Vanguard Inflation-Protected Securities Fund

Transcription

1 Annual Report December 31, 2017 Vanguard Inflation-Protected Securities 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 Advisor s Report Results of Proxy Voting Fund Profile Performance Summary Financial Statements 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 December 31, 2017, Vanguard Inflation-Protected Securities Fund returned 2.81% for Investor Shares, 2.91% for Admiral Shares, and 2.97% for Institutional Shares. Those returns were in line with the return of the fund s benchmark, the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index, and ahead of the average return of peer-group funds. Short-term rates rose in reaction to the Federal Reserve s three interest rate hikes during the year. But yields fell and prices rose for longer-term bonds, reflecting uncertainty over the direction of inflation and the current administration s legislative agenda. Treasuries underperformed investment-grade corporate bonds. Yields of Treasury inflation-protected securities (TIPS) were higher on the short end of the maturity spectrum but decreased on the longer end. A measure of expected inflation over the next five years based on the gap between nominal Treasury and TIPS yields increased slightly, to 1.83% from 1.80%. Total Returns: Fiscal Year Ended December 31, Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Inflation-Protected Securities Fund Investor Shares 0.26% 2.35% 0.46% 2.81% Admiral Shares Institutional Shares Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index 3.01 Inflation-Protected Bond Funds Average 2.44 Inflation-Protected Bond 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. Total Returns: Ten Years Ended December 31, 2017 Average Annual Return Inflation-Protected Securities Fund Investor Shares 3.26% Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index 3.53 Inflation-Protected Bond Funds Average 2.67 Inflation-Protected Bond 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. 1

4 Expense Ratios Your Fund Compared With Its Peer Group Investor Shares Admiral Shares Institutional Shares Peer Group Average Inflation-Protected Securities Fund 0.20% 0.10% 0.07% 0.74% 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 December 31, 2017, the fund s expense ratios were 0.20% for Investor Shares, 0.10% for Admiral Shares, and 0.07% 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: Inflation-Protected Bond 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 December 31, 2017, 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. Market Barometer Average Annual Total Returns Periods Ended December 31, 2017 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 Advisor s Report For the 12 months ended December 31, 2017, Vanguard Inflation-Protected Securities Fund returned 2.81% for Investor Shares, 2.91% for Admiral Shares, and 2.97% for Institutional Shares. Those returns were in line with the return of the fund s benchmark, the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index, and ahead of the average return of peer-group funds. Investment environment A surge of optimism that followed the November 2016 U.S. presidential election spilled over into the beginning of the year, as investors grew enthusiastic about a new policy agenda focused on tax reform, infrastructure spending, and greater deregulation all designed to spark economic growth. While political gridlock initially cooled some of that optimism, stocks continued to rise throughout the period, with many market indexes hitting record highs as companies posted strong profits and initiatives such as tax reform were passed by Congress. The Federal Reserve was also enthusiastic about the health of the U.S. economy. It raised rates three times during the year, pushing its target range for the federal funds rate to 1.25% 1.5%. It also began to reduce its $4.5 trillion balance sheet. All were signals that the central bank was intent on normalizing monetary policy. The Fed s decisions were likely buoyed by decent economic readings. The U.S. economy shrugged off weather-related events to grow at a 3% pace in the third quarter. (Fourth-quarter results were not available at the time of this writing.) That performance was spurred by increases in consumer spending, investments in Yields of U.S. Treasury Inflation-Protected Securities (Real Yields) December 31, June 30, December 31, Maturity Years -0.54% -0.25% 0.19% 3 Years Years Years Years Years Years Source: Vanguard. 7

