SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C. 20549
 
 
Form N-1A
 
REGISTRATION STATEMENT (NO. 33-06001)    
UNDER THE SECURITIES ACT OF 1933   [X]  
Pre-Effective Amendment No.   [ ]  
Post-Effective Amendment No. 85   [X]  
and
 
REGISTRATION STATEMENT (NO. 811-04681) UNDER THE INVESTMENT COMPANY ACT  
OF 1940    
Amendment No. 87   [X]  
 
 
VANGUARD BOND INDEX FUNDS
(Exact Name of Registrant as Specified in Declaration of Trust)
 
P.O. Box 2600, Valley Forge, PA 19482
(Address of Principal Executive Office)
 
Registrant’s Telephone Number (610) 669-1000
 
Anne E. Robinson, Esquire
P.O. Box 876
Valley Forge, PA 19482
 
Approximate Date of Proposed Public Offering:    
It is proposed that this filing will become effective (check appropriate box)    
[ ] immediately upon filing pursuant to paragraph (b)    
[X] on April 26, 2019, pursuant to paragraph (b)    
[ ] 60 days after filing pursuant to paragraph (a)(1)    
[ ] on (date) pursuant to paragraph (a)(1)    
[ ] 75 days after filing pursuant to paragraph (a)(2)    
[ ] on (date) pursuant to paragraph (a)(2) of rule 485    
If appropriate, check the following box:    
[ ] This post-effective amendment designates a new effective date for a  
previously filed post-effective amendment.    

 


 

Vanguard Bond Index Funds  
Prospectus    
 
April 26, 2019    
 
 
Investor Shares & Admiral™ Shares    
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)  
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)  
Vanguard Short-Term Bond Index Fund Investor Shares   (VBISX)  
Vanguard Short-Term Bond Index Fund Admiral Shares   (VBIRX)  
Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX)  
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX)  
Vanguard Long-Term Bond Index Fund Investor Shares   (VBLTX)  
Vanguard Long-Term Bond Index Fund Admiral Shares (VBLAX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.    
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Vanguard Fund Summaries     Investing With Vanguard   47  
Total Bond Market Index Fund   1   Purchasing Shares   47  
Short-Term Bond Index Fund   7   Converting Shares   51  
Intermediate-Term Bond Index Fund   12   Redeeming Shares   52  
Long-Term Bond Index Fund   17   Exchanging Shares   57  
Investing in Index Funds   22   Frequent-Trading Limitations   57  
More on the Funds   23   Other Rules You Should Know   59  
The Funds and Vanguard   35   Fund and Account Updates   64  
Investment Advisor   36   Employer-Sponsored Plans   65  
Dividends, Capital Gains, and Taxes   37   Contacting Vanguard   66  
Share Price   39   Additional Information   67  
Financial Highlights   40   Glossary of Investment Terms   69  

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Investor Shares   Admiral Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  
Account Service Fee (for certain fund account balances below   $20/year   $20/year  
$10,000)      
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
  Investor Shares   Admiral Shares  
Management Fees   0.13%   0.04%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.02%   0.01%  
Total Annual Fund Operating Expenses   0.15%   0.05%  

 

1


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Investor Shares   $15   $48   $85   $192  
Admiral Shares   $5   $16   $28   $64  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 8.3 years.

2


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund’s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates . Extension risk should be moderate for the Fund.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such redemptions and subsequent reinvestments would also increase the Fund‘s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

3


 

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 3.98% (quarter ended September 30, 2011), and the lowest return for a quarter was –3.19% (quarter ended December 31, 2016).

4


 

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Total Bond Market Index Fund Investor Shares        
Return Before Taxes   –0.13%   2.35%   3.31%  
Return After Taxes on Distributions   –1.22   1.26   2.14  
Return After Taxes on Distributions and Sale of Fund Shares   –0.08   1.32   2.10  
Vanguard Total Bond Market Index Fund Admiral Shares        
Return Before Taxes   –0.03%   2.46%   3.42%  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Aggregate Float Adjusted Index   –0.08%   2.50%   %  
Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index   –0.08   2.50   3.49  
Bloomberg Barclays U.S. Aggregate Bond Index   0.01   2.52   3.48  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

5


 

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Investor Shares or Admiral Shares is $3,000. The minimum investment amount required to add to an existing Fund account is generally $1. Financial intermediaries, institutional clients, and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

Vanguard Short-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Investor Shares   Admiral Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  
Account Service Fee (for certain fund account balances below   $20/year   $20/year  
$10,000)      
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
  Investor Shares   Admiral Shares  
Management Fees   0.13%   0.06%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.02%   0.01%  
Total Annual Fund Operating Expenses   0.15%   0.07%  

 

7


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Investor Shares   $15   $48   $85   $192  
Admiral Shares   $7   $23   $40   $90  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 48 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally does not exceed 3 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 2.8 years.

8


 

Principal Risks

The Fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds, so investors should expect the Fund’s monthly income to fluctuate.

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for the Fund because it invests primarily in short-term bonds, whose prices are less sensitive to interest rate changes than are the prices of longer-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. 1-5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

9


 

Annual Total Returns — Vanguard Short-Term Bond Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 2.04% (quarter ended September 30, 2009), and the lowest return for a quarter was –1.14% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Short-Term Bond Index Fund Investor Shares        
Return Before Taxes   1.27%   1.16%   1.89%  
Return After Taxes on Distributions   0.47   0.52   1.19  
Return After Taxes on Distributions and Sale of Fund Shares   0.74   0.60   1.19  
Vanguard Short-Term Bond Index Fund Admiral Shares        
Return Before Taxes   1.35%   1.24%   1.98%  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float Adjusted        
Index   1.38%   1.32%   %  
Spliced Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float        
Adjusted Index   1.38   1.32   2.09  
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Bond Index   1.38   1.32   2.09  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also,

10


 

figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Investor Shares or Admiral Shares is $3,000. The minimum investment amount required to add to an existing Fund account is generally $1. Financial intermediaries, institutional clients, and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

11


 

Vanguard Intermediate-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Investor Shares   Admiral Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  
Account Service Fee (for certain fund account balances below   $20/year   $20/year  
$10,000)      
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
  Investor Shares   Admiral Shares  
Management Fees   0.11%   0.06%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.04%   0.01%  
Total Annual Fund Operating Expenses   0.15%   0.07%  

 

12


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Investor Shares   $15   $48   $85   $192  
Admiral Shares   $7   $23   $40   $90  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 53 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 5–10 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 5 and 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 7.2 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 6.3 years.

13


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

14


 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.39% (quarter ended September 30, 2009), and the lowest return for a quarter was –4.17% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Intermediate-Term Bond Index Fund Investor Shares        
Return Before Taxes   –0.25%   2.84%   4.36%  
Return After Taxes on Distributions   –1.38   1.61   2.96  
Return After Taxes on Distributions and Sale of Fund Shares   –0.16   1.65   2.89  
Vanguard Intermediate-Term Bond Index Fund Admiral Shares        
Return Before Taxes   –0.17%   2.92%   4.46%  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float Adjusted        
Index   –0.07%   2.98%   %  
Spliced Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float        
Adjusted Index   –0.07   2.98   4.48  
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Bond Index   –0.07   2.98   4.47  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also,

15


 

figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Investor Shares or Admiral Shares is $3,000. The minimum investment amount required to add to an existing Fund account is generally $1. Financial intermediaries, institutional clients, and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

16


 

Vanguard Long-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Investor Shares   Admiral Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  
Account Service Fee (for certain fund account balances below   $20/year   $20/year  
$10,000)      
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
  Investor Shares   Admiral Shares 1  
Management Fees   0.13%   0.04%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.02%   0.03%  
Total Annual Fund Operating Expenses   0.15%   0.07%  

 

1 The expense information shown in the table reflects estimated amounts for the current fiscal year.

17


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Investor Shares   $15   $48   $85   $192  
Admiral Shares   $7   $23   $40   $90  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 38% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 15 and 30 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 24.1 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 15 years.

18


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be high for the Fund because it invests primarily in long-term bonds, whose prices are more sensitive to interest rate changes than are the prices of shorter-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk should be low for the Fund because it invests primarily in long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund’s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Investor Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Fund‘s Admiral Shares have not been in operation long enough to report a full calendar-year return. Performance of the Fund‘s Admiral Shares would be substantially similar to that of the Investor Shares because both share classes constitute an investment in the same portfolio of securities; therefore, their returns generally should differ only to the extent that the expenses of the two share classes differ. The Spliced Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Long Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and

19


 

after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Bond Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 16.01% (quarter ended September 30, 2011), and the lowest return for a quarter was –8.30% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018

 

  1 Year   5 Years   10 Years  
Vanguard Long-Term Bond Index Fund Investor Shares        
Return Before Taxes   –4.51%   5.40%   5.79%  
Return After Taxes on Distributions   –6.03   3.63   3.96  
Return After Taxes on Distributions and Sale of Fund Shares   –2.65   3.38   3.78  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Long Gov/Credit Float Adjusted Index   –4.68%   5.37%   %  
Spliced Bloomberg Barclays U.S. Long Gov/Credit Float        
Adjusted Index   –4.68   5.37   5.88  
Bloomberg Barclays U.S. Long Gov/Credit Bond Index   –4.68   5.37   5.88  

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the

20


 

same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Investor Shares or Admiral Shares is $3,000. The minimum investment amount required to add to an existing Fund account is generally $1. Financial intermediaries, institutional clients, and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

21


 

Investing in Index Funds

What Is Indexing?

Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bond s. One cannot invest directly in an index.

The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. Generally, the index sponsor does not provide any warranty, or accept any liability, with respect to the quality, accuracy, or completeness of either the target index or its related data. Errors made by the index sponsor may occur from time to time and Vanguard does not provide any warranty or guarantee against such errors. Therefore, the gains, losses, or costs associated with the index sponsor’s errors will generally be borne by the index fund and its shareholders .

An index fund seeks to hold all, or a representative sample, of the securities that make up its target index. Index funds attempt to mirror the performance of the target index, for better or worse. However, an index fund generally does not perform exactly like its target index. For example, index funds have operating expenses and transaction costs. Market indexes do not, and therefore they will usually have a slight performance advantage over funds that track them.

Index funds typically have the following characteristics:

Variety of investments. Index funds generally invest in the securities of a variety of companies and industries.

Relative performance consistency . Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.

Low cost . Index funds are generally inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity—and thus dealer markups and other transaction costs—to a minimum compared with actively managed funds.

22


 

More on the Funds

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Funds’ Investor Shares and Admiral Share s. A separate prospectus offers Institutional Shares and Institutional Plus Shares of the Funds, which are generally for investors who invest a minimum of $5 million and $100 million, respectively. Another prospectus offers Institutional Select Shares for the Total Bond Market Index Fund, which are generally for investors who invest a minimum of $3 billion. In addition, each Fund issues ETF Shares (an exchange-traded class of shares), which are also offered through a separate prospectus.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund’s performance.  

 

The following sections explain the principal investment strategies and policies that each Fund uses in pursuit of its objective. The Funds‘ board of trustees, which oversees each Fund‘s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Each Fund‘s policy of investing at least 80% of its assets in bonds that are part of its target index may be changed only upon 60 days‘ notice to shareholders.

23


 

Market Exposure


Each Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for short-term bond funds, moderate for intermediate-term bond funds, and high for long-term bond funds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Funds in particular.

24


 

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .


Each Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally higher for short-term bond funds and lower for long-term bond funds.

25


 

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Total Bond Market Index Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.


The Total Bond Market Index Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

26


 


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate.

Call risk should be low for the Total Bond Market Index Fund and very low for the other Funds.


Each Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

The credit quality of each Fund is expected to be very high, and thus credit risk is expected to be low.

To a limited extent, the Funds are subject to event risk, which is the chance that corporate fixed income securities held by a Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


Each Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell.

27


 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in their target indexes, each Fund uses index “sampling” techniques to select securities. Using computer programs, each Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, each Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Funds do not hold all of the securities included in their target indexes, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target indexes. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


Each Fund is subject to index sampling risk, which is the chance that the securities selected for a Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for each Fund is expected to be low.

The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target index, as of December 31, 2018 .

  Number of   Number of Bonds  
Vanguard Fund   Bonds Held   in Target Index  
Total Bond Market Index Fund   8,582   10,248  
Short-Term Bond Index Fund   2,552   2,908  
Intermediate-Term Bond Index Fund   1,842   1,963  
Long-Term Bond Index Fund   2,149   2,233  

 

Types of bonds. The Total Bond Market Index Fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index; the Short-Term, Intermediate-Term, and Long-Term Bond Index Funds track subsets of that Index. The Bloomberg Barclays U.S. Aggregate Float Adjusted Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

28


 

As of December 31, 2018 , each Fund was composed of the following types of bonds:

  U.S.       International      
  Government/     Mortgage-   Dollar-      
Vanguard Fund   Agency   Corporate   Backed   Denominated   Other   Total  
Total Bond Market              
Index Fund   43.3%   28.9%   22.1%   5.2%   0.5%   100%  
Short-Term Bond              
Index Fund   65.6   27.0     7.3   0.1   100  
Intermediate-Term              
Bond Index Fund   54.0   40.4     5.3   0.3   100  
Long-Term Bond              
Index Fund   43.5   48.7     7.6   0.2   100  

 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). Each Fund expects to purchase only investment-grade corporate bonds.

29


 

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments. Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Total Bond Market Index Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance the Fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the Fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the Fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that a Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

30


 

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

Other Investment Policies and Risks

Each Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of each Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The Fund’s advisor expects that vast majority of these securities will have characteristics similar to those in the target indexes. Subject to the same 20% limit, the Funds may also purchase other investments that are outside of their target indexes or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Funds may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

31


 

Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

Each Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market index, or a reference rate . Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

Each Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. A Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

Cash Management

Each Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, each Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, each Fund typically expects to meet redemptions with positive cash flows. When this is not an option, each Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, a Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio; see “Potentially disruptive redemptions” under Redeeming Shares in the Investing With Vanguard section.

Under certain circumstances, including under stressed market conditions, there are additional tools that each Fund may use in order to meet redemptions, including

32


 

advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. A Fund may also suspend payment of redemption proceeds for up to seven days; see “Emergency circumstances” under Redeeming Shares in the Investing With Vanguard section. Additionally under these unusual circumstances, a Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

Each Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or

33


 

otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

See the Investing With Vanguard section of this prospectus for further details on Vanguard’s transaction policies.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Funds generally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests from shareholders of conventional (not exchange-traded) shares or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

34


 

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

35


 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Funds pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Funds.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of each Fund’s average net assets.

Under the terms of an SEC exemption, the Funds‘ board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in a Fund’s advisory arrangements will be communicated to shareholders in writing. As the Funds‘ sponsor and overall manager, Vanguard may provide investment advisory services to a Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Funds have filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, t he Funds may rely on the new SEC relief.

For a discussion of why the board of trustees approved each Fund’s investment advisory arrangement, see the most recent semiannual reports to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Funds is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, has managed the Intermediate-Term Bond Index Fund since 2008, and has managed the Total Bond Market Index, Short-Term Bond Index, and Long-Term Bond Index Funds since 2013. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Funds‘ Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Funds.

36


 

Dividends, Capital Gains, and Taxes

Fund Distributions

Each Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings . Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December. In addition, each Fund may occasionally make a supplemental distribution at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional Fund shares.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Funds‘ normal investment activities and cash flows.

37


 

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Funds offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

38


 

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Funds do not sell or redeem shares. However, on those days the value of a Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

39


 

Financial Highlights

The following financial highlights tables are intended to help you understand each Fund’s financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The Long-Term Bond Index Fund’s Admiral Shares did not commence operations until February 7, 2019, and therefore have no financial performance to report. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose reports—along with each Fund’s financial statements—are included in the Funds‘ most recent annual reports to shareholders. You may obtain a free copy of the latest annual or semiannual reports by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market Index Fund Investor Shares            
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.75   $10.65   $10.64   $10.87   $10.56  
Investment Operations            
Net Investment Income   .279 1   .260 1   .254   .253   .264  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.296)   .105   .015   (.219)   .339  
Total from Investment Operations   (.017)   .365   .269   .034   .603  
Distributions            
Dividends from Net Investment Income   (.280)   (.260)   (.254)   (.254)   (.264)  
Distributions from Realized Capital Gains   (.003)   (.005)   (.005)   (.010)   (.029)  
Total Distributions   (.283)   (.265)   (.259)   (.264)   (.293)  
Net Asset Value, End of Period   $10.45   $10.75   $10.65   $10.64   $10.87  
Total Return 2   –0.13%   3.45%   2.50%   0.30%   5.76%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $4,250   $5,166   $5,969   $6,434   $7,076  
Ratio of Total Expenses to Average Net Assets   0.15%   0.15%   0.15%   0.16%   0.20%  
Ratio of Net Investment Income to Average            
Net Assets   2.68%   2.42%   2.30%   2.34%   2.44%  
Portfolio Turnover Rate 3,4   54%   55%   61%   84%   72%  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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 13%, 15%, 23%, 45%, and 38% attributable to mortgage-dollar-roll activity.

40


 

Total Bond Market Index Fund Admiral Shares            
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.75   $10.65   $10.64   $10.87   $10.56  
Investment Operations            
Net Investment Income   .290 1   .271 1   .265   .263   .278  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.297)   .105   .015   (.219)   .339  
Total from Investment Operations   (.007)   .376   .280   .044   .617  
Distributions            
Dividends from Net Investment Income   (.290)   (.271)   (.265)   (.264)   (.278)  
Distributions from Realized Capital Gains   (.003)   (.005)   (.005)   (.010)   (.029)  
Total Distributions   (.293)   (.276)   (.270)   (.274)   (.307)  
Net Asset Value, End of Period   $10.45   $10.75   $10.65   $10.64   $10.87  
Total Return 2   –0.03%   3.56%   2.60%   0.40%   5.89%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $88,281   $82,839   $72,592   $60,783   $54,198  
Ratio of Total Expenses to Average Net Assets   0.05%   0.05%   0.05%   0.06%   0.07%  
Ratio of Net Investment Income to Average            
Net Assets   2.78%   2.52%   2.40%   2.44%   2.57%  
Portfolio Turnover Rate 3,4   54%   55%   61%   84%   72%  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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 13%, 15%, 23%, 45%, and 38% attributable to mortgage-dollar-roll activity.

