Vanguard U.S. Stock Index Funds Small-Capitalization Portfolios

Transcription

1 Annual Report December 31, 2017 Vanguard U.S. Stock Index Funds Small-Capitalization Portfolios Vanguard Small-Cap Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Value 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 Small-Cap Index Fund Small-Cap Growth Index Fund Small-Cap Value Index Fund Your Fund s After-Tax Returns About Your Fund s Expenses Glossary Please note: The opinions expressed in this report are just that informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus. See the Glossary for definitions of investment terms used in this report. About the cover: Nautical images have been part of Vanguard s rich heritage since its start in For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first and light the way as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.

3 Your Fund s Performance at a Glance For the 12 months ended December 31, 2017, returns for Vanguard s three smallcapitalization U.S. index funds ranged from almost 12% for Vanguard Small-Cap Value Index Fund to nearly 22% for Vanguard Small-Cap Growth Index Fund. Vanguard Small-Cap Index Fund, which contains both growth and value stocks, returned about 16%. All three funds closely tracked their target indexes. The Small-Cap Index Fund and Small-Cap Value Index Fund surpassed the average return of their peers; the Small- Cap Growth Index Fund lagged the average return of its peers. Small-cap stocks trailed their large-cap counterparts, while growth stocks outperformed value stocks. The industrial, technology, and health care sectors contributed strongly to all three funds. Returns in telecommunications and oil and gas were negative for all three funds. Over the ten years ended December 31, 2017, all three funds closely tracked their target indexes and exceeded the average return of their peers. Total Returns: Fiscal Year Ended December 31, 2017 Total Returns Vanguard Small-Cap Index Fund Investor Shares 16.10% ETF Shares Market Price Net Asset Value Admiral Shares Institutional Shares Institutional Plus Shares CRSP US Small Cap Index Small-Cap Core Funds Average Small-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 1

4 Total Returns Vanguard Small-Cap Growth Index Fund Investor Shares 21.78% ETF Shares Market Price Net Asset Value Admiral Shares Institutional Shares CRSP US Small Cap Growth Index Small-Cap Growth Funds Average Small-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Vanguard Small-Cap Value Index Fund Investor Shares 11.67% ETF Shares Market Price Net Asset Value Admiral Shares Institutional Shares CRSP US Small Cap Value Index Small-Cap Value Funds Average 8.73 Small-Cap Value 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 December 31, 2017 Average Annual Return Small-Cap Index Fund Investor Shares 9.54% Spliced Small-Cap Index 9.61 Small-Cap Core Funds Average 7.74 For a benchmark description, see the Glossary. Small-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 2

5 Average Annual Return Small-Cap Growth Index Fund Investor Shares 9.23% Spliced Small-Cap Growth Index 9.26 Small-Cap Growth Funds Average 7.62 For a benchmark description, see the Glossary. Small-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. Small-Cap Value Index Fund Investor Shares 9.63% Spliced Small-Cap Value Index 9.76 Small-Cap Value Funds Average 8.16 For a benchmark description, see the Glossary. Small-Cap Value 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 Small-Cap Index Fund 0.18% 0.06% 0.06% 0.05% 0.04% 1.24% Small-Cap Growth Index Fund Small-Cap Value Index Fund The fund expense ratios shown are from the prospectus dated April 27, 2017, and represent estimated costs for the current fiscal year. For the fiscal year ended December 31, 2017, the funds expense ratios were: for the Small-Cap Index Fund, 0.17% for Investor Shares, 0.05% for ETF Shares, 0.05% for Admiral Shares, 0.04% for Institutional Shares, and 0.03% for Institutional Plus Shares; for the Small-Cap Growth Index Fund, 0.19% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.06% for Institutional Shares; and for the Small-Cap Value Index Fund, 0.19% for Investor Shares, 0.07% for ETF Shares, 0.07% for Admiral Shares, and 0.06% for Institutional Shares. The 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 Small-Cap Index Fund, Small-Cap Core Funds; for the Small-Cap Growth Index Fund, Small-Cap Growth Funds; and for the Small-Cap Value Index Fund, Small-Cap Value 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 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. 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. 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,