10 inventory, and exports. The unemployment rate continued to grind lower, dropping to 4.1% in December after starting the year at 4.8%. But wage growth remained elusive, with workers, on average, making as much at the end of the period as when it started. Inflation confounded market watchers. As the year began, annual changes in the consumer price index (CPI) approached or exceeded the Fed s 2% target, but inflation readings moderated throughout the spring and early summer. Another measure that is watched closely by the Fed, the core personal consumption expenditures (PCE) index, also moderated in the middle of the year and remained below the CPI and the Fed s target inflation level. While it wasn t clear what was behind the readings sluggish commodity prices may have been a culprit some market watchers believed the Fed had gotten ahead of itself with interest rate hikes, leading to a sell-off in parts of the bond market. However, Janet Yellen, the Fed chairwoman at the time, described the effect as transitory, which seemed to be proven out as inflation inched back up while the year drew to a close. Management of the portfolio The U.S. Treasury uses the non-seasonally adjusted CPI for urban consumers (CPI-U NSA) to govern the inflation adjustments made for Treasury inflation-protected securities (TIPS). In general, this measure rose for most of the period. It increased the most in January (+0.6%) and September (+0.5%) and decreased slightly in July, October, and December. The short end of the TIPS yield curve, which is sensitive to interest rates, increased amid the Fed s three rate hikes (and investors expected more increases in 2018). Short-term yields turned positive for the first time in years. The 1-year TIPS real yield ended the period at 0.15%, up from 0.69% a year earlier, and the 3-year TIPS real yield finished at 0.21%, up from 0.35% 12 months earlier. Long-term TIPS yields decreased, reversing a trend that began toward the end of the previous year, when investors flocked to riskier assets as they grew optimistic about the new administration s policy agenda. The decrease was likely the result of uncertainty over the direction of inflation and an acknowledgement that the legislative agenda and regulatory rollback would bolster growth in the near term. The 30-year TIPS real yield ended the period at 0.83%, down from 1.06% at the beginning of the period. The 10-year TIPS real yield ended the period at 0.60%, down from 0.62% one year earlier. In the Treasury market, yields followed a similar trajectory. The 1-year and 3-year yields ended the period at 1.74% and 1.97%, respectively, up from 0.81% and 1.45% at the beginning of the year. 8

11 Meanwhile, long-term Treasury yields decreased. The 30-year and the 10-year nominal yields ended the period at 2.74% and 2.41% respectively, down from 3.07% and 2.45% one year earlier. The break-even inflation (BEI) rate, which is the difference between nominal Treasury yields and TIPS yields, changed only modestly during the year. For example, the 2-year BEI declined to 1.69% from 1.73%, the 5-year BEI increased to 1.83% from 1.80%, and the 10-year BEI dropped to 1.81% from 1.83%. Heading into the year, we maintained an overweight allocation to long-dated securities, reflecting our expectation that the Fed would maintain a very gradual pace of rate hikes. That positioning initially detracted from performance as inflation readings weakened and investors moved out of TIPS. We continued to see potential in these securities, however, given our view that inflation would move higher in the medium term. That conviction paid off as the year progressed and inflation moved higher amid stronger global growth and the narrowing of the gap between the actual output of the economy and its potential output. We unwound our break-even inflation trade as we anticipated inflation to moderate. We reallocated those assets across the curve and into tactical positions that adhere to our inflation outlook. In a year with 2%-plus inflation, we were successful at generating sufficient income from fund holdings through inflation adjustments triggered by monthly changes in the CPI-U NSA. This allowed us to make distributions during the period. Outlook In spite of long-term structural challenges posed by, among other things, the pace of productivity growth, demographic trends, and the impact of new technologies, the U.S. economy should break above its long-term potential growth rate of about 2% in The unemployment rate has fallen to its lowest level since 2000 and is likely to move even lower. A reemergence of upward pressure on wages, along with stable and broader global growth and some recovery in commodity prices, may lead to stronger inflation than currently anticipated by financial markets. Recent weakness in the U.S. dollar is also likely to bolster core inflation metrics, albeit moderately and over the course of the next year. However, our long-term outlook, which calls for tepid inflation, remains unchanged. That backdrop should justify the Fed in raising the federal funds rate to at least 2% by the end of It will probably want to stick to the framework and timetable it has laid out for reductions in its balance sheet, barring unexpected economic data or unintended consequences from tapering in the bond market. 9