41


 

Short-Term Bond Index Fund Investor Shares            
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.38   $10.43   $10.43   $10.48   $10.49  
Investment Operations            
Net Investment Income   .198 1   .164 1   .146   .130   .116  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.069)   (.050)   .002   (.040)   .005  
Total from Investment Operations   .129   .114   .148   .090   .121  
Distributions            
Dividends from Net Investment Income   (.199)   (.164)   (.146)   (.130)   (.116)  
Distributions from Realized Capital Gains     (.000) 2   (.002)   (.010)   (.015)  
Total Distributions   (.199)   (.164)   (.148)   (.140)   (.131)  
Net Asset Value, End of Period   $10.31   $10.38   $10.43   $10.43   $10.48  
Total Return 3   1.27%   1.10%   1.41%   0.85%   1.16%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $1,143   $1,545   $1,865   $2,307   $2,667  
Ratio of Total Expenses to Average Net Assets   0.15%   0.15%   0.15%   0.16%   0.20%  
Ratio of Net Investment Income to Average            
Net Assets   1.94%   1.57%   1.38%   1.23%   1.10%  
Portfolio Turnover Rate 4   48%   50%   51%   52%   45%  

1 Calculated based on average shares outstanding. 2 Distribution was less than $0.001 per share.

3 Total returns do not include account service fees that may have applied in the periods shown.

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.

42


 

Short-Term Bond Index Fund Admiral Shares            
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.38   $10.43   $10.43   $10.48   $10.49  
Investment Operations            
Net Investment Income   .207 1   .172 1   .154   .137   .126  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.070)   (.050)   .002   (.040)   .005  
Total from Investment Operations   .137   .122   .156   .097   .131  
Distributions            
Dividends from Net Investment Income   (.207)   (.172)   (.154)   (.137)   (.126)  
Distributions from Realized Capital Gains     (.000) 2   (.002)   (.010)   (.015)  
Total Distributions   (.207)   (.172)   (.156)   (.147)   (.141)  
Net Asset Value, End of Period   $10.31   $10.38   $10.43   $10.43   $10.48  
Total Return 3   1.35%   1.18%   1.49%   0.92%   1.26%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $13,812   $16,034   $15,335   $14,662 $13,212  
Ratio of Total Expenses to Average Net Assets   0.07%   0.07%   0.07%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   2.02%   1.65%   1.46%   1.30%   1.20%  
Portfolio Turnover Rate 4   48%   50%   51%   52%   45%  

1 Calculated based on average shares outstanding. 2 Distribution was less than $0.001 per share.

3 Total returns do not include account service fees that may have applied in the periods shown.

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.

43


 

Intermediate-Term Bond Index Fund Investor Shares          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $11.36   $11.24   $11.26   $11.46   $11.09  
Investment Operations            
Net Investment Income   .306 1   .289 1   .289   .302   .316  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.340)   .132   .025   (.162)   .437  
Total from Investment Operations   (.034)   .421   .314   .140   .753  
Distributions            
Dividends from Net Investment Income   (.306)   (.290)   (.289)   (.302)   (.316)  
Distributions from Realized Capital Gains     (.011)   (.045)   (.038)   (.067)  
Total Distributions   (.306)   (.301)   (.334)   (.340)   (.383)  
Net Asset Value, End of Period   $11.02   $11.36   $11.24   $11.26   $11.46  
Total Return 2   –0.25%   3.76%   2.75%   1.21%   6.85%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $1,037   $1,307   $1,472   $1,397   $1,551  
Ratio of Total Expenses to Average Net Assets   0.15%   0.15%   0.15%   0.16%   0.20%  
Ratio of Net Investment Income to Average            
Net Assets   2.79%   2.54%   2.48%   2.62%   2.76%  
Portfolio Turnover Rate 3   53%   55%   57%   51%   60%  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

44


 

Intermediate-Term Bond Index Fund Admiral Shares          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $11.36   $11.24   $11.26   $11.46   $11.09  
Investment Operations            
Net Investment Income   .315 1   .298 1   .299   .309   .327  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.341)   .132   .025   (.162)   .437  
Total from Investment Operations   (.026)   .430   .324   .147   .764  
Distributions            
Dividends from Net Investment Income   (.314)   (.299)   (.299)   (.309)   (.327)  
Distributions from Realized Capital Gains     (.011)   (.045)   (.038)   (.067)  
Total Distributions   (.314)   (.310)   (.344)   (.347)   (.394)  
Net Asset Value, End of Period   $11.02   $11.36   $11.24   $11.26   $11.46  
Total Return 2   –0.17%   3.85%   2.83%   1.27%   6.96%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $12,830   $13,477   $11,954   $10,061   $8,922  
Ratio of Total Expenses to Average Net Assets   0.07%   0.07%   0.07%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   2.87%   2.62%   2.56%   2.69%   2.86%  
Portfolio Turnover Rate 3   53%   55%   57%   51%   60%  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

45


 

Long-Term Bond Index Fund Investor Shares            
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $14.42   $13.51   $13.20   $14.26   $12.41  
Investment Operations            
Net Investment Income   .515 1   .519 1   .529   .546   .556  
Net Realized and Unrealized Gain (Loss)            
on Investments   (1.168)   .910   .333   (1.025)   1.853  
Total from Investment Operations   (.653)   1.429   .862   (.479)   2.409  
Distributions            
Dividends from Net Investment Income   (.515)   (.519)   (.529)   (.546)   (.556)  
Distributions from Realized Capital Gains   (.022)     (.023)   (.035)   (.003)  
Total Distributions   (.537)   (.519)   (.552)   (.581)   (.559)  
Net Asset Value, End of Period   $13.23   $14.42   $13.51   $13.20   $14.26  
Total Return 2   –4.51%   10.76%   6.41%   –3.47%   19.72%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $2,808   $3,047   $2,595   $2,415   $2,594  
Ratio of Total Expenses to Average Net Assets   0.15%   0.15%   0.15%   0.16%   0.20%  
Ratio of Net Investment Income to Average            
Net Assets   3.85%   3.71%   3.72%   3.95%   4.10%  
Portfolio Turnover Rate 3   38%   41%   45%   42%   39%  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

46


 

Investing With Vanguard

This section of the prospectus explains the basics of doing business with Vanguard. Vanguard fund shares can be held directly with Vanguard or indirectly through an intermediary, such as a bank, a broker, or an investment advisor. If you hold Vanguard fund shares directly with Vanguard, you should carefully read each topic within this section that pertains to your relationship with Vanguard. If you hold Vanguard fund shares indirectly through an intermediary (including shares held in a brokerage account through Vanguard Brokerage Services ® ), please see Investing With Vanguard Through Other Firms , and also refer to your account agreement with the intermediary for information about transacting in that account. If you hold Vanguard fund shares through an employer-sponsored retirement or savings plan, please see Employer-Sponsored Plans . Vanguard reserves the right to change the following policies without notice. Please call or check online for current information. See Contacting Vanguard.

For Vanguard fund shares held directly with Vanguard, each fund you hold in an account is a separate “fund account.” For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accounts—and this is true even if you hold the same fund in multiple accounts. Note that each reference to “you” in this prospectus applies to any one or more registered account owners or persons authorized to transact on your account.

Purchasing Shares

Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account or to add to an existing fund account.

Investment minimums may differ for certain categories of investors.

Account Minimums for Investor Shares To open and maintain an account. $3,000.

To add to an existing account. Generally $1.

Account Minimums for Admiral Shares

To open and maintain an account. $3,000. Financial intermediaries, institutional clients , and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility.

To add to an existing account. Generally $1.

47


 

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also call Vanguard to request a purchase of shares in your account or to request an exchange. See

Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from a transaction confirmation or your account statement) or with a deposit slip (available online). For a list of Vanguard addresses, see Contacting Vanguard .

Transaction Fees on Purchases

Each Fund reserves the right to charge the following transaction fees to investors whose aggregate share purchases into the Fund equal or exceed the following amounts:

Vanguard Fund   Transaction Fee   Aggregate Purchases  
Total Bond Market Index Fund   0.25%   Over $500 million  
Short-Term Bond Index Fund   0.15   Over $200 million  
Intermediate-Term Bond Index Fund   0.25   Over $100 million  
Long-Term Bond Index Fund   0.50   Over $100 million  

 

Each Fund may impose these transaction fees if an investor’s aggregate purchases into a Fund over a 12-month period exceed, or are expected to exceed, the indicated amounts upon notice to the client in conjuction with a purchase that triggers application of the fees. The fees will be assessed only if the client elects to proceed with the purchase. Generally, these fees will not apply to transactions coordinated in advance between a client and Vanguard.

48


 

How to Pay for a Purchase

By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money from a bank account. To establish the electronic bank transfer service on an account, you must designate the bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or upon request. Your purchase request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.

By check. You may make initial or additional purchases to your fund account by sending a check with a deposit slip or by utilizing our mobile application if you are registered for online access. Also see How to Initiate a Purchase Request. Make your check payable to Vanguard and include the appropriate fund number (e.g., Vanguard—xx). For a list of Fund numbers (for Funds and share classes in this prospectus), see Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail with an exchange form . See Exchanging Shares .

Trade Date

The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For purchases by check into all funds other than money market funds and for purchases by exchange , wire , or electronic bank transfer (not using an Automatic Investment Plan) into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the next business day.

For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the next business day. If the purchase request is received on a business day after the close of

49


 

regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date for the purchase will be one business day later than for other funds.