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 10,555,505, ,858, % Emerson U. Fullwood 10,550,271, ,092, % Amy Gutmann 10,549,661, ,702, % JoAnn Heffernan Heisen 10,561,362, ,001, % F. Joseph Loughrey 10,550,135, ,228, % Mark Loughridge 10,554,054, ,309, % Scott C. Malpass 10,546,031, ,332, % F. William McNabb III 10,544,013, ,350, % Deanna Mulligan 10,560,536, ,827, % André F. Perold 10,509,222, ,140, % Sarah Bloom Raskin 10,554,241, ,122, % Peter F. Volanakis 10,551,315, ,048, % * 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 Small-Cap Growth Index Fund 164,362,787 6,606,954 7,038,309 34,408, % Small-Cap Index Fund 448,437,808 18,207,513 16,637,019 89,582, % Small-Cap Value Index Fund 233,854,697 10,530,844 9,934,901 52,619, % 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 Small-Cap Growth Index Fund 165,816,644 6,376,930 5,814,476 34,408, % Small-Cap Index Fund 452,039,550 17,524,391 13,718,398 89,582, % Small-Cap Value Index Fund 236,499,857 9,568,247 8,252,338 52,619, % 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 Small-Cap Growth Index Fund 33,984,457 15,140, ,883,353 34,408, % Small-Cap Index Fund 82,614,878 31,345, ,322,272 89,582, % Small-Cap Value Index Fund 46,455,628 19,247, ,617,707 52,619, % 9

12 Small-Cap Index Fund Fund Profile As of December 31, 2017 Share-Class Characteristics Investor Shares ETF Shares Admiral Shares Institutional Shares Institutional Plus Shares Ticker Symbol NAESX VB VSMAX VSCIX VSCPX Expense Ratio % 0.06% 0.06% 0.05% 0.04% 30-Day SEC Yield 1.29% 1.40% 1.40% 1.41% 1.42% Portfolio Characteristics DJ U.S. Fund CRSP US Small Cap Index Total Market FA Index Number of Stocks 1,429 1,402 3,775 Median Market Cap $4.1B $4.1B $66.8B Price/Earnings Ratio 21.4x 21.3x 22.8x Price/Book Ratio 2.4x 2.4x 3.0x Return on Equity 9.0% 9.1% 15.1% Earnings Growth Rate 11.4% 11.3% 9.9% Dividend Yield 1.4% 1.4% 1.7% Foreign Holdings 0.0% 0.0% 0.0% Turnover Rate 15% Short-Term Reserves 0.1% Volatility Measures CRSP US Small Cap Index DJ U.S. Total Market FA Index R-Squared Beta These measures show the degree and timing of the fund s fluctuations compared with the indexes over 36 months. Ten Largest Holdings (% of total net assets) Diamondback Energy Inc. XPO Logistics Inc. Broadridge Financial Solutions Inc. Exploration & Production 0.3% Transportation Services 0.3 Financial Administration 0.3 CDW Corp. Computer Services 0.3 IDEX Corp. Industrial Machinery 0.3 Spirit AeroSystems Holdings Inc. Aerospace 0.3 Leidos Holdings Inc. Computer Services 0.3 Atmos Energy Corp. Gas Distribution 0.3 Steel Dynamics Inc. Iron & Steel 0.3 Nektar Therapeutics Biotechnology 0.3 Top Ten 3.0% The holdings listed exclude any temporary cash investments and equity index products. 1 The expense ratios shown are from the prospectus dated April 27, 2017, and represent estimated costs for the current fiscal year. For the fiscal year ended December 31, 2017, the expense ratios were 0.17% for Investor Shares, 0.05% for ETF Shares, 0.05% for Admiral Shares, 0.04% for Institutional Shares, and 0.03% for Institutional Plus Shares. 10

13 Small-Cap Index Fund Sector Diversification (% of equity exposure) DJ Fund CRSP US Small Cap Index U.S. Total Market FA Index Basic Materials 4.6% 4.6% 2.7% Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecommunications Utilities Sector categories are based on the Industry Classification Benchmark ( ICB ), except for the Other category (if applicable), which includes securities that have not been provided an ICB classification as of the effective reporting period. Investment Focus Style Value Blend Growth Market Cap Large Medium Small 11

14 Small-Cap 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 December 31, 2017 Initial Investment of $10,000 $30,000 24, ,000 Average Annual Total Returns Periods Ended December 31, 2017 One Year Five Years Ten Years Final Value of a $10,000 Investment Small-Cap Index Fund*Investor Shares 16.10% 14.30% 9.54% $24,874 Spliced Small-Cap Index ,036 Small-Cap Core Funds Average ,082 Dow Jones U.S. Total Stock Market Float Adjusted Index ,948 For a benchmark description, see the Glossary. Small-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. One Year Five Years Ten Years Final Value of a $10,000 Investment Small-Cap Index Fund ETF Shares Net Asset Value 16.24% 14.44% 9.68% $25,204 Spliced Small-Cap Index ,036 Dow Jones U.S. Total Stock Market Float Adjusted Index ,948 See Financial Highlights for dividend and capital gains information. 12