12 Volatility could well pick up from the very low levels we ve been experiencing. The list of potential catalysts is long and varied. Risks include an inflation surprise driven by globally tight labor markets, trade negotiations, or geopolitical tensions. In addition, as 2018 unfolds, we anticipate a convergence of monetary policy, with central banks adopting a less accommodative stance some raising rates, some planning to raise rates, some reducing quantitative easing while overall bond purchases are reduced. This has the potential to have an impact on volatility and the term premium the difference between yields on long- and short-term bonds in the second half of the year. Gemma Wright-Casparius, Principal Vanguard Fixed Income Group January 22,

13 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 Inflation-Protected Securities Fund 779,640,127 37,703,625 46,610, ,922, % 11

14 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 Inflation-Protected Securities Fund 787,847,093 36,808,312 39,298, ,922, % Fund shareholders 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 Inflation-Protected Securities Fund 167,138,870 80,505, ,309, ,922, % 12

15 Inflation-Protected Securities Fund Fund Profile As of December 31, 2017 Share-Class Characteristics Financial Attributes Investor Shares Admiral Institutional Shares Shares Ticker Symbol VIPSX VAIPX VIPIX Expense Ratio % 0.10% 0.07% 30-Day SEC Yield % 0.36% 0.39% Bloomberg Barclays Fund Inflation Protected Securities Index Bloomberg Barclays US Aggregate Bond Index Number of Bonds ,706 Yield to Maturity (before expenses) 2.4% 2.3% 2.7% Average Coupon 0.8% 0.8% 3.1% Average Duration 7.9 years 7.7 years 6.0 years Average Effective Maturity 8.5 years 8.3 years 8.2 years Short-Term Reserves 1.0% Sector Diversification (% of portfolio) Treasury/Agency 100.0% 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 Inflation Protected Securities Index Bloomberg Barclays US Aggregate Bond Index R-Squared Beta These measures show the degree and timing of the fund s fluctuations compared with the indexes over 36 months. Distribution by Effective Maturity (% of portfolio) Under 1 Year 0.3% 1-3 Years Years Years Years Years 13.2 Distribution by Credit Quality (% of portfolio) U.S. Government 100.0% Credit-quality ratings are obtained from Moody's and S&P, and the higher rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. Not rated securities include a fund's investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality. Investment Focus Average Maturity Short Med. Long Credit Quality Treasury/ Agency Investment-Grade Corporate Below Investment-Grade 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 December 31, 2017, the expense ratios were 0.20% for Investor Shares, 0.10% for Admiral Shares, and 0.07% for Institutional Shares. 2 Yields of inflation-protected securities tend to be lower than those of nominal bonds, because the former do not incorporate market expectations about inflation. The principal amounts and thus the interest payments of inflation-protected securities are adjusted over time to reflect inflation. 13

16 Inflation-Protected Securities 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 December 31, 2017 Initial Investment of $10,000 $17,000 13, ,000 Average Annual Total Returns Periods Ended December 31, 2017 One Year Five Years Ten Years Final Value of a $10,000 Investment Inflation-Protected Securities Fund Investor Shares 2.81% -0.05% 3.26% $13,786 Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index ,144 Inflation-Protected Bond Funds Average ,013 Bloomberg Barclays U.S. Aggregate Bond Index ,811 Inflation-Protected Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. One Year Five Years Ten Years Final Value of a $50,000 Investment Inflation-Protected Securities Fund Admiral Shares 2.91% 0.06% 3.37% $69,650 Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index ,720 Bloomberg Barclays U.S. Aggregate Bond Index ,053 See Financial Highlights for dividend and capital gains information. 14