For purchases by electronic bank transfer using an Automatic Investment Plan : Your trade date generally will be the date you selected for withdrawal of funds from your designated bank account. Your bank account generally will be debited on the business day after your trade date. If the date you selected for withdrawal of funds from your bank account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your designated bank account falls on the last business day of the year, your trade date will be the first business day of the following year. Please note that if you select the first of the month for automated withdrawals from your designated bank account, trades designated for January 1 will receive the next business day’s trade date.

If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know—Good Order .

For further information about purchase transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally begin earning dividends on the business day following your trade date. When buying money market fund shares through a federal funds wire on a business day, however, you generally can begin earning dividends immediately by making a purchase request by telephone to Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund).

Other Purchase Rules You Should Know

Admiral Shares. Admiral Shares generally are not available for SIMPLE IRAs and Vanguard Individual 401(k) Plans.

Check purchases. All purchase checks must be written in U.S. dollars, be drawn on a U.S. bank , and be accompanied by good order instructions . Vanguard does not accept cash, traveler’s checks, starter checks, or money orders. In addition, Vanguard may refuse checks that are not made payable to Vanguard.

50


 

New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable. Certain types of accounts may require additional documentation.

Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because the investor has a history of frequent trading or because the purchase may negatively affect a fund’s operation or performance.

Large purchases. Call Vanguard before attempting to invest a large dollar amount.

No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.

Converting Shares

When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the “new” shares you receive equals the dollar value of the “old” shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the NAVs of the two share classes.

Vanguard will not accept your request to cancel any self-directed conversion request once processing has begun. Please be careful when placing a conversion request.

A conversion between share classes of the same fund is a nontaxable event.

Trade Date

The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.

51


 

Conversions From Investor Shares to Admiral Shares

Self-directed conversions. You may ask Vanguard to convert your Investor Shares to Admiral Shares at any time. You may request a conversion through our website (if you are registered for online access), by telephone, or by mail. Financial intermediaries, institutional clients , and Vanguard- advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. See Contacting Vanguard . If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibilit y.

Conversions to Institutional Shares or Institutional Plus Shares

You are eligible for a self-directed conversion from another share class to Institutional Shares or Institutional Plus Shares of the same Fund, provided that your account meets all eligibility requirements. You may request a conversion through our website (if you are registered for online access), or you may contact Vanguard by telephone or by mail to request this transaction. Accounts that qualify for Institutional Shares or Institutional Plus Shares will not be automatically converted.

Conversions to Institutional Select Shares

You are eligible for a self-directed conversion from another share class to Institutional Select Shares of the same Fund (if available), provided that your account meets all eligibility requirements. You may request a conversion through our website (if you are registered for online access), through a trading platform, by mail, or by telephone. Accounts that qualify for Institutional Select Shares will not be automatically converted.

Mandatory Conversions to Another Share Class

If an account no longer meets the balance requirements for a share class, Vanguard may automatically convert the shares in the account to another share class, as appropriate. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.

Redeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares or request an exchange through our website or our mobile application if you are registered for online access.

52


 

By telephone. You may call Vanguard to request a redemption of shares or an exchange. See Contacting Vanguard .

By mail. You may send a form (available online) to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard .

By writing a check. If you have established the checkwriting service on your account, you can redeem shares by writing a check for $250 or more.

How to Receive Redemption Proceeds

By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer service on an account, you must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or upon request. Your redemption request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. To receive your proceeds by wire, you may instruct Vanguard to wire your redemption proceeds ($100 minimum) to a previously designated bank account. To establish the wire redemption service, you generally must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form.

Please note that Vanguard charges a $10 wire fee for outgoing wire redemptions. The fee is assessed in addition to, rather than being withheld from, redemption proceeds and is paid directly to the fund in which you invest . For example, if you redeem $100 via a wire, you will receive the full $100, and the $10 fee will be assessed to your fund account with an additional redemption of fund shares . If you redeem your entire fund account, your redemption proceeds will be reduced by the amount of the fee . The wire fee does not apply to accounts held by Flagship and Flagship Select clients; accounts held through intermediaries, including Vanguard Brokerage Services; or accounts held by institutional clients.

By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail. See Exchanging Shares .

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, normally within two business days of your trade date, and generally to the address of record.

53


 

Trade Date

The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For redemptions by check , exchange , or wire : If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

• Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.

• Note on timing of wire redemptions from all other funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.

For redemptions by electronic bank transfer using an Automatic Withdrawal Plan : Your trade date generally will be the date you selected for withdrawal of funds (redemption of shares) from your Vanguard account. Proceeds of redeemed shares generally will be credited to your designated bank account two business days after your trade date. If the date you selected for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your Vanguard account falls on the last day of the year and if that date is a holiday, your trade date will be the first business day of the following year. Please note that if you designate the first of the month for automated withdrawals, trades designated for January 1 will receive the next business day’s trade date.

54


 

For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

If your redemption request is received in good order, we typically expect that redemption proceeds will be paid by a Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction. For further information, see “Potentially disruptive redemptions” and “Emergency circumstances.”

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally will continue earning dividends until the first business day following your trade date. Generally, there are two exceptions to this rule: (1) If you redeem shares by writing a check against your account, the shares will stop earning dividends on the day that your check posts to your account; and (2) For money market funds, if you redeem shares with a same-day wire request before 10:45 a.m., Eastern time, on a business day (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the shares will stop earning dividends that same day.

Other Redemption Rules You Should Know

Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts.

55


 

Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limitations for information about Vanguard’s policies to limit frequent trading.

Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to seven calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.

Share certificates. Share certificates are no longer issued for Vanguard funds. Shares currently held in certificates cannot be redeemed, exchanged, converted, or transferred (reregistered) until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard .

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing (using a form available online) at any time. Confirmations of address changes are sent to both the old and new addresses.

Payment to a different person or address. At your request, we can make your redemption check payable, or wire your redemption proceeds, to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require additional documentation, such as a signature guarantee or a notarized signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange.

No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.

Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.

56


 

Exchanging Shares

An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are registered for online access), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Call Vanguard before attempting to exchange a large dollar amount. By calling us before you attempt to exchange a large dollar amount, you may avoid delayed or rejected transactions.

Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. See Frequent-Trading Limitations for additional restrictions on exchanges.

Frequent-Trading Limitations

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in the funds. Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) limits an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to these frequent-trading limits.

For Vanguard Retirement Investment Program pooled plans, the limitations apply to exchanges made online or by telephone.

These frequent-trading limitations do not apply to the following:

• Purchases of shares with reinvested dividend or capital gains distributions.

• Transactions through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online ® .

• Discretionary transactions through Vanguard Personal Advisor Services ® and Vanguard Institutional Advisory Services ® .

57


 

• Redemptions of shares to pay fund or account fees.

• Redemptions of shares to remove excess shareholder contributions to certain types of retirement accounts (including, but not limited to, IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans).

• Transfers and reregistrations of shares within the same fund.

• Purchases of shares by asset transfer or direct rollover.

• Conversions of shares from one share class to another in the same fund.

• Checkwriting redemptions.

• Section 529 college savings plans.

• Certain approved institutional portfolios and asset allocation programs, as well as trades made by funds or trusts managed by Vanguard or its affiliates that invest in other Vanguard funds. (Please note that shareholders of Vanguard’s funds of funds are subject to the limitations.)

For participants in employer-sponsored defined contribution plans,* the frequent-trading limitations do not apply to:

• Purchases of shares with participant payroll or employer contributions or loan repayments.

• Purchases of shares with reinvested dividend or capital gains distributions.

• Distributions, loans, and in-service withdrawals from a plan.

• Redemptions of shares as part of a plan termination or at the direction of the plan.

• Transactions executed through the Vanguard Managed Account Program.

• Redemptions of shares to pay fund or account fees.

• Share or asset transfers or rollovers.

• Reregistrations of shares.

• Conversions of shares from one share class to another in the same fund.

• Exchange requests submitted by written request to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are subject to the limitations.)

* The following Vanguard fund accounts are subject to the frequent-trading limitations: SEP-IRAs, SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans.

Accounts Held by Institutions (Other Than Defined Contribution Plans)

Vanguard will systematically monitor for frequent trading in institutional clients’ accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client’s accounts the 30-day policy

58


 

previously described, prohibiting a client’s purchases of fund shares, and/or revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries will be asked to assess these fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading limitations. If you invest with Vanguard through an intermediary, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Other Rules You Should Know

Prospectus and Shareholder Report Mailings

When two or more shareholders have the same last name and address, just one summary prospectus (or prospectus) and/or shareholder report may be sent in an attempt to eliminate the unnecessary expense of duplicate mailings. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or online. See Contacting Vanguard .

Vanguard.com

Registration. If you are a registered user of vanguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions through our website. You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, prospectuses, certain tax forms, and shareholder reports electronically. If you are a registered user of vanguard.com , you can consent to the electronic delivery of these documents by logging on and changing your mailing preferences under “Account Maintenance.” You can revoke your electronic consent at any time

59


 

through our website, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

Telephone Transactions

Automatic. When we set up your account, we will automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.

Tele-Account ® . To obtain fund and account information through Vanguard’s automated telephone service, you must first establish a Personal Identification Number (PIN) by calling Tele-Account at 800-662-6273.

Proof of a caller’s authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:

• Authorization to act on the account (as the account owner or by legal documentation or other means).