15 Small-Cap Index Fund Average Annual Total Returns Periods Ended December 31, 2017 One Year Five Years Ten Years Final Value of a $10,000 Investment Small-Cap Index Fund Admiral Shares 16.24% 14.44% 9.68% $25,202 Spliced Small-Cap Index ,036 Dow Jones U.S. Total Stock Market Float Adjusted Index ,948 One Year Five Years Ten Years Final Value of a $5,000,000 Investment Small-Cap Index Fund Institutional Shares 16.25% 14.45% 9.71% $12,632,604 Spliced Small-Cap Index ,517,772 Dow Jones U.S. Total Stock Market Float Adjusted Index ,473,897 One Year Five Years Since Inception (12/17/2010) Final Value of a $100,000,000 Investment Small-Cap Index Fund Institutional Plus Shares 16.27% 14.47% 12.44% $228,226,852 Spliced Small-Cap Index ,325,391 Dow Jones U.S. Total Stock Market Float Adjusted Index ,815,191 "Since Inception" performance is calculated from the Institutional Plus Shares inception date for both the fund and its comparative standards. Cumulative Returns of ETF Shares: December 31, 2007, Through December 31, 2017 One Year Five Years Ten Years Small-Cap Index Fund ETF Shares Market Price 16.24% 96.26% % Small-Cap Index Fund ETF Shares Net Asset Value Spliced Small-Cap Index

16 Small-Cap Index Fund Fiscal-Year Total Returns (%): December 31, 2007, Through December 31, Small-Cap Index Fund Investor Shares Spliced Small-Cap Index For a benchmark description, see the Glossary. 14

17 Small-Cap Index Fund Financial Statements Statement of Net Assets Investments Summary As of December 31, 2017 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). Market Percentage Value of Net Shares ($000) Assets Common Stocks Basic Materials Steel Dynamics Inc. 5,281, , % Chemours Co. 4,358, , % Basic Materials Other 3,459, % 3,905, % Consumer Goods Thor Industries Inc. 1,177, , % * Middleby Corp. 1,310, , % Toll Brothers Inc. 3,547, , % Consumer Goods Other 5,666, % 6,191, % Consumer Services * Copart Inc. 4,909, , % Vail Resorts Inc. 959, , % * Burlington Stores Inc. 1,600, , % * JetBlue Airways Corp. 7,545, , % Consumer Services Other 9,297, % 10,078, % Financials East West Bancorp Inc. 3,426, , % American Financial Group Inc. 1,685, , % WP Carey Inc. 2,556, , % Kilroy Realty Corp. 2,315, , % MarketAxess Holdings Inc. 837, , % Equity LifeStyle Properties Inc. 1,893, , % Financials Other 19,605, % 20,683, % 15

18 Small-Cap Index Fund Market Percentage Value of Net Shares ($000) Assets Health Care * Nektar Therapeutics Class A 3,706, , % * Exelixis Inc. 6,955, , % * WellCare Health Plans Inc. 1,049, , % * Bluebird Bio Inc. 1,170, , % * ABIOMED Inc. 986, , % STERIS plc 1,996, , % West Pharmaceutical Services Inc. 1,742, , % Health Care Other 7,275, % 8,659, % Industrials * XPO Logistics Inc. 2,825, , % Broadridge Financial Solutions Inc. 2,767, , % IDEX Corp. 1,810, , % Spirit AeroSystems Holdings Inc. Class A 2,724, , % Jack Henry & Associates Inc. 1,840, , % * TransUnion 3,889, , % AO Smith Corp. 3,436, , % Old Dominion Freight Line Inc. 1,563, , % Lennox International Inc. 937, , % PerkinElmer Inc. 2,602, , % * Berry Global Group Inc. 3,137, , % * Keysight Technologies Inc. 4,360, , % Orbital ATK Inc. 1,367, , % Graco Inc. 3,960, , % Allegion plc 2,244, , % Universal Display Corp. 995, , % Nordson Corp. 1,154, , % Industrials Other 13,989, % 17,450, % Oil & Gas * Diamondback Energy Inc. 2,312, , % Oil & Gas Other 3,869, % 4,161, % 1,2Other 8, % Technology CDW Corp. 3,607, , % Leidos Holdings Inc. 3,568, , % * IAC/InterActiveCorp 1,795, , % * ON Semiconductor Corp. 10,093, , % Teradyne Inc. 4,636, , % * CommScope Holding Co. Inc. 4,487, , % 2 Technology Other 8,113, % 9,389, % Telecommunications 311, % Utilities Atmos Energy Corp. 2,672, , % NRG Energy Inc. 7,065, , % 16

