Vanguard Total Bond Market Index Fund

Transcription

1 Annual Report Vanguard Total Bond Index Fund

2 Vanguard s Principles for Investing Success We want to give you the best chance of investment success. These principles, grounded in Vanguard s research and experience, can put you on the right path. Goals. Create clear, appropriate investment goals. Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost. Discipline. Maintain perspective and long-term discipline. A single theme unites these principles: Focus on the things you can control. We believe there is no wiser course for any investor. Contents Your Fund s Performance at a Glance Chairman s Perspective Results of Proxy Voting 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, Vanguard Total Bond Index Fund returned 3.45% for Investor Shares. The result closely matched the benchmark index s return of 3.63% after taking costs into account. The average return of peer funds was 3.56%. The yield curve flattened over the period. Solid economic data and a strong labor market prompted the Federal Reserve to raise the federal funds rate target three times in That pushed up short-term rates, while longer-term rates eased lower on dimmer longer-range prospects for faster economic growth and higher inflation. U.S. Treasuries returned about 2.3% and mortgage-backed securities slightly more than that. Corporate bonds returned about 6.4%, with their average yield over Treasuries narrowing a little amid the uptick in growth. Lower-quality investment-grade bonds outpaced higher-quality bonds. By maturity, long-term bonds significantly outpaced their intermediate- and short-term counterparts. Total Returns: Fiscal Year Ended 30-Day SEC Yield Income Returns Capital Returns Total Returns Vanguard Total Bond Index Fund Investor Shares 2.45% 2.46% 0.99% 3.45% ETF Shares 2.56 Price 3.54 Net Asset 3.62 Admiral Shares Institutional Shares Institutional Plus Shares Institutional Select Shares Bloomberg Barclays U.S. Aggregate Float Adjusted Index 3.63 Core Bond Funds Average 3.56 Core 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, Institutional Plus Shares, and Institutional Select 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. 1

4 Total Returns: Ten Years Ended Average Annual Return Total Bond Index Fund Investor Shares 3.84% Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index 4.03 Spliced Intermediate Investment-Grade Debt Funds Average 3.72 For a benchmark description, see the Glossary. Spliced Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. 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 Institutional Shares Plus Shares Institutional Select Shares Peer Group Average Total Bond Index Fund 0.15% 0.05% 0.05% 0.04% 0.03% 0.01% 0.78% The fund expense ratios shown are from the prospectus dated April 26, 2017, and represent estimated costs for the current fiscal year. For the fiscal year ended, the fund s expense ratios were 0.15% for Investor Shares, 0.05% for ETF Shares, 0.05% for Admiral Shares, 0.04% for Institutional Shares, 0.03% for Institutional Plus Shares, and 0.01% for Institutional Select 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: Core Bond Funds Average. 2

5 Chairman s Perspective Dear Shareholder, Lately I ve been asked a lot about my legacy. And candidly, that phrase bugs me it isn t my legacy. Vanguard s success is a result of thousands of my colleagues committing to a clear mission: helping investors achieve their financial goals. Bill McNabb Chairman The reason the topic has come up is that on, I officially stepped down as Vanguard s CEO after almost a decade in that role. I ll remain chairman for a period to be determined by the board of directors. Tim Buckley, who was previously Vanguard s president and chief investment officer, was elected CEO. I can t think of a better successor. I ve spent 32 years at Vanguard almost my entire professional life and during that time I ve had the good fortune of working with smart, principled colleagues from across the world. I ve learned from each of them. In particular, I would like to thank Jack Bogle, our founder, who took a chance on me when I was a young business school graduate, and Jack Brennan, my predecessor as CEO, who constantly challenged me with new roles and responsibilities. 3