• Account registration and address.

• Fund name and account number, if applicable.

• Other information relating to the caller, the account owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

• Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

• Include the fund name and account number.

• Include the amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must generally be provided on a Vanguard form and include:

S ignature( s) and date from the authorized person(s).

• Signature guarantees or notarized signatures, if required for the type of transaction.

(Call Vanguard for specific requirements.)

• Any supporting documentation that may be required.

Good order requirements may vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

60


 

Future Trade-Date Requests

Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares , Converting Shares , Redeeming Shares, and

Exchanging Shares . Vanguard reserves the right to return future-dated purchase checks.

Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally will accept instructions from any one owner or authorized person.

Responsibility for Fraud

Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. Vanguard may be required to transfer assets related to uncashed checks to a state under the state’s abandoned property law.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law, subject to potential federal or state withholding taxes .

Unusual Circumstances

If you experience difficulty contacting Vanguard online or by telephone, you can send us your transaction request on a Vanguard form by regular or express mail. See Contacting Vanguard for addresses.

61


 

Investing With Vanguard Through Other Firms

You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, a broker, or an investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply. Your financial intermediary can provide you with account information and any required tax forms. You may be required to pay a commission on purchases of mutual fund shares made through a financial intermediary.

Please see Frequent - Trading Limitations Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Account Service Fee

Vanguard charges a $20 account service fee on fund accounts that have a balance below $10,000 for any reason, including market fluctuation. The account service fee applies to both retirement and nonretirement fund accounts and will be assessed on fund accounts in all Vanguard funds, regardless of the account minimum. The fee, which will be collected by redeeming fund shares in the amount of $20, will be deducted from a fund account only once per calendar year.

If you register on vanguard.com and elect to receive electronic delivery of statements, reports, and other materials for all of your fund accounts, the account service fee for balances below $10,000 will not be charged, so long as that election remains in effect.

The account service fee also does not apply to the following:

• Money market sweep accounts owned in connection with a Vanguard Brokerage Services account.*

• Accounts held through intermediaries.*

• Accounts held by institutional clients.

• Accounts held by Voyager, Voyager Select, Flagship, and Flagship Select clients.

Eligibility is based on total household assets held at Vanguard, with a minimum of $50,000 to qualify for Vanguard Voyager Services ® , $500,000 for Vanguard Voyager Select Services ® , $1 million for Vanguard Flagship Services ® , and $5 million for Vanguard Flagship Select Services ® . Vanguard determines eligibility by aggregating assets of all qualifying accounts held by the investor and immediate family members who reside at the same address. Aggregate assets include investments in Vanguard mutual funds, Vanguard ETFs ® , certain annuities through Vanguard, the Vanguard 529 Plan, and certain small-business accounts. Assets in employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if the investor also has a personal account holding Vanguard mutual funds. Note that assets held in a Vanguard Brokerage Services account (other

62


 

than Vanguard funds, including Vanguard ETFs) are not included when determining a household’s eligibility.

• Participant accounts in employer-sponsored defined contribution plans.** Please consult your enrollment materials for the rules that apply to your account.

• Section 529 college savings plans.

* Please note that intermediaries, including Vanguard Brokerage Services, may charge a separate fee.

** The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Individual 401(k) Plans.

Low-Balance Accounts

Each Fund reserves the right to liquidate a fund account whose balance falls below the account minimum for any reason, including market fluctuation. This liquidation policy applies to nonretirement fund accounts and accounts that are held through intermediaries. Any such liquidation will be preceded by written notice to the investor.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

63


 

Share Classes

Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.

Fund and Account Updates

Confirmation Statements

We will send (or provide through our website, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.

Portfolio Summaries

We will send (or provide through our website, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter (or month). Promptly review each summary that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.

Tax Information Statements

For most accounts, Vanguard (or your intermediary) is required to provide annual tax forms to assist you in preparing your income tax returns. These forms are generally available for each calendar year early in the following year. Registered users of vanguard.com can also view certain forms through our website. Vanguard (or your intermediary) may also provide you with additional tax-related documentation. For more information, consult our website at vanguard.com or see Contacting Vanguard .

Annual and Semiannual Reports

We will send (or provide through our website, whichever you prefer) reports about Vanguard Bond Index Funds twice a year, in February and August. These reports

64


 

include overviews of the financial markets and provide the following specific Fund information:

• Performance assessments and comparisons with industry benchmarks.

• Financial statements with listings of Fund holdings.

Portfolio Holdings

Please consult the Funds‘ Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of a Fund’s portfolio holdings.

Employer-Sponsored Plans

Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option.

• If you have any questions about a Fund or Vanguard, including those about a Fund’s investment objective, strategies, or risks, contact Vanguard Participant Services toll-free at 800-523-1188 or visit our website at vanguard.com.

• If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.

• Be sure to carefully read each topic that pertains to your transactions with Vanguard.

Vanguard reserves the right to change its policies without notice to shareholders.

Transactions

Processing times for your transaction requests may differ among recordkeepers or among transaction and funding types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing time frames for your transaction requests prior to submission to a Fund. Consult your recordkeeper or plan administrator for more information.

If Vanguard is serving as your plan recordkeeper and if your transaction involves one or more investments with an early cut-off time for processing or another trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

65


 

Contacting Vanguard    
 
 
Web    
Vanguard.com   For the most complete source of Vanguard news  
  For fund, account, and service information  
  For most account transactions  
  For literature requests  
  24 hours a day, 7 days a week  
 
Phone    
Vanguard Tele-Account ® 800-662-6273   For automated fund and account information  
  Toll-free, 24 hours a day, 7 days a week  
Investor Information 800-662-7447   For fund and service information  
(Text telephone for people with hearing   For literature requests  
impairment at 800-749-7273)    
Client Services 800-662-2739   For account information  
(Text telephone for people with hearing   For most account transactions  
impairment at 800-749-7273)    
Participant Services 800-523-1188   For information and services for participants in employer-  
(Text telephone for people with hearing   sponsored plans  
impairment at 800-749-7273)    
Institutional Division   For information and services for large institutional investors  
888-809-8102    
Financial Advisor and Intermediary   For information and services for financial intermediaries  
Sales Support 800-997-2798   including financial advisors, broker-dealers, trust institutions,  
  and insurance companies  
Financial Advisory and Intermediary   For account information and trading support for financial  
Trading Support 800-669-0498   intermediaries including financial advisors, broker-dealers,  
  trust institutions, and insurance companies  

 

66


 

Vanguard Addresses

Please be sure to use the correct address and the correct form . Use of an incorrect address or form could delay the processing of your transaction.

Regular Mail (Individuals)   The Vanguard Group      
  P.O. Box 1110      
  Valley Forge, PA 19482-1110    
Regular Mail (Institutions, Intermediaries, and The Vanguard Group      
Employer-Sponsored Plan Participants)   P.O. Box 2900      
  Valley Forge, PA 19482-2900    
Registered, Express, or Overnight Mail   The Vanguard Group      
  455 Devon Park Drive      
  Wayne, PA 19087-1815      
 
Additional Information          
 
      Vanguard    
  Inception   Newspaper   Fund   CUSIP  
  Date   Abbreviation   Number   Number  
Total Bond Market Index Fund          
Investor Shares   12/11/1986   TotBd   84   921937108  
Admiral Shares   11/12/2001   TotBdAdml   584   921937603  
Short-Term Bond Index Fund          
Investor Shares   3/1/1994   STBond   132   921937207  
Admiral Shares   11/12/2001   STBondAdml   5132   921937702  
Intermediate-Term Bond Index Fund          
Investor Shares   3/1/1994   ITBond   314   921937306  
Admiral Shares   11/12/2001   ITBondAdml   5314   921937801  
Long-Term Bond Index Fund          
Investor Shares   3/1/1994   LTBond   522   921937405  
Admiral Shares   2/7/2019   LTBondAdml   2022   921937652  

 

67


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 1-5 Year Government/Credit Bond Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index, Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index, and Bloomberg Barclays U.S. Long Government/Credit Bond Index (the Indices or Bloomberg Barclays Indices).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Bond Index Funds and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Bond Index Funds. The Indices are licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Bond Index Funds. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Indices is the licensing of the Indices, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Bond Index Funds or the owners of the Bond Index Funds.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with the Bond Index Funds. Investors acquire the Bond Index Funds from Vanguard and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Bond Index Funds. The Bond Index Funds are not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Bond Index Funds or the advisability of investing in securities generally or the ability of the Indices to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Bond Index Funds with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Bond Index Funds to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Bond Index Funds or any other third party into consideration in determining, composing or calculating the Indices. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Bond Index Funds.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Bond Index Funds, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Bond Index Funds, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDICES, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE BOND INDEX FUNDS.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

68


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years.

Bloomberg Barclays U.S. 5–10 Year Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds with maturities of 5 to 10 years.

Bloomberg Barclays U.S. Aggregate Bond Index. An index that is the broadest representation of the taxable U.S. bond market, including most U.S. Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Bloomberg Barclays U.S. Long Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 10 years or more.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

69


 

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. Each Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Funds’ board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

70


 

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

71


 

This page intentionally left blank.


 

This page intentionally left blank.