19 Small-Cap Index Fund Market Percentage Value of Net Shares ($000) Assets UGI Corp. 4,102, , % Westar Energy Inc. Class A 3,379, , % Utilities Other 2,369, % 3,171, % Total Common Stocks (Cost $61,771,703) 84,010, % 3 Coupon Temporary Cash Investments Money Market Fund 4,5 Vanguard Market Liquidity Fund 1.458% 14,810,476 1,481, % 6U.S. Government and Agency Obligations 32, % Total Temporary Cash Investments (Cost $1,513,368) 1,513, % 3 7Total Investments (Cost $63,285,071) 85,524, % Amount ($000) Other Assets and Liabilities Other Assets Investment in Vanguard 4,637 Receivables for Investment Securities Sold 26,153 Receivables for Accrued Income 137,681 Receivables for Capital Shares Issued 112,840 Unrealized Appreciation Swap Contracts 773 Other Assets 8 1,143 Total Other Assets 283, % Liabilities Payables for Investment Securities Purchased (102,544) Collateral for Securities on Loan (865,524) Payables for Capital Shares Redeemed (164,247) Payables to Vanguard (33,936) Variation Margin Payable Futures Contracts (4,222) Unrealized Depreciation Swap Contracts (1,134) Other Liabilities (1,060) Total Liabilities (1,172,667) (1.4%) Net Assets 84,634, % At December 31, 2017, net assets consisted of: Amount ($000) Paid-in Capital 64,226,722 Overdistributed Net Investment Income (17,215) Accumulated Net Realized Losses (1,816,202) Unrealized Appreciation (Depreciation) Investment Securities 22,239,207 Futures Contracts 2,687 Swap Contracts (361) Net Assets 84,634,838 17

20 Small-Cap Index Fund At December 31, 2017, net assets consisted of: Amount ($000) Investor Shares Net Assets Applicable to 61,409,882 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 4,345,458 Net Asset Value Per Share Investor Shares $70.76 ETF Shares Net Assets Applicable to 146,262,829 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 21,605,204 Net Asset Value Per Share ETF Shares $ Admiral Shares Net Assets Applicable to 477,526,565 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 33,800,914 Net Asset Value Per Share Admiral Shares $70.78 Institutional Shares Net Assets Applicable to 216,898,984 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 15,352,401 Net Asset Value Per Share Institutional Shares $70.78 Institutional Plus Shares Net Assets Applicable to 46,650,359 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 9,530,861 Net Asset Value Per Share Institutional Plus Shares $ See Note A in Notes to Financial Statements. * Non-income-producing security. Represents the aggregate value, by category, of securities that are not among the 50 largest holdings and, in total for any issuer, represent 1% or less of net assets. 1 Other represents securities that are not classified by the fund s benchmark index. 2 Certain of the fund s securities are valued using significant unobservable inputs. 3 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts and swap contracts. After giving effect to futures and swap investments, the fund s effective common stock and temporary cash investment positions represent 100.1% and 1.0%, respectively, of net assets. 4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. 5 Includes $865,524,000 of collateral received for securities on loan. 6 Securities with a value of $21,016,000 have been segregated as initial margin for open futures contracts. 7 The total value of securities on loan is $812,376, Cash with a value of $880,000 has been segregated as collateral for open over-the-counter swap contracts. 18