6 When you re just starting out, there is nothing quite like getting votes of confidence from people you respect. The short list A milestone like this naturally brings about some reflection. With that in mind, here s a tally by no means exhaustive of the accomplishments that we at Vanguard are proud of: Low costs. Over the last decade, we cut our average asset-weighted expense ratio by about 50%. 1 This isn t a result of some contrived price war. Since its founding, Vanguard has emphasized the benefits of low-cost investing. As Jack Bogle once said: The honest steward who charges least, wins most. But not for himself; for those investors who entrust their assets to his care. It is not all that complicated. Global diversification. Through our thought leadership and investment options, such as our target-date funds, Vanguard has encouraged clients to obtain exposure to international markets. Global diversification isn t just about helping to control risk it can also be a way of expanding your set of opportunities and harnessing the potential of all markets. Barometer Average Annual Total Returns Periods Ended One Year Three Years Five Years Stocks Russell 1000 Index (Large-caps) 21.69% 11.23% 15.71% Russell 2000 Index (Small-caps) Russell 3000 Index (Broad U.S. market) FTSE All-World ex US Index (International) Bonds Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) 3.54% 2.24% 2.10% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 2.11% 1.64% 1.43% 1 Source: Vanguard calculation, based on data from Morningstar, Inc., as of December 31,

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

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

9 Results of Proxy Voting At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals: Proposal 1 Elect trustees for the fund.* The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting. Percentage Trustee For Withheld For Mortimer J. Buckley 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 Total Bond Index Fund 8,570,955, ,571, ,561, ,366, % 7

10 Proposal 3 Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard. This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC s approval of a pending application for an order of exemption. Broker Percentage Vanguard Fund For Abstain Against Non-Votes For Total Bond Index Fund 8,657,891, ,725, ,470, ,366, % 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 Total Bond Index Fund 1,852,140, ,394,816 6,591,553, ,366, % 8

11 Total Bond Index Fund Fund Profile As of Share-Class Characteristics Investor Shares ETF Shares Admiral Shares Institutional Shares Institutional Plus Shares Institutional Select Shares Ticker Symbol VBMFX BND VBTLX VBTIX VBMPX VTBSX Expense Ratio % 0.05% 0.05% 0.04% 0.03% 0.01% 30-Day SEC Yield 2.45% 2.56% 2.56% 2.56% 2.58% 2.59% Financial Attributes Bloomberg Barclays U.S. Aggregate Float Adjusted Fund Index Number of Bonds 8,345 9,706 Yield to (before expenses) 2.7% 2.7% Average 3.0% 3.0% Average Duration 6.1 years 6.1 years Average Effective 8.4 years 8.3 years Short-Term Reserves 2.5% Sector Diversification (% of portfolio) Asset-Backed 0.4% Commercial Mortgage-Backed 1.8 Finance 8.9 Foreign 5.5 Government Mortgage-Backed 21.3 Industrial 17.4 Treasury/Agency 42.5 Utilities 2.0 Other 0.2 The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government. Volatility Measures Bloomberg Barclays U.S. Aggregate Float Adjusted Index R-Squared 0.99 Beta 1.04 These measures show the degree and timing of the fund s fluctuations compared with the index over 36 months. Distribution by Credit Quality (% of portfolio) U.S. Government 63.9% Aaa 5.3 Aa 3.6 A 12.5 Baa 14.7 Credit-quality ratings are obtained from Barclays and are from Moody's, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. For more information about these ratings, see the Glossary entry for Credit Quality. Distribution by Effective (% of portfolio) Under 1 Year 0.5% 1-3 Years Years Years Years Years 13.0 Over 30 Years The expense ratios shown are from the prospectus dated April 26, 2017, and represent estimated costs for the current fiscal year. For the fiscal year ended, the expense ratios were 0.15% for Investor Shares, 0.05% for ETF Shares, 0.05% for Admiral Shares, 0.04% for Institutional Shares, 0.03% for Institutional Plus Shares, and 0.01% for Institutional Select Shares. 9

12 Total Bond Index Fund Investment Focus Average Short Med. Long Credit Quality Treasury/ Agency Investment-Grade Corporate Below Investment-Grade 10