 

P.O. Box 2600

Valley Forge, PA 19482-2600

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Bond Index Funds, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Funds’ investments is available in the Funds’ annual and semiannual reports to shareholders. In the annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during their last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Funds and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a participant in an employer-sponsored plan:

The Vanguard Group Participant Services P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-523-1188; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

Reports and other information about the Funds are av ailable in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.g ov.

Funds’ Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 084 042019


 

Vanguard Bond Index Funds  
Prospectus  
 
April 26, 2019  
 
 
Institutional Shares & Institutional Plus Shares  
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX)  
Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)  
Vanguard Short-Term Bond Index Fund Institutional Shares (VBITX)  
Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX)  
Vanguard Intermediate-Term Bond Index Fund Institutional Shares (VBIMX)  
Vanguard Intermediate-Term Bond Index Fund Institutional Plus Shares (VBIUX)  
Vanguard Long-Term Bond Index Fund Institutional Shares (VBLLX)  
Vanguard Long-Term Bond Index Fund Institutional Plus Shares (VBLIX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Vanguard Fund Summaries     Investing With Vanguard   48  
Total Bond Market Index Fund   1   Purchasing Shares   48  
Short-Term Bond Index Fund   7   Converting Shares   52  
Intermediate-Term Bond Index Fund   12   Redeeming Shares   53  
Long-Term Bond Index Fund   17   Exchanging Shares   57  
Investing in Index Funds   22   Frequent-Trading Limitations   57  
More on the Funds   23   Other Rules You Should Know   59  
The Funds and Vanguard   35   Fund and Account Updates   63  
Investment Advisor   35   Employer-Sponsored Plans   64  
Dividends, Capital Gains, and Taxes   36   Contacting Vanguard   65  
Share Price   38   Additional Information   66  
Financial Highlights   40   Glossary of Investment Terms   68  

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Institutional   Institutional Plus  
  Shares   Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  

 

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

  Institutional   Institutional Plus  
  Shares   Shares  
Management Fees   0.025%   0.03%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.01%   0.00%  
Total Annual Fund Operating Expenses   0.035%   0.03%  

 

1


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Institutional Shares or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Institutional Shares   $4   $11   $20   $45  
Institutional Plus Shares   $3   $10   $17   $39  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 8.3 years.

2


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund’s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates . Extension risk should be moderate for the Fund.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such redemptions and subsequent reinvestments would also increase the Fund‘s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

3


 

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter . The one-year and five-year returns shown in the table for the Institutional Plus Shares reflect the Institutional Plus Shares’ historical returns. The ten-year return in the table for the Institutional Plus Shares is a blend of the performance of the Fund’s Institutional Shares prior to the inception date of the Institutional Plus Shares—February 5, 2010—and performance of the Institutional Plus Shares thereafter. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

4


 

Annual Total Returns — Vanguard Total Bond Market Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.02% (quarter ended September 30, 2011), and the lowest return for a quarter was –3.16% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Total Bond Market Index Fund Institutional Shares        
Return Before Taxes   –0.01%   2.47%   3.45%  
Return After Taxes on Distributions   –1.15   1.33   2.22  
Return After Taxes on Distributions and Sale of Fund Shares   –0.01   1.38   2.18  
Vanguard Total Bond Market Index Fund Institutional Plus Shares      
Return Before Taxes   –0.01%   2.48%   3.46%  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Aggregate Float Adjusted Index   –0.08%   2.50%   %  
Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index   –0.08   2.50   3.49  
Bloomberg Barclays U.S. Aggregate Bond Index   0.01   2.52   3.48  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Institutional Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be

5


 

higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Institutional Shares or Institutional Plus Shares is $5 million or $100 million, respectively. The minimum investment amount required to add to an existing Fund account is generally $1. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

Vanguard Short-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Institutional   Institutional Plus  
  Shares   Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  

 

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

  Institutional   Institutional Plus  
  Shares   Shares  
Management Fees   0.05%   0.04%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.00%   0.00%  
Total Annual Fund Operating Expenses   0.05%   0.04%  

 

7


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Institutional Shares or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Institutional Shares   $5   $16   $28   $64  
Institutional Plus Shares   $4   $13   $23   $51  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 48 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally does not exceed 3 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 2.8 years.

8


 

Principal Risks

The Fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds, so investors should expect the Fund’s monthly income to fluctuate.

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for the Fund because it invests primarily in short-term bonds, whose prices are less sensitive to interest rate changes than are the prices of longer-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

9


 

Annual Total Returns — Vanguard Short-Term Bond Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 1.61% (quarter ended March 31, 2016), and the lowest return for a quarter was –1.12% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
 
      Since  
      Inception  
      (Sep. 27,  
  1 Year   5 Years   2011)  
Vanguard Short-Term Bond Index Fund Institutional Shares        
Return Before Taxes   1.37%   1.26%   1.25%  
Return After Taxes on Distributions   0.53   0.58   0.58  
Return After Taxes on Distributions and Sale of Fund Shares   0.80   0.66   0.68  
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float Adjusted        
Index        
(reflects no deduction for fees, expenses, or taxes)   1.38%   1.32%   1.31%  
      Since  
      Inception  
      (Sep. 29,  
  1 Year   5 Years   2011)  
Vanguard Short-Term Bond Index Fund Institutional Plus Shares        
Return Before Taxes   1.38%   1.28%   1.26%  
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float Adjusted        
Index        
(reflects no deduction for fees, expenses, or taxes)   1.38%   1.32%   1.31%  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and

10


 

local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Institutional Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Institutional Shares or Institutional Plus Shares is $5 million or $100 million, respectively. The minimum investment amount required to add to an existing Fund account is generally $1. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

11


 

Vanguard Intermediate-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Institutional   Institutional Plus  
  Shares   Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  

 

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

  Institutional   Institutional Plus  
  Shares   Shares  
Management Fees   0.05%   0.04%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.00%   0.00%  
Total Annual Fund Operating Expenses   0.05%   0.04%  

 

12


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Institutional Shares or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Institutional Shares   $5   $16   $28   $64  
Institutional Plus Shares   $4   $13   $23   $51  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 53 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 5–10 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 5 and 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 7.2 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 6.3 years.

13


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

14


 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.43% (quarter ended September 30, 2009), and the lowest return for a quarter was –4.14% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Intermediate-Term Bond Index Fund Institutional Shares      
Return Before Taxes   –0.15%   2.94%   4.49%  
Return After Taxes on Distributions   –1.32   1.67   3.04  
Return After Taxes on Distributions and Sale of Fund Shares   –0.10   1.71   2.97  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float Adjusted        
Index   –0.07%   2.98%   %  
Spliced Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float        
Adjusted Index   –0.07   2.98   4.48  
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Bond Index   –0.07   2.98   4.47  
      Since  
      Inception  
      (Nov. 30,  
  1 Year   5 Years   2011)  
Vanguard Intermediate-Term Bond Index Fund Institutional Plus Shares      
Return Before Taxes   –0.14%   2.96%   2.83%  
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float        
Adjusted Index        
(reflects no deduction for fees, expenses, or taxes)   –0.07%   2.98%   2.85%  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the

15


 

shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Institutional Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Institutional Shares or Institutional Plus Shares is $5 million or $100 million, respectively. The minimum investment amount required to add to an existing Fund account is generally $1. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

16


 

Vanguard Long-Term Bond Index Fund

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Institutional   Institutional Plus  
  Shares   Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  

 

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

  Institutional   Institutional Plus  
  Shares   Shares  
Management Fees   0.05%   0.04%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.00%   0.00%  
Total Annual Fund Operating Expenses   0.05%   0.04%  

 

17


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Institutional Shares or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Institutional Shares   $5   $16   $28   $64  
Institutional Plus Shares   $4   $13   $23   $51  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 38 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 15 and 30 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 24.1 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 15 years.

18


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be high for the Fund because it invests primarily in long-term bonds, whose prices are more sensitive to interest rate changes than are the prices of shorter-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk should be low for the Fund because it invests primarily in long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Long Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

19


 

Annual Total Returns — Vanguard Long-Term Bond Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 16.05% (quarter ended September 30, 2011), and the lowest return for a quarter was –8.28% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Long-Term Bond Index Fund Institutional Shares        
Return Before Taxes   –4.41%   5.51%   5.92%  
Return After Taxes on Distributions   –5.97   3.70   4.04  
Return After Taxes on Distributions and Sale of Fund Shares   –2.59   3.45   3.86  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Long Gov/Credit Float Adjusted Index   –4.68%   5.37%   %  
Spliced Bloomberg Barclays U.S. Long Gov/Credit Float        
Adjusted Index   –4.68   5.37   5.88  
Bloomberg Barclays U.S. Long Gov/Credit Bond Index   –4.68   5.37   5.88  
      Since  
      Inception  
      (Oct. 6,  
  1 Year   5 Years   2011)  
Vanguard Long-Term Bond Index Fund Institutional Plus Shares        
Return Before Taxes   –4.40%   5.52%   4.13%  
Bloomberg Barclays U.S. Long Gov/Credit Float Adjusted        
Index        
(reflects no deduction for fees, expenses, or taxes)   –4.68%   5.37%   4.04%  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the

20


 

shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Institutional Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Institutional Shares or Institutional Plus Shares is $5 million or $100 million, respectively. The minimum investment amount required to add to an existing Fund account is generally $1. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

21


 

Investing in Index Funds

What Is Indexing?

Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bond s. One cannot invest directly in an index.