21 Small-Cap Index 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 E-mini S&P Mid-Cap 400 Index March , ,408 1,177 E-mini Russell 2000 Index March , ,894 1,510 2,687 Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes. Total Return Swaps Value and Floating Unrealized Notional Interest Rate Appreciation Termination Amount Received (Depreciation) Reference Entity Date Counterparty ($000) (Paid) 1 ($000) Ambac Financial Group Inc. 1/10/18 GSCM 8,356 (1.895%) 668 Gaming and Leisure Properties Inc. 3/21/18 GSI 17,461 (2.051%) 105 SLM Corp. 2/26/18 GSI 41,019 (1.964%) (1,134) GSCM Goldman Sachs Capital Management. GSI Goldman Sachs International. 1 Payment received/paid monthly. Unrealized appreciation (depreciation) on open swap contracts is required to be treated as ordinary income (loss) for tax purposes. At December 31, 2017, a counterparty had deposited in a segregated account cash of $570,000 in connection with open swap contracts. (361) See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Small-Cap Index Fund Statement of Operations Year Ended December 31, 2017 ($000) Investment Income Income Dividends 1,129,913 Interest 1 6,342 Securities Lending Net 40,717 Total Income 1,176,972 Expenses The Vanguard Group Note B Investment Advisory Services 4,514 Management and Administrative Investor Shares 6,114 Management and Administrative ETF Shares 2,524 Management and Administrative Admiral Shares 9,134 Management and Administrative Institutional Shares 3,659 Management and Administrative Institutional Plus Shares 1,500 Marketing and Distribution Investor Shares 728 Marketing and Distribution ETF Shares 999 Marketing and Distribution Admiral Shares 2,547 Marketing and Distribution Institutional Shares 353 Marketing and Distribution Institutional Plus Shares 94 Custodian Fees 1,675 Auditing Fees 44 Shareholders Reports and Proxy Investor Shares 316 Shareholders Reports and Proxy ETF Shares 4,431 Shareholders Reports and Proxy Admiral Shares 1,076 Shareholders Reports and Proxy Institutional Shares 484 Shareholders Reports and Proxy Institutional Plus Shares 291 Trustees Fees and Expenses 59 Total Expenses 40,542 Net Investment Income 1,136,430 Realized Net Gain (Loss) Investment Securities Sold 1 4,058,840 Futures Contracts 61,190 Swap Contracts (3,775) Realized Net Gain (Loss) 4,116,255 Change in Unrealized Appreciation (Depreciation) Investment Securities 1 6,437,816 Futures Contracts 7,868 Swap Contracts 160 Change in Unrealized Appreciation (Depreciation) 6,445,844 Net Increase (Decrease) in Net Assets Resulting from Operations 11,698,529 1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $6,047,000, ($33,000), and $8,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Small-Cap Index Fund Statement of Changes in Net Assets Year Ended December 31, ($000) ($000) Increase (Decrease) in Net Assets Operations Net Investment Income 1,136, ,349 Realized Net Gain (Loss) 4,116,255 1,377,249 Change in Unrealized Appreciation (Depreciation) 6,445,844 7,968,527 Net Increase (Decrease) in Net Assets Resulting from Operations 11,698,529 10,326,125 Distributions Net Investment Income Investor Shares (57,529) (62,250) ETF Shares (280,715) (227,380) Admiral Shares (451,429) (399,294) Institutional Shares (208,650) (189,498) Institutional Plus Shares (129,060) (120,494) Realized Capital Gain Investor Shares ETF Shares Admiral Shares Institutional Shares Institutional Plus Shares Total Distributions (1,127,383) (998,916) Capital Share Transactions Investor Shares (653,015) (288,011) ETF Shares 2,848,082 2,612,289 Admiral Shares 1,795,522 2,568,322 Institutional Shares 370,934 1,232,054 Institutional Plus Shares 260,540 52,625 Net Increase (Decrease) from Capital Share Transactions 4,622,063 6,177,279 Total Increase (Decrease) 15,193,209 15,504,488 Net Assets Beginning of Period 69,441,629 53,937,141 End of Period 1 84,634,838 69,441,629 1 Net Assets End of Period includes undistributed (overdistributed) net investment income of ($17,215,000) and ($23,248,000). See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Small-Cap Index Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $61.75 $53.03 $55.86 $52.69 $38.74 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (2.840) Total from Investment Operations (2.113) Distributions Dividends from Net Investment Income (.877) (.857) (.717) (.708) (.617) Distributions from Realized Capital Gains Total Distributions (.877) (.857) (.717) (.708) (.617) Net Asset Value, End of Period $70.76 $61.75 $53.03 $55.86 $52.69 Total Return % 18.17% -3.78% 7.37% 37.62% Ratios/Supplemental Data Net Assets, End of Period (Millions) $4,345 $4,401 $4,058 $4,606 $5,041 Ratio of Total Expenses to Average Net Assets 0.17% 0.18% 0.20% 0.23% 0.24% Ratio of Net Investment Income to Average Net Assets 1.36% 1.55% 1.33% 1.40% 1.39% Portfolio Turnover Rate 3 15% 14% 11% 10% 29% 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, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Small-Cap Index Fund Financial Highlights ETF Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $ $ $ $ $80.89 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (5.931) Total from Investment Operations (4.263) Distributions Dividends from Net Investment Income (1.995) (1.930) (1.637) (1.673) (1.439) Distributions from Realized Capital Gains Total Distributions (1.995) (1.930) (1.637) (1.673) (1.439) Net Asset Value, End of Period $ $ $ $ $ Total Return 16.24% 18.31% -3.65% 7.51% 37.80% Ratios/Supplemental Data Net Assets, End of Period (Millions) $21,605 $16,153 $11,478 $9,833 $8,217 Ratio of Total Expenses to Average Net Assets 0.05% 0.06% 0.08% 0.09% 0.09% Ratio of Net Investment Income to Average Net Assets 1.48% 1.67% 1.45% 1.54% 1.54% Portfolio Turnover Rate 2 15% 14% 11% 10% 29% 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 Small-Cap Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $61.77 $53.05 $55.87 $52.72 $38.76 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (2.833) Total from Investment Operations (2.036) Distributions Dividends from Net Investment Income (.957) (.923) (.784) (.800) (.689) Distributions from Realized Capital Gains Total Distributions (.957) (.923) (.784) (.800) (.689) Net Asset Value, End of Period $70.78 $61.77 $53.05 $55.87 $52.72 Total Return % 18.30% -3.64% 7.50% 37.81% Ratios/Supplemental Data Net Assets, End of Period (Millions) $33,801 $27,778 $21,441 $20,034 $10,126 Ratio of Total Expenses to Average Net Assets 0.05% 0.06% 0.08% 0.09% 0.09% Ratio of Net Investment Income to Average Net Assets 1.48% 1.67% 1.45% 1.54% 1.54% Portfolio Turnover Rate 3 15% 14% 11% 10% 29% 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, including ETF Creation Units. See accompanying Notes, which are an integral part of the Financial Statements. 24