13 Total Bond Index Fund Performance Summary All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares. Cumulative Performance: December 31, 2007, Through Initial Investment of $10,000 $17,000 14, ,000 Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Total Bond Index Fund Investor Shares 3.45% 1.91% 3.84% $14,571 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 Spliced Intermediate Investment-Grade Debt Funds Average ,412 For a benchmark description, see the Glossary. Spliced Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. One Year Five Years Ten Years Final of a $10,000 Investment Total Bond Index Fund ETF Shares Net Asset 3.62% 2.04% 3.95% $14,725 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 See Financial Highlights for dividend and capital gains information. 11

14 Total Bond Index Fund Average Annual Total Returns Periods Ended One Year Five Years Ten Years Final of a $10,000 Investment Total Bond Index Fund Admiral Shares 3.56% 2.02% 3.95% $14,727 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,845 One Year Five Years Ten Years Final of a $5,000,000 Investment Total Bond Index Fund Institutional Shares 3.57% 2.03% 3.97% $7,380,934 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,422,440 One Year Five Years Ten Years Final of a $100,000,000 Investment Total Bond Index Fund Institutional Plus Shares 3.58% 2.05% 3.98% $147,792,586 Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,448,796 The creation of the Institutional Plus Shares occurred on February 5, 2010, when Vanguard Total Bond Index Fund acquired the net assets of Vanguard Institutional Total Bond Index Fund. For the periods ended, the returns and other data shown in the table above reflect a blend of historical performance of the fund s Institutional Shares prior to February 5, 2010, and of the Institutional Plus Shares from then on. One Year Since Inception (6/24/2016) Final of a $3,000,000,000 Investment Total Bond Index Fund Institutional Select Shares 3.60% 0.87% $3,039,606,703 Bloomberg Barclays U.S. Aggregate Float Adjusted Index ,069,800,134 "Since Inception" performance is calculated from the Institutional Select Shares inception date for both the fund and its comparative standard. 12

15 Total Bond Index Fund Cumulative Returns of ETF Shares: December 31, 2007, Through One Year Five Years Ten Years Total Bond Index Fund ETF Shares Price 3.54% 10.56% 46.54% Total Bond Index Fund ETF Shares Net Asset Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index Fiscal-Year Total Returns (%): December 31, 2007, Through Spliced Bloomberg Barclays Aggregate Investor Shares FA Index Fiscal Year Income Returns Capital Returns Total Returns Total Returns % 0.20% 5.05% 5.24% For a benchmark description, see the Glossary. 13

16 Total Bond Index Fund Financial Statements Statement of Net Assets Investments Summary As of This Statement summarizes the fund s holdings by asset type. Details are reported for each of the fund s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the fund s net assets. The total value of smaller holdings is reported as a single amount within each category. The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the complete listing of the fund s holdings is available electronically on vanguard.com and on the Securities and Exchange Commission s website (sec.gov), or you can have it mailed to you without charge by calling For the first and third fiscal quarters, the fund files the lists with the SEC on Form N-Q. Shareholders can look up the fund s Forms N-Q on the SEC s website. Forms N-Q may also be reviewed and copied at the SEC s Public Reference Room (see the back cover of this report for further information). Percentage of Net Assets U.S. Government and Agency Obligations U.S. Government Securities United States Treasury Note/Bond 2.125% 5/15/25 976, , % United States Treasury Note/Bond 2.250% 11/15/27 933, , % United States Treasury Note/Bond 2.625% 11/15/20 853, , % United States Treasury Note/Bond 1.375% 2/15/20 858, , % 1 United States Treasury Note/Bond 1.750% 5/15/23 846, , % United States Treasury Note/Bond 2.125% 12/31/22 807, , % United States Treasury Note/Bond 1.625% 3/15/20 796, , % United States Treasury Note/Bond 3.625% 8/15/19 766, , % United States Treasury Note/Bond 1.750% 2/28/22 781, , % United States Treasury Note/Bond 1.000% 3/15/19 769, , % United States Treasury Note/Bond 2.250% 11/15/25 750, , % United States Treasury Note/Bond 2.500% 5/15/46 779, , % United States Treasury Note/Bond 1.500% 10/31/19 741, , % United States Treasury Note/Bond 2.000% 11/30/22 726, , % United States Treasury Note/Bond 1.250% 3/31/21 709, , % United States Treasury Note/Bond 2.875% 11/15/46 660, , % United States Treasury Note/Bond 1.625% 5/15/26 716, , % United States Treasury Note/Bond 2.500% 5/15/24 657, , % United States Treasury Note/Bond 1.625% 2/15/26 694, , % United States Treasury Note/Bond 1.750% 11/15/20 650, , % United States Treasury Note/Bond 0.750% 2/15/19 652, , % United States Treasury Note/Bond 2.125% 2/29/24 632, , % United States Treasury Note/Bond 2.250% 2/15/27 633, , % United States Treasury Note/Bond 2.000% 8/15/25 638, , % United States Treasury Note/Bond 3.125% 5/15/19 606, , % United States Treasury Note/Bond 2.250% 11/15/24 618, , % United States Treasury Note/Bond 2.750% 11/15/42 607, , % United States Treasury Note/Bond 1.500% 8/15/20 601, , % United States Treasury Note/Bond 2.750% 8/15/42 588, , % 14