17 Inflation-Protected Securities Fund Average Annual Total Returns Periods Ended December 31, 2017 One Year Five Years Ten Years Final Value of a $5,000,000 Investment Inflation-Protected Securities Fund Institutional Shares 2.97% 0.10% 3.40% $6,987,407 Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index ,072,049 Bloomberg Barclays U.S. Aggregate Bond Index ,405,275 Fiscal-Year Total Returns (%): December 31, 2007, Through December 31, 2017 Bloomberg Barclays Inflation Protected Securities Investor Shares Index Fiscal Year Income Returns Capital Returns Total Returns Total Returns % -7.47% -2.85% -2.35%

18 Inflation-Protected Securities Fund Financial Statements Statement of Net Assets As of December 31, 2017 The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund s Forms N-Q on the SEC s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC s Public Reference Room (see the back cover of this report for further information). Face Market Maturity Amount Value Coupon Date ($000) ($000) U.S. Government and Agency Obligations (98.8%) U.S. Government Securities (98.8%) United States Treasury Inflation Indexed Bonds 2.125% 1/15/19 280, ,086 United States Treasury Inflation Indexed Bonds 0.125% 4/15/19 868, ,050 United States Treasury Inflation Indexed Bonds 1.875% 7/15/19 342, ,577 United States Treasury Inflation Indexed Bonds 1.375% 1/15/20 395, ,931 United States Treasury Inflation Indexed Bonds 0.125% 4/15/20 1,105,200 1,161,744 United States Treasury Inflation Indexed Bonds 1.250% 7/15/20 641, ,689 United States Treasury Inflation Indexed Bonds 1.125% 1/15/21 770, ,463 United States Treasury Inflation Indexed Bonds 0.125% 4/15/21 1,060,500 1,098,870 United States Treasury Inflation Indexed Bonds 0.625% 7/15/21 857, ,388 United States Treasury Inflation Indexed Bonds 0.125% 1/15/22 937,671 1,017,264 United States Treasury Inflation Indexed Bonds 0.125% 4/15/22 1,045,000 1,051,952 United States Treasury Inflation Indexed Bonds 0.125% 7/15/22 987,019 1,056,876 United States Treasury Inflation Indexed Bonds 0.125% 1/15/23 1,125,330 1,192,977 United States Treasury Inflation Indexed Bonds 0.375% 7/15/23 1,030,936 1,100,228 United States Treasury Inflation Indexed Bonds 0.625% 1/15/24 991,256 1,065,742 United States Treasury Inflation Indexed Bonds 0.125% 7/15/24 988,771 1,014,152 United States Treasury Inflation Indexed Bonds 0.250% 1/15/25 1,000,300 1,031,951 United States Treasury Inflation Indexed Bonds 2.375% 1/15/25 521, ,226 United States Treasury Inflation Indexed Bonds 0.375% 7/15/25 1,001,844 1,043,038 United States Treasury Inflation Indexed Bonds 0.625% 1/15/26 887, ,581 United States Treasury Inflation Indexed Bonds 2.000% 1/15/26 399, ,328 United States Treasury Inflation Indexed Bonds 0.125% 7/15/26 853, ,502 United States Treasury Inflation Indexed Bonds 0.375% 1/15/27 855, ,692 United States Treasury Inflation Indexed Bonds 2.375% 1/15/27 314, ,945 United States Treasury Inflation Indexed Bonds 0.375% 7/15/27 290, ,687 United States Treasury Inflation Indexed Bonds 1.750% 1/15/28 340, ,627 United States Treasury Inflation Indexed Bonds 3.625% 4/15/28 222, ,197 United States Treasury Inflation Indexed Bonds 2.500% 1/15/29 342, ,582 1 United States Treasury Inflation Indexed Bonds 3.875% 4/15/29 275, ,757 United States Treasury Inflation Indexed Bonds 3.375% 4/15/32 112, ,253 United States Treasury Inflation Indexed Bonds 2.125% 2/15/40 94, ,489 United States Treasury Inflation Indexed Bonds 2.125% 2/15/41 240, ,127 United States Treasury Inflation Indexed Bonds 0.750% 2/15/42 442, ,274 United States Treasury Inflation Indexed Bonds 0.625% 2/15/43 324, ,198 United States Treasury Inflation Indexed Bonds 1.375% 2/15/44 502, ,307 United States Treasury Inflation Indexed Bonds 0.750% 2/15/45 675, ,453 16