27 Small-Cap Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $61.77 $53.05 $55.87 $52.71 $38.76 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (2.834) Total from Investment Operations (2.031) Distributions Dividends from Net Investment Income (.963) (.929) (.789) (.805) (.693) Distributions from Realized Capital Gains Total Distributions (.963) (.929) (.789) (.805) (.693) Net Asset Value, End of Period $70.78 $61.77 $53.05 $55.87 $52.71 Total Return 16.25% 18.32% -3.63% 7.53% 37.80% Ratios/Supplemental Data Net Assets, End of Period (Millions) $15,352 $13,030 $10,036 $9,975 $9,185 Ratio of Total Expenses to Average Net Assets 0.04% 0.05% 0.07% 0.08% 0.08% Ratio of Net Investment Income to Average Net Assets 1.49% 1.68% 1.46% 1.55% 1.55% Portfolio Turnover Rate 2 15% 14% 11% 10% 29% 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. 25

28 Small-Cap Index Fund Financial Highlights Institutional Plus Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $ $ $ $ $ Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (8.203) Total from Investment Operations (5.850) Distributions Dividends from Net Investment Income (2.795) (2.703) (2.310) (2.357) (2.028) Distributions from Realized Capital Gains Total Distributions (2.795) (2.703) (2.310) (2.357) (2.028) Net Asset Value, End of Period $ $ $ $ $ Total Return 16.27% 18.33% -3.62% 7.55% 37.85% Ratios/Supplemental Data Net Assets, End of Period (Millions) $9,531 $8,080 $6,925 $6,024 $4,323 Ratio of Total Expenses to Average Net Assets 0.03% 0.04% 0.05% 0.06% 0.06% Ratio of Net Investment Income to Average Net Assets 1.50% 1.69% 1.48% 1.57% 1.57% Portfolio Turnover Rate 2 15% 14% 11% 10% 29% 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. 26

29 Small-Cap Index Fund Notes to Financial Statements Vanguard Small-Cap Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. 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 NYSE Arca; 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. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund s pricing time but after the close of the securities primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. 2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses). During the year ended December 31, 2017, 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. 27

30 Small-Cap Index Fund 3. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on shortterm interest rates, applied to the notional amount. At the same time, the fund invests an amount approximating the notional amount of the swap in high-quality temporary cash investments. The notional amounts of swap contracts are not recorded in the Statement of Net Assets. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded. A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days. During the year ended December 31, 2017, the fund s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period. 4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund s tax positions taken for all open federal income tax years (December 31, ), and has concluded that no provision for federal income tax is required in the fund s financial statements. 5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. 28