The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. Generally, the index sponsor does not provide any warranty, or accept any liability, with respect to the quality, accuracy, or completeness of either the target index or its related data. Errors made by the index sponsor may occur from time to time and Vanguard does not provide any warranty or guarantee against such errors. Therefore, the gains, losses, or costs associated with the index sponsor’s errors will generally be borne by the index fund and its shareholders .

An index fund seeks to hold all, or a representative sample, of the securities that make up its target index. Index funds attempt to mirror the performance of the target index, for better or worse. However, an index fund generally does not perform exactly like its target index. For example, index funds have operating expenses and transaction costs. Market indexes do not, and therefore they will usually have a slight performance advantage over funds that track them.

Index funds typically have the following characteristics:

Variety of investments. Index funds generally invest in the securities of a variety of companies and industries.

Relative performance consistency . Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.

Low cost . Index funds are generally inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity—and thus dealer markups and other transaction costs—to a minimum compared with actively managed funds.

22


 

More on the Funds

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Funds’ Institutional Shares and Institutional Plus Shares, which are generally for investors who invest a minimum of $5 million and $100 million, respectively. A separate prospectus offers the Funds’ Investor Shares and Admiral™ Shares, which generally have investment minimums of $3,000 . Another prospectus offers Institutional Select Shares for the Total Bond Market Index Fund, which are generally for investors who invest a minimum of $3 billion. In addition, each Fund issues ETF Shares (an exchange-traded class of shares), which are also offered through a separate prospectus.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund’s performance.  

 

The following sections explain the principal investment strategies and policies that each Fund uses in pursuit of its objective. The Funds‘ board of trustees, which oversees each Fund‘s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Each Fund‘s policy of investing at least 80%

23


 

of its assets in bonds that are part of its target index may be changed only upon 60 days‘ notice to shareholders.

Market Exposure


Each Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for short-term bond funds, moderate for intermediate-term bond funds, and high for long-term bond funds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Funds in particular.

24


 

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .


Each Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally higher for short-term bond funds and lower for long-term bond funds.

25


 

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Total Bond Market Index Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.


The Total Bond Market Index Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

26


 


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate.

Call risk should be low for the Total Bond Market Index Fund and very low for the other Funds.


Each Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

The credit quality of each Fund is expected to be very high, and thus credit risk is expected to be low.

To a limited extent, the Funds are subject to event risk, which is the chance that corporate fixed income securities held by a Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


Each Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell.

27


 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in their target indexes, each Fund uses index “sampling” techniques to select securities. Using computer programs, each Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, each Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Funds do not hold all of the securities included in their target indexes, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target indexes. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


Each Fund is subject to index sampling risk, which is the chance that the securities selected for a Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for each Fund is expected to be low.

The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target index, as of December 31, 2018 .

  Number of   Number of Bonds  
Vanguard Fund   Bonds Held   in Target Index  
Total Bond Market Index Fund   8,582   10,248  
Short-Term Bond Index Fund   2,552   2,908  
Intermediate-Term Bond Index Fund   1,842   1,963  
Long-Term Bond Index Fund   2,149   2,233  

 

Types of bonds. The Total Bond Market Index Fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index; the Short-Term, Intermediate-Term, and Long-Term Bond Index Funds track subsets of that Index. The Bloomberg Barclays U.S. Aggregate Float Adjusted Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

28


 

As of December 31, 2018 , each Fund was composed of the following types of bonds:

  U.S.       International      
  Government/     Mortgage-   Dollar-      
Vanguard Fund   Agency   Corporate   Backed   Denominated   Other   Total  
Total Bond Market              
Index Fund   43.3%   28.9%   22.1%   5.2%   0.5%   100%  
Short-Term Bond              
Index Fund   65.6   27.0     7.3   0.1   100  
Intermediate-Term              
Bond Index Fund   54.0   40.4     5.3   0.3   100  
Long-Term Bond              
Index Fund   43.5   48.7     7.6   0.2   100  

 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). Each Fund expects to purchase only investment-grade corporate bonds.

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments.

29


 

Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Total Bond Market Index Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance the Fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the Fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the Fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that a Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

30


 

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

Other Investment Policies and Risks

Each Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of each Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The Fund’s advisor expects that vast majority of these securities will have characteristics similar to those in the target indexes. Subject to the same 20% limit, the Funds may also purchase other investments that are outside of their target indexes or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Funds may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

31


 

Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

Each Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market index, or a reference rate . Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

Each Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. A Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

Cash Management

Each Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, each Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, each Fund typically expects to meet redemptions with positive cash flows. When this is not an option, each Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, a Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio; see “Potentially disruptive redemptions” under Redeeming Shares in the Investing With Vanguard section.

Under certain circumstances, including under stressed market conditions, there are additional tools that each Fund may use in order to meet redemptions, including

32


 

advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. A Fund may also suspend payment of redemption proceeds for up to seven days; see “Emergency circumstances” under Redeeming Shares in the Investing With Vanguard section. Additionally under these unusual circumstances, a Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

Each Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or

33


 

otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

See the Investing With Vanguard section of this prospectus for further details on Vanguard’s transaction policies.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Funds generally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests from shareholders of conventional (not exchange-traded) shares or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

34


 

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Funds pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Funds.

35


 

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of each Fund’s average net assets.

Under the terms of an SEC exemption, the Funds‘ board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in a Fund’s advisory arrangements will be communicated to shareholders in writing. As the Funds‘ sponsor and overall manager, Vanguard may provide investment advisory services to a Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Funds have filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, t he Funds may rely on the new SEC relief.

For a discussion of why the board of trustees approved each Fund’s investment advisory arrangement, see the most recent semiannual reports to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Funds is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, has managed the Intermediate-Term Bond Index Fund since 2008, and has managed the Total Bond Market Index, Short-Term Bond Index, and Long-Term Bond Index Funds since 2013. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Funds‘ Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Funds.

Dividends, Capital Gains, and Taxes

Fund Distributions

Each Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings . Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December. In addition, each Fund may occasionally make a supplemental distribution at some other time during the year.

36


 

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional Fund shares.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Funds‘ normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net

37


 

investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Funds offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally

38


 

4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Funds do not sell or redeem shares. However, on those days the value of a Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

39


 

Financial Highlights

The following financial highlights tables are intended to help you understand each Fund‘s financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose reports—along with each Fund’s financial statements—are included in the Funds’ most recent annual reports to shareholders. You may obtain a free copy of the latest annual or semiannual reports by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market Index Fund Institutional Shares

      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.75   $10.65   $10.64   $10.87   $10.56  
Investment Operations            
Net Investment Income   .292 1   .272 1   .266   .265   .279  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.297)   .105   .015   (.219)   .339  
Total from Investment Operations   (.005)   .377   .281   .046   .618  
Distributions            
Dividends from Net Investment Income   (.292)   (.272)   (.266)   (.266)   (.279)  
Distributions from Realized Capital Gains   (.003)   (.005)   (.005)   (.010)   (.029)  
Total Distributions   (.295)   (.277)   (.271)   (.276)   (.308)  
Net Asset Value, End of Period   $10.45   $10.75   $10.65   $10.64   $10.87  
Total Return   –0.01%   3.57%   2.61%   0.41%   5.91%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $40,728   $39,101   $34,167   $29,095   $27,103  
Ratio of Total Expenses to Average Net Assets   0.035%   0.04%   0.04%   0.05%   0.06%  
Ratio of Net Investment Income to Average            
Net Assets   2.79%   2.53%   2.41%   2.45%   2.58%  
Portfolio Turnover Rate 2,3   54%   55%   61%   84%   72%  

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 13%, 15%, 23%, 45%, and 38% attributable to mortgage-dollar-roll activity.

40


 

Total Bond Market Index Fund Institutional Plus Shares          
 
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.75   $10.65   $10.64   $10.87   $10.56  
Investment Operations            
Net Investment Income   .292 1   .273 1   .267   .266   .280  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.297)   .105   .015   (.219)   .339  
Total from Investment Operations   (.005)   .378   .282   .047   .619  
Distributions            
Dividends from Net Investment Income   (.292)   (.273)   (.267)   (.267)   (.280)  
Distributions from Realized Capital Gains   (.003)   (.005)   (.005)   (.010)   (.029)  
Total Distributions   (.295)   (.278)   (.272)   (.277)   (.309)  
Net Asset Value, End of Period   $10.45   $10.75   $10.65   $10.64   $10.87  
Total Return   –0.01%   3.58%   2.62%   0.42%   5.92%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $19,399   $19,488   $22,203   $24,287   $22,254  
Ratio of Total Expenses to Average Net Assets   0.03%   0.03%   0.03%   0.04%   0.05%  
Ratio of Net Investment Income to Average            
Net Assets   2.80%   2.54%   2.42%   2.46%   2.59%  
Portfolio Turnover Rate 2,3   54%   55%   61%   84%   72%  

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 13%, 15%, 23%, 45%, and 38% attributable to mortgage-dollar-roll activity.