19 Inflation-Protected Securities Fund Face Market Maturity Amount Value Coupon Date ($000) ($000) United States Treasury Inflation Indexed Bonds 1.000% 2/15/46 435, ,563 United States Treasury Inflation Indexed Bonds 0.875% 2/15/47 554, ,253 United States Treasury Note/Bond 0.750% 9/30/18 100,000 99,281 Total U.S. Government and Agency Obligations (Cost $26,429,024) 27,245,300 Shares Temporary Cash Investment (1.0%) Money Market Fund (1.0%) 2 Vanguard Market Liquidity Fund (Cost $265,190) 1.458% 2,651, ,203 Total Investments (99.8%) (Cost $26,694,214) 27,510,503 Notional Expiration Exercise Amount Value Date Contracts Price ($000) ($000) Liability for Written Options on Futures (0.0%) Call Options on 10-year U.S. Treasury Note Futures Contracts 1/26/ USD ,436 (9) Put Options on 10-year U.S. Treasury Note Futures Contracts 1/26/ USD ,064 (79) Put Options on 10-year U.S. Treasury Note Futures Contracts 2/23/18 1,858 USD ,605 (348) Put Options on 10-year U.S. Treasury Note Futures Contracts 2/23/ USD ,730 (58) Total Liability for Written Options on Futures (Premiums Received $730) (494) Amount ($000) Other Assets and Liabilities (0.2%) Other Assets Investment in Vanguard 1,515 Receivables for Accrued Income 83,266 Receivables for Capital Shares Issued 47,705 Variation Margin Receivable Futures Contracts 2,568 Other Assets 255 Total Other Assets 135,309 Other Liabilities Payables for Investment Securities Purchased (620) Payables for Capital Shares Redeemed (52,668) Payables to Vanguard (26,877) Variation Margin Payable Futures Contracts (1,670) Total Other Liabilities (81,835) Net Assets (100%) 27,563,483 17

20 Inflation-Protected Securities Fund At December 31, 2017, net assets consisted of: Amount ($000) Paid-in Capital 26,798,613 Overdistributed Net Investment Income (15,945) Accumulated Net Realized Losses (31,270) Unrealized Appreciation (Depreciation) Investment Securities 816,289 Futures Contracts (4,440) Options on Futures Contracts 236 Net Assets 27,563,483 Investor Shares Net Assets Applicable to 317,338,753 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 4,138,860 Net Asset Value Per Share Investor Shares $13.04 Admiral Shares Net Assets Applicable to 543,631,935 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 13,916,663 Net Asset Value Per Share Admiral Shares $25.60 Institutional Shares Net Assets Applicable to 911,823,309 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 9,507,960 Net Asset Value Per Share Institutional Shares $10.43 See Note A in Notes to Financial Statements. 1 Securities with a value of $4,754,000 have been segregated as initial margin for open futures contracts. 2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. 18

21 Inflation-Protected Securities Fund Derivative Financial Instruments Outstanding as of Period End Futures Contracts ($000) Value and Number of Unrealized Long (Short) Notional Appreciation Expiration Contracts Amount (Depreciation) Long Futures Contracts 2-Year U.S. Treasury Note March ,479 1,387,215 (1,565) 10-Year U.S. Treasury Note March , ,092 (441) Ultra 10-Year U.S. Treasury Note March , ,129 (391) (2,397) Short Futures Contracts Ultra Long U.S. Treasury Bond March 2018 (2,505) (419,979) (1,858) 5-Year U.S. Treasury Note March 2018 (1,678) (194,923) (185) (2,043) (4,440) 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. 19

