $10.49 Total Return 1.20% 1.51% 0.95% 1.29% 0.20% Ratios/Supplemental Data Net Assets, End of Period (Millions) $5,033 $4,963 $4,506 $4,505 $3,282 Ratio of Total Expenses to Average Net Assets 0.05% 0.05% 0.06% 0.07% 0.07% Ratio of Net Investment Income to Average Net Assets 1.67% 1.48% 1.33% 1.23% 1.22% Portfolio Turnover Rate 3 50% 51% 52% 45% 50% 1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 25

28 Short-Term Bond Index Fund Financial Highlights Institutional Plus Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.43 $10.43 $10.48 $10.49 $10.63 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.050).002 (.040).005 (.109) Total from Investment Operations Distributions Dividends from Net Investment Income (.175) (.158) (.142) (.132) (.132) Distributions from Realized Capital Gains (.000) 2 (.002) (.010) (.015) (.031) Total Distributions (.175) (.160) (.152) (.147) (.163) Net Asset, End of Period $10.38 $10.43 $10.43 $10.48 $10.49 Total Return 1.21% 1.52% 0.97% 1.31% 0.22% Ratios/Supplemental Data Net Assets, End of Period (Millions) $5,078 $4,336 $3,502 $2,515 $1,868 Ratio of Total Expenses to Average Net Assets 0.04% 0.04% 0.04% 0.05% 0.05% Ratio of Net Investment Income to Average Net Assets 1.68% 1.49% 1.35% 1.25% 1.24% Portfolio Turnover Rate 3 50% 51% 52% 45% 50% 1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 26

29 Short-Term Bond Index Fund Notes to Financial Statements Vanguard Short-Term Bond 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 five classes of shares: Investor Shares, ETF Shares, Admiral Shares, Institutional Shares, and Institutional Plus Shares. Investor Shares are available to any investor who meets the fund s minimum purchase requirements. ETF Shares are listed for trading on Nasdaq; they can be purchased and sold through a broker. Admiral Shares, Institutional Shares, and Institutional Plus Shares are designed for investors who meet certain administrative, service, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. 1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Bonds and temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. 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 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 futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds 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). 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. The fund had no open futures contracts at. 27

30 Short-Term Bond Index Fund 3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its 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. 4. Distributions: Distributions from net investment income are declared daily by all share classes except ETF Shares, and paid on the first business day of the following month. Monthly income dividends from ETF Shares, and annual distributions from realized capital gains, if any, are recorded on the ex-dividend date. 5. 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. 6. Other: 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. 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. Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At, the fund had contributed to Vanguard capital in the amount of $2,828,000, representing 0.01% of the fund s net assets and 1.13% of Vanguard s capitalization. The fund s trustees and officers are also directors and employees, respectively, of Vanguard. 28