17 Total Bond Index Fund Percentage of Net Assets United States Treasury Note/Bond 3.000% 5/15/45 559, , % United States Treasury Note/Bond 3.375% 11/15/19 569, , % United States Treasury Note/Bond 2.750% 8/15/47 567, , % United States Treasury Note/Bond 1.500% 8/15/26 607, , % United States Treasury Note/Bond 0.875% 5/15/19 567, , % United States Treasury Note/Bond 1.250% 1/31/20 553, , % United States Treasury Note/Bond 1.125% 9/30/21 564, , % United States Treasury Note/Bond 1.000% 11/15/19 536, , % United States Treasury Note/Bond 1.875% 2/28/22 531, , % United States Treasury Note/Bond 1.875% 7/31/22 530, , % United States Treasury Note/Bond 3.500% 5/15/20 501, , % United States Treasury Note/Bond 2.125% 11/30/24 515, , % United States Treasury Note/Bond 2.125% 9/30/24 515, , % United States Treasury Note/Bond 2.250% 8/15/27 514, , % United States Treasury Note/Bond 1.500% 11/30/19 503, , % United States Treasury Note/Bond 1.250% 10/31/21 514, , % 1 United States Treasury Note/Bond 3.625% 2/15/20 477, , % United States Treasury Note/Bond 1.875% 9/30/22 499, , % 1 United States Treasury Note/Bond 0.750% 8.875% 11/15/18 11/15/47 47,665,945 48,638, % 79,042, % Agency Bonds and Notes 2 Federal Home Loan Mortgage Corp % 6.750% 3/27/19 7/15/32 933, , % 2 Federal National Mortgage Assn % 7.250% 12/14/18 7/15/37 1,465,054 1,497, % Agency Bonds and Notes Other 1,285, % 3,756, % Conventional Mortgage-Backed Securities 2,3,4 Fannie Mae Pool 3.500% 1/1/48 547, , % 2,3,4 Fannie Mae Pool 2.000% 9.500% 1/1/18 1/1/48 16,332,118 16,887, % 2,3,4 Freddie Mac Gold Pool 3.500% 1/1/48 645, , % 2,3,4 Freddie Mac Gold Pool 2.000% % 1/1/18 2/1/48 10,256,612 10,574, % 2,3 Freddie Mac Non Gold Pool 9.500% 3/1/ % 3,4 Ginnie Mae I Pool 3.000% % 2/15/25 1/1/48 1,361,812 1,439, % 3,4 Ginnie Mae II Pool 3.500% 1/1/48 903, , % 3,4 Ginnie Mae II Pool 2.500% 8.500% 4/20/18 1/1/48 10,307,127 10,667, % 41,727, % Nonconventional Mortgage-Backed Securities 2,3 Fannie Mae Pool 2.124% 5.860% 11/1/32 12/1/43 133, , % 2,3 Freddie Mac Non Gold Pool 2.386% 4.865% 4/1/33 11/1/43 38,573 40, % 3 Ginnie Mae II Pool 2.250% 3.500% 6/20/29 1/20/44 43,283 44, % 222, % Total U.S. Government and Agency Obligations (Cost $124,965,760) 124,749, % *, 5Asset-Backed/Commercial Mortgage-Backed Securities (Cost $4,793,122) 4,791, % 15