22 Inflation-Protected Securities Fund Statement of Operations Year Ended December 31, 2017 ($000) Investment Income Income Interest 1 694,838 Total Income 694,838 Expenses The Vanguard Group Note B Investment Advisory Services 3,413 Management and Administrative Investor Shares 7,013 Management and Administrative Admiral Shares 9,950 Management and Administrative Institutional Shares 4,651 Marketing and Distribution Investor Shares 717 Marketing and Distribution Admiral Shares 1,161 Marketing and Distribution Institutional Shares 245 Custodian Fees 131 Auditing Fees 41 Shareholders Reports and Proxy Investor Shares 444 Shareholders Reports and Proxy Admiral Shares 564 Shareholders Reports and Proxy Institutional Shares 260 Trustees Fees and Expenses 23 Total Expenses 28,613 Net Investment Income 666,225 Realized Net Gain (Loss) Investment Securities Sold 1 (2,730) Futures Contracts (31,666) Purchased Options on Futures Contracts (2,348) Written Options on Futures Contracts 9,361 Realized Net Gain (Loss) (27,383) Change in Unrealized Appreciation (Depreciation) Investment Securities 1 127,776 Futures Contracts (5,341) Written Options on Futures Contracts (957) Change in Unrealized Appreciation (Depreciation) 121,478 Net Increase (Decrease) in Net Assets Resulting from Operations 760,320 1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $2,861,000, $14,000, and $11,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Inflation-Protected Securities Fund Statement of Changes in Net Assets Year Ended December 31, ($000) ($000) Increase (Decrease) in Net Assets Operations Net Investment Income 666, ,306 Realized Net Gain (Loss) (27,383) 56,121 Change in Unrealized Appreciation (Depreciation) 121, ,975 Net Increase (Decrease) in Net Assets Resulting from Operations 760,320 1,026,402 Distributions Net Investment Income Investor Shares (96,588) (89,680) Admiral Shares (329,839) (251,324) Institutional Shares (227,183) (176,121) Realized Capital Gain 1 Investor Shares (5,713) Admiral Shares (16,005) Institutional Shares (11,234) Return of Capital Investor Shares (52,119) Admiral Shares (146,011) Institutional Shares (102,484) Total Distributions (653,610) (850,691) Capital Share Transactions Investor Shares (380,258) (315,211) Admiral Shares 1,662,662 1,609,525 Institutional Shares 836,653 1,117,521 Net Increase (Decrease) from Capital Share Transactions 2,119,057 2,411,835 Total Increase (Decrease) 2,225,767 2,587,546 Net Assets Beginning of Period 25,337,716 22,750,170 End of Period 2 27,563,483 25,337,716 1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $0, 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 ($15,945,000) and ($38,465,000). See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Inflation-Protected Securities Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $12.98 $12.84 $13.18 $12.98 $14.53 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.339).273 (1.499) Total from Investment Operations (.241).497 (1.289) Distributions Dividends from Net Investment Income (.303) (.266) (.098) (.281) (.216) Distributions from Realized Capital Gains (.017) (.001) (.016) (.045) Return of Capital (.155) Total Distributions (.303) (.438) (.099) (.297) (.261) Net Asset Value, End of Period $13.04 $12.98 $12.84 $13.18 $12.98 Total Return % 4.52% -1.83% 3.83% -8.92% Ratios/Supplemental Data Net Assets, End of Period (Millions) $4,139 $4,496 $4,746 $5,604 $6,577 Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% Ratio of Net Investment Income to Average Net Assets 2.38% 1.99% 0.72% 2.01% 1.33% Portfolio Turnover Rate 3 22% 27% 43% 39% 44% 1 Calculated based on average shares outstanding. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares. See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Inflation-Protected Securities Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $25.48 $25.21 $25.87 $25.47 $28.54 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.658).544 (2.965) Total from Investment Operations (.437) (2.516) Distributions Dividends from Net Investment Income (.617) (.541) (.220) (.581) (.465) Distributions from Realized Capital Gains (.034) (.003) (.031) (.089) Return of Capital (.314) Total Distributions (.617) (.889) (.223) (.612) (.554) Net Asset Value, End of Period $25.60 $25.48 $25.21 $25.87 $25.47 Total Return % 4.62% -1.69% 3.97% -8.86% Ratios/Supplemental Data Net Assets, End of Period (Millions) $13,917 $12,205 $10,533 $10,778 $11,005 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.10% 0.10% 0.10% Ratio of Net Investment Income to Average Net Assets 2.48% 2.09% 0.82% 2.11% 1.43% Portfolio Turnover Rate 3 22% 27% 43% 39% 44% 1 Calculated based on average shares outstanding. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares. See accompanying Notes, which are an integral part of the Financial Statements. 23