18 Total Bond Index Fund Percentage of Net Assets Corporate Bonds Finance 5 Banking 12,338, % 5 Brokerage 453, % Finance Companies 540, % 5 Insurance 2,414, % Other Finance 17, % Real Estate Investment Trusts 1,366, % 17,131, % Industrial 5 Basic Industry 1,770, % 5 Capital Goods 2,697, % 5 Communication 5,111, % 5 Consumer Cyclical 4,117, % 5 Consumer Noncyclical 8,573, % 5 Energy 5,116, % Other Industrial 195, % 5 Technology 4,751, % 5 Transportation 1,240, % 33,575, % Utilities 5 Electric 3,505, % Natural Gas 269, % Other Utility 49, % 3,824, % Total Corporate Bonds (Cost $52,642,021) 54,531, % 5Sovereign Bonds (Cost $9,251,476) 9,336, % Taxable Municipal Bonds (Cost $1,253,803) 1,445, % Shares Temporary Cash Investment Money Fund 6 Vanguard Liquidity Fund (Cost $4,937,892) 1.458% 49,376,526 4,938, % Total Investments (Cost $197,844,074) 199,792, % 16

19 Total Bond Index Fund Percentage of Net Assets Other Assets and Liabilities Other Assets Investment in Vanguard 10,707 Receivables for Investment Securities Sold 439,303 Receivables for Accrued Income 1,180,771 Receivables for Capital Shares Issued 228,057 Other Assets 45,423 Total Other Assets 1,904, % Liabilities Payables for Investment Securities Purchased (5,359,635) Payables for Capital Shares Redeemed (347,247) Payables for Distributions (25,611) Payables to Vanguard (81,639) Other Liabilities (10,316) Total Liabilities (5,824,448) (3.0%) Net Assets 195,871, % At, net assets consisted of: Paid-in Capital 193,884,478 Overdistributed Net Investment Income (6,243) Accumulated Net Realized Gains 45,652 Unrealized Appreciation (Depreciation) 1,947,931 Net Assets 195,871,818 Investor Shares Net Assets Applicable to 480,355,429 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 5,165,688 Net Asset Per Share Investor Shares $10.75 ETF Shares Net Assets Applicable to 457,223,018 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 37,246,929 Net Asset Per Share ETF Shares $81.46 Admiral Shares Net Assets Applicable to 7,703,137,890 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 82,838,810 Net Asset Per Share Admiral Shares $10.75 Institutional Shares Net Assets Applicable to 3,635,999,789 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 39,101,154 Net Asset Per Share Institutional Shares $

20 Total Bond Index Fund Institutional Plus Shares Net Assets Applicable to 1,812,199,737 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 19,488,174 Net Asset Per Share Institutional Plus Shares $10.75 Institutional Select Shares Net Assets Applicable to 1,118,758,332 outstanding $.001 par value shares of beneficial interest (unlimited authorization) 12,031,063 Net Asset Per Share Institutional Select Shares $10.75 See Note A in Notes to Financial Statements. * Certain of the fund s securities are valued using significant unobservable inputs. 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 Securities with a value of $3,610,000 have been segregated as collateral for certain open To Be Announced (TBA) transactions. 2 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock. 3 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments and prepayments or the possibility of the issue being called. 4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of. 5 Security exempt from registration under Rule 144A of the Securities Act of Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At, the aggregate value of these securities was $1,899,549,000, representing 1.0% of net assets. 6 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. See accompanying Notes, which are an integral part of the Financial Statements. 18

21 Total Bond Index Fund Statement of Operations Year Ended Investment Income Income Interest 1 4,722,057 Total Income 4,722,057 Expenses The Vanguard Group Note B Investment Advisory Services 5,822 Management and Administrative Investor Shares 6,701 Management and Administrative ETF Shares 11,455 Management and Administrative Admiral Shares 27,291 Management and Administrative Institutional Shares 11,564 Management and Administrative Institutional Plus Shares 4,924 Management and Administrative Institutional Select Shares 489 ing and Distribution Investor Shares 1,099 ing and Distribution ETF Shares 1,608 ing and Distribution Admiral Shares 6,257 ing and Distribution Institutional Shares 992 ing and Distribution Institutional Plus Shares 256 ing and Distribution Institutional Select Shares Custodian Fees 1,441 Auditing Fees 54 Shareholders Reports and Proxy Investor Shares 432 Shareholders Reports and Proxy ETF Shares 2,647 Shareholders Reports and Proxy Admiral Shares 1,816 Shareholders Reports and Proxy Institutional Shares 962 Shareholders Reports and Proxy Institutional Plus Shares 319 Shareholders Reports and Proxy Institutional Select Shares Trustees Fees and Expenses 141 Total Expenses 86,270 Net Investment Income 4,635,787 Realized Net Gain (Loss) Investment Securities Sold 1 319,359 Futures Contracts (41) Realized Net Gain (Loss) 319,318 Change in Unrealized Appreciation (Depreciation) of Investment Securities 1 1,487,063 Net Increase (Decrease) in Net Assets Resulting from Operations 6,442,168 1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $40,172,000, ($108,000), and $41,000, respectively. See accompanying Notes, which are an integral part of the Financial Statements. 19

22 Total Bond Index Fund Statement of Changes in Net Assets Year Ended December 31, Increase (Decrease) in Net Assets Operations Net Investment Income 4,635,787 4,000,540 Realized Net Gain (Loss) 319,318 47,329 Change in Unrealized Appreciation (Depreciation) 1,487,063 (530,101) Net Increase (Decrease) in Net Assets Resulting from Operations 6,442,168 3,517,768 Distributions Net Investment Income Investor Shares (136,467) (151,601) ETF Shares (867,362) (739,901) Admiral Shares (1,949,232) (1,658,060) Institutional Shares (930,195) (802,418) Institutional Plus Shares (535,236) (601,353) Institutional Select Shares (213,518) (51,450) Realized Capital Gain 1 ETF Shares (16,877) (13,867) Admiral Shares (37,589) (31,890) Institutional Shares (17,718) (15,046) Institutional Plus Shares (8,878) (9,748) Institutional Select Shares (5,451) (2,382) Investor Shares (2,350) (2,662) Total Distributions (4,720,873) (4,080,378) Capital Share Transactions Investor Shares (862,500) (483,969) ETF Shares 5,481,982 4,246,515 Admiral Shares 9,524,616 12,106,214 Institutional Shares 4,588,226 5,211,610 Institutional Plus Shares (2,935,783) (2,219,425) Institutional Select Shares 6,538,787 5,638,625 Net Increase (Decrease) from Capital Share Transactions 22,335,328 24,499,570 Total Increase (Decrease) 24,056,623 23,936,960 Net Assets Beginning of Period 171,815, ,878,235 End of Period 2 195,871, ,815,195 1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $51,469,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 2 Net Assets End of Period includes undistributed (overdistributed) net investment income of ($6,243,000) and ($10,020,000). See accompanying Notes, which are an integral part of the Financial Statements. 20

23 Total Bond Index Fund Financial Highlights Investor Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.65 $10.64 $10.87 $10.56 $11.09 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.219).339 (.504) Total from Investment Operations (.248) Distributions Dividends from Net Investment Income (.260) (.254) (.254) (.264) (.256) Distributions from Realized Capital Gains (.005) (.005) (.010) (.029) (.026) Total Distributions (.265) (.259) (.264) (.293) (.282) Net Asset, End of Period $10.75 $10.65 $10.64 $10.87 $10.56 Total Return % 2.50% 0.30% 5.76% -2.26% Ratios/Supplemental Data Net Assets, End of Period (Millions) $5,166 $5,969 $6,434 $7,076 $7,939 Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.16% 0.20% 0.20% Ratio of Net Investment Income to Average Net Assets 2.42% 2.30% 2.34% 2.44% 2.37% Portfolio Turnover Rate 3, 4 55% 61% 84% 72% 73% 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. 4 Includes 15%, 23%, 45%, 38%, and 45% attributable to mortgage-dollar-roll activity. See accompanying Notes, which are an integral part of the Financial Statements. 21