26 Inflation-Protected Securities Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $10.38 $10.27 $10.54 $10.37 $11.62 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.269).229 (1.208) Total from Investment Operations (.176).422 (1.021) Distributions Dividends from Net Investment Income (.256) (.221) (.093) (.239) (.193) Distributions from Realized Capital Gains (.014) (.001) (.013) (.036) Return of Capital (.129) Total Distributions (.256) (.364) (.094) (.252) (.229) Net Asset Value, End of Period $10.43 $10.38 $10.27 $10.54 $10.37 Total Return 2.97% 4.63% -1.67% 4.07% -8.83% Ratios/Supplemental Data Net Assets, End of Period (Millions) $9,508 $8,637 $7,471 $8,449 $8,919 Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 0.07% 0.07% 0.07% Ratio of Net Investment Income to Average Net Assets 2.51% 2.12% 0.85% 2.14% 1.46% Portfolio Turnover Rate 2 22% 27% 43% 39% 44% 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. See accompanying Notes, which are an integral part of the Financial Statements. 24

27 Inflation-Protected Securities Fund Notes to Financial Statements Vanguard Inflation-Protected Securities Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers three classes of shares: 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. Bonds and temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Investments in Vanguard Market Liquidity Fund are valued at that fund s net asset value. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund s pricing time but after the close of the securities primary markets, are valued by methods deemed by the board of trustees to represent fair value. 2. Futures and Options: The fund uses futures contracts and options on 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. The primary risk associated with purchasing options is that interest rates move in such a way that the option is out-of-the-money, the position is worthless at expiration, and the fund loses the premium paid. The primary risk associated with writing options is that interest rates move in such a way that the option is in-the-money, the counterparty exercises the option, and the fund loses an amount equal to the market value of the option written less the premium received. Counterparty risk involving futures and exchange-traded options is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures and options 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 December 31, 2017, the fund s average investments in long and short futures contracts represented 8% and 4% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. 25

28 Inflation-Protected Securities Fund Options on futures contrats are also valued at their quoted daily settlement price. The premium paid for a purchased option is recorded in the Statement of Net Assets as an asset that is subsequently adjusted daily to the current market value of the option purchased. The premium received for a written option is recorded in the Statement of Net Assets as an asset with an equal liability that is subsequently adjusted daily to the current market value of the option written. Fluctuations in the value of the options are recorded in the Statement of Operations as unrealized appreciation (depreciation) until expired, closed, or exercised, at which time realized gains (losses) are recognized. During the year ended December 31, 2017, the fund s average value of investments in options purchased and options written each represented less than 1% of net assets, based on the average market values at each quarter-end during the period. 3. 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. 4. Distributions: Distributions to shareholders 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 December 31, 2017, or at any time during the period then ended. 6. Other: Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Inflation adjustments to the face amount of inflation-indexed securities are included in interest income. 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. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets. 26