24 Total Bond Index Fund Financial Highlights ETF Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $80.64 $80.58 $82.33 $79.91 $83.92 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (1.671) (3.812) Total from Investment Operations (1.781) Distributions Dividends from Net Investment Income (2.038) (1.995) (2.001) (2.073) (2.031) Distributions from Realized Capital Gains (.037) (.036) (.078) (.221) (.198) Total Distributions (2.075) (2.031) (2.079) (2.294) (2.229) Net Asset, End of Period $81.46 $80.64 $80.58 $82.33 $79.91 Total Return 3.62% 2.57% 0.39% 5.96% -2.14% Ratios/Supplemental Data Net Assets, End of Period (Millions) $37,247 $31,445 $27,279 $26,041 $17,637 Ratio of Total Expenses to Average Net Assets 0.05% 0.05% 0.06% 0.07% 0.08% Ratio of Net Investment Income to Average Net Assets 2.52% 2.40% 2.44% 2.57% 2.49% Portfolio Turnover Rate 2, 3 55% 61% 84% 72% 73% 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. 3 Includes 15%, 23%, 45%, 38%, and 45% attributable to mortgage-dollar-roll activity. See accompanying Notes, which are an integral part of the Financial Statements. 22

25 Total Bond Index Fund Financial Highlights Admiral Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.65 $10.64 $10.87 $10.56 $11.09 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.219).339 (.504) Total from Investment Operations (.235) Distributions Dividends from Net Investment Income (.271) (.265) (.264) (.278) (.269) Distributions from Realized Capital Gains (.005) (.005) (.010) (.029) (.026) Total Distributions (.276) (.270) (.274) (.307) (.295) Net Asset, End of Period $10.75 $10.65 $10.64 $10.87 $10.56 Total Return % 2.60% 0.40% 5.89% -2.15% Ratios/Supplemental Data Net Assets, End of Period (Millions) $82,839 $72,592 $60,783 $54,198 $33,450 Ratio of Total Expenses to Average Net Assets 0.05% 0.05% 0.06% 0.07% 0.08% Ratio of Net Investment Income to Average Net Assets 2.52% 2.40% 2.44% 2.57% 2.49% Portfolio Turnover Rate 3, 4 55% 61% 84% 72% 73% 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. 4 Includes 15%, 23%, 45%, 38%, and 45% attributable to mortgage-dollar-roll activity. See accompanying Notes, which are an integral part of the Financial Statements. 23

26 Total Bond Index Fund Financial Highlights Institutional Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.65 $10.64 $10.87 $10.56 $11.09 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.219).339 (.504) Total from Investment Operations (.234) Distributions Dividends from Net Investment Income (.272) (.266) (.266) (.279) (.270) Distributions from Realized Capital Gains (.005) (.005) (.010) (.029) (.026) Total Distributions (.277) (.271) (.276) (.308) (.296) Net Asset, End of Period $10.75 $10.65 $10.64 $10.87 $10.56 Total Return 3.57% 2.61% 0.41% 5.91% -2.14% Ratios/Supplemental Data Net Assets, End of Period (Millions) $39,101 $34,167 $29,095 $27,103 $20,206 Ratio of Total Expenses to Average Net Assets 0.04% 0.04% 0.05% 0.06% 0.07% Ratio of Net Investment Income to Average Net Assets 2.53% 2.41% 2.45% 2.58% 2.50% Portfolio Turnover Rate 2, 3 55% 61% 84% 72% 73% 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. 3 Includes 15%, 23%, 45%, 38%, and 45% attributable to mortgage-dollar-roll activity. See accompanying Notes, which are an integral part of the Financial Statements. 24

27 Total Bond Index Fund Financial Highlights Institutional Plus Shares For a Share Outstanding Year Ended December 31, Throughout Each Period Net Asset, Beginning of Period $10.65 $10.64 $10.87 $10.56 $11.09 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments (.219).339 (.504) Total from Investment Operations (.232) Distributions Dividends from Net Investment Income (.273) (.267) (.267) (.280) (.272) Distributions from Realized Capital Gains (.005) (.005) (.010) (.029) (.026) Total Distributions (.278) (.272) (.277) (.309) (.298) Net Asset, End of Period $10.75 $10.65 $10.64 $10.87 $10.56 Total Return 3.58% 2.62% 0.42% 5.92% -2.12% Ratios/Supplemental Data Net Assets, End of Period (Millions) $19,488 $22,203 $24,287 $22,254 $18,607 Ratio of Total Expenses to Average Net Assets 0.03% 0.03% 0.04% 0.05% 0.05% Ratio of Net Investment Income to Average Net Assets 2.54% 2.42% 2.46% 2.59% 2.52% Portfolio Turnover Rate 2, 3 55% 61% 84% 72% 73% 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. 3 Includes 15%, 23%, 45%, 38%, and 45% attributable to mortgage-dollar-roll activity. See accompanying Notes, which are an integral part of the Financial Statements. 25

28 Total Bond Index Fund Financial Highlights Institutional Select Shares Year June 24, Ended to Dec. 31, Dec. 31, For a Share Outstanding Throughout Each Period Net Asset, Beginning of Period $10.65 $11.03 Investment Operations Net Investment Income Net Realized and Unrealized Gain (Loss) on Investments.105 (.375) Total from Investment Operations.380 (.240) Distributions Dividends from Net Investment Income (.275) (.135) Distributions from Realized Capital Gains (.005) (.005) Total Distributions (.280) (.140) Net Asset, End of Period $10.75 $10.65 Total Return 3.60% -2.20% Ratios/Supplemental Data Net Assets, End of Period (Millions) $12,031 $5,438 Ratio of Total Expenses to Average Net Assets 0.01% 0.01% 3 Ratio of Net Investment Income to Average Net Assets 2.56% 2.41% 3 Portfolio Turnover Rate 4, 5 55% 61% 6 1 Inception. 2 Calculated based on average shares outstanding. 3 Annualized. 4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund s capital shares, including ETF Creation Units. 5 Includes 15% and 23% attributable to mortgage-dollar-roll activity. 6 Reflects the fund s portfolio turnover for the fiscal year ended December 31, See accompanying Notes, which are an integral part of the Financial Statements. 26

29 Total Bond Index Fund Notes to Financial Statements Vanguard Total Bond Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund s investments are in corporate debt instruments; the issuers abilities to meet their obligations may be affected by economic developments in their respective industries. The fund offers six classes of shares: Investor Shares, ETF Shares, Admiral Shares, Institutional Shares, Institutional Plus Shares, and Institutional Select 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, Institutional Plus Shares, and Institutional Select Shares are designed for investors who meet certain administrative, service, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. 1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Bonds and temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Liquidity Fund are valued at that fund s net asset value. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund s pricing time but after the close of the securities primary markets, are valued by methods deemed by the board of trustees to represent fair value. 2. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses). During the year ended, the fund s average investments in long and short futures contracts represented 0% and less than 1% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. The fund had no open futures contracts at. 27

30 Total Bond Index Fund 3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgagebacked securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. 4. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund s portfolio turnover rate. s to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities Purchased in the Statement of Net Assets. 5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund s tax positions taken for all open federal income tax years (December 31, ), and has concluded that no provision for federal income tax is required in the fund s financial statements. 6. Distributions: Distributions from net investment income are declared daily by all share classes except ETF Shares, and paid on the first business day of the following month. Monthly income dividends from ETF Shares, and annual distributions from realized capital gains, if any, are recorded on the ex-dividend date. 7. 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 28