41


 

Short-Term Bond Index Fund Institutional Shares            
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.38   $10.43   $10.43   $10.48   $10.49  
Investment Operations            
Net Investment Income   .209 1   .174 1   .156   .140   .130  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.070)   (.050)   .002   (.040)   .005  
Total from Investment Operations   .139   .124   .158   .100   .135  
Distributions            
Dividends from Net Investment Income   (.209)   (.174)   (.156)   (.140)   (.130)  
Distributions from Realized Capital Gains     (.000) 2   (.002)   (.010)   (.015)  
Total Distributions   (.209)   (.174)   (.158)   (.150)   (.145)  
Net Asset Value, End of Period   $10.31   $10.38   $10.43   $10.43   $10.48  
Total Return   1.37%   1.20%   1.51%   0.95%   1.29%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $4,930   $5,033   $4,963   $4,506   $4,505  
Ratio of Total Expenses to Average Net Assets   0.05%   0.05%   0.05%   0.06%   0.07%  
Ratio of Net Investment Income to            
Average Net Assets   2.04%   1.67%   1.48%   1.33%   1.23%  
Portfolio Turnover Rate 3   48%   50%   51%   52%   45%  

1 Calculated based on average shares outstanding. 2 Distribution was less than $0.001 per share.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund’s capital shares, including ETF Creation Units.

42


 

Short-Term Bond Index Fund Institutional Plus Shares          
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.38   $10.43   $10.43   $10.48   $10.49  
Investment Operations            
Net Investment Income   .210 1   .175 1   .158   .142   .132  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.070)   (.050)   .002   (.040)   .005  
Total from Investment Operations   .140   .125   .160   .102   .137  
Distributions            
Dividends from Net Investment Income   (.210)   (.175)   (.158)   (.142)   (.132)  
Distributions from Realized Capital Gains     (.000) 2   (.002)   (.010)   (.015)  
Total Distributions   (.210)   (.175)   (.160)   (.152)   (.147)  
Net Asset Value, End of Period   $10.31   $10.38   $10.43   $10.43   $10.48  
Total Return   1.38%   1.21%   1.52%   0.97%   1.31%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $5,404   $5,078   $4,336   $3,502   $2,515  
Ratio of Total Expenses to Average Net Assets   0.04%   0.04%   0.04%   0.04%   0.05%  
Ratio of Net Investment Income to            
Average Net Assets   2.05%   1.68%   1.49%   1.35%   1.25%  
Portfolio Turnover Rate 3   48%   50%   51%   52%   45%  

1 Calculated based on average shares outstanding. 2 Distribution was less than $0.001 per share.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund’s capital shares, including ETF Creation Units.

43


 

Intermediate-Term Bond Index Fund Institutional Shares          
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $11.36   $11.24   $11.26   $11.46   $11.09  
Investment Operations            
Net Investment Income   .317 1   .301 1   .301   .313   .331  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.340)   .131   .025   (.162)   .437  
Total from Investment Operations   (.023)   .432   .326   .151   .768  
Distributions            
Dividends from Net Investment Income   (.317)   (.301)   (.301)   (.313)   (.331)  
Distributions from Realized Capital Gains     (.011)   (.045)   (.038)   (.067)  
Total Distributions   (.317)   (.312)   (.346)   (.351)   (.398)  
Net Asset Value, End of Period   $11.02   $11.36   $11.24   $11.26   $11.46  
Total Return   –0.15%   3.87%   2.85%   1.31%   6.99%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $2,952   $3,127   $2,626   $2,399   $1,610  
Ratio of Total Expenses to Average Net Assets   0.05%   0.05%   0.05%   0.06%   0.07%  
Ratio of Net Investment Income to Average            
Net Assets   2.89%   2.64%   2.58%   2.72%   2.89%  
Portfolio Turnover Rate 2   53%   55%   57%   51%   60%  

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.

44


 

Intermediate-Term Bond Index Fund Institutional Plus Shares        
 
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $11.36   $11.24   $11.26   $11.46   $11.09  
Investment Operations            
Net Investment Income   .319 1   .302 1   .302   .315   .333  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.341)   .131   .025   (.162)   .437  
Total from Investment Operations   (.022)   .433   .327   .153   .770  
Distributions            
Dividends from Net Investment Income   (.318)   (.302)   (.302)   (.315)   (.333)  
Distributions from Realized Capital Gains     (.011)   (.045)   (.038)   (.067)  
Total Distributions   (.318)   (.313)   (.347)   (.353)   (.400)  
Net Asset Value, End of Period   $11.02   $11.36   $11.24   $11.26   $11.46  
Total Return   –0.14%   3.88%   2.86%   1.33%   7.01%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $1,752   $1,640   $1,478   $1,057   $293  
Ratio of Total Expenses to Average Net Assets   0.04%   0.04%   0.04%   0.04%   0.05%  
Ratio of Net Investment Income to            
Average Net Assets   2.90%   2.65%   2.59%   2.74%   2.91%  
Portfolio Turnover Rate 2   53%   55%   57%   51%   60%  

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.

45


 

Long-Term Bond Index Fund Institutional Shares          
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $14.42   $13.51   $13.20   $14.26   $12.41  
Investment Operations            
Net Investment Income   .529 1   .533 1   .544   .560   .573  
Net Realized and Unrealized Gain (Loss)            
on Investments   (1.169)   .910   .333   (1.025)   1.853  
Total from Investment Operations   (.640)   1.443   .877   (.465)   2.426  
Distributions            
Dividends from Net Investment Income   (.528)   (.533)   (.544 )   (.560)   (.573)  
Distributions from Realized Capital Gains   (.022)     (.023 )   (.035)   (.003)  
Total Distributions   (.550)   (.533)   (.567 )   (.595)   (.576)  
Net Asset Value, End of Period   $13.23   $14.42   $13.51   $13.20   $14.26  
Total Return   –4.41%   10.87%   6.51%   –3.37%   19.87%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $2,706   $2,552   $2,216   $2,174   $2,283  
Ratio of Total Expenses to Average Net Assets   0.05%   0.05%   0.05%   0.06%   0.07%  
Ratio of Net Investment Income to            
Average Net Assets   3.95%   3.81%   3.82%   4.05%   4.23%  
Portfolio Turnover Rate 2   38%   41%   45%   42%   39%  

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.

46


 

Long-Term Bond Index Fund Institutional Plus Shares          
 
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $14.42   $13.51   $13.20   $14.26   $12.41  
Investment Operations            
Net Investment Income   .530 1   .535 1   .545   .563   .576  
Net Realized and Unrealized Gain (Loss)            
on Investments   (1.168)   .910   .333   (1.025)   1.853  
Total from Investment Operations   (.638)   1.445   .878   (.462)   2.429  
Distributions            
Dividends from Net Investment Income   (.530)   (.535)   (.545)   (.563)   (.576)  
Distributions from Realized Capital Gains   (.022)     (.023)   (.035)   (.003)  
Total Distributions   (.552)   (.535)   (.568)   (.598)   (.579)  
Net Asset Value, End of Period   $13.23   $14.42   $13.51   $13.20   $14.26  
Total Return   –4.40%   10.88%   6.52%   –3.35%   19.89%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $2,972   $3,315   $2,745   $2,533   $2,571  
Ratio of Total Expenses to Average Net Assets   0.04%   0.04%   0.04%   0.04%   0.05%  
Ratio of Net Investment Income to            
Average Net Assets   3.96%   3.82%   3.83%   4.07%   4.25%  
Portfolio Turnover Rate 2   38%   41%   45%   42%   39%  

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.

47


 

Investing With Vanguard

This section of the prospectus explains the basics of doing business with Vanguard. Vanguard fund shares can be held directly with Vanguard or indirectly through an intermediary, such as a bank, a broker, or an investment advisor. If you hold Vanguard fund shares directly with Vanguard, you should carefully read each topic within this section that pertains to your relationship with Vanguard. If you hold Vanguard fund shares indirectly through an intermediary (including shares held in a brokerage account through Vanguard Brokerage Services ® ), please see Investing With Vanguard Through Other Firms , and also refer to your account agreement with the intermediary for information about transacting in that account. If you hold Vanguard fund shares through an employer-sponsored retirement or savings plan, please see Employer-Sponsored Plans . Vanguard reserves the right to change the following policies without notice. Please call or check online for current information. See Contacting Vanguard.

For Vanguard fund shares held directly with Vanguard, each fund you hold in an account is a separate “fund account.” For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accounts—and this is true even if you hold the same fund in multiple accounts. Note that each reference to “you” in this prospectus applies to any one or more registered account owners or persons authorized to transact on your account.

Purchasing Shares

Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account or to add to an existing fund account.

Investment minimums may differ for certain categories of investors.

Account Minimums for Institutional Shares and Institutional Plus Shares To open and maintain an account. Institutional Shares—$5 million; Institutional Plus Shares—$100 million. If you request Institutional Shares or Institutional Plus Shares when you open a new account but the investment amount does not meet the account minimum for the requested share class, your investment will be placed in another share class of the Fund, as appropriate.

Certain Vanguard institutional clients may meet the minimum investment amount by aggregating separate accounts within the same fund. This aggregation policy does not apply to financial intermediaries.

Vanguard may charge additional recordkeeping fees for institutional clients whose accounts are recordkept by Vanguard. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your account.

To add to an existing account. Generally $1.

48


 

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also call Vanguard to request a purchase of shares in your account or to request an exchange. See

Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from a transaction confirmation or your account statement) or with a deposit slip (available online). For a list of Vanguard addresses, see Contacting Vanguard .

Transaction Fees on Purchases

Each Fund reserves the right to charge the following transaction fees to investors whose aggregate share purchases into the Fund equal or exceed the following amounts:

Vanguard Fund   Transaction Fee   Aggregate Purchases  
Total Bond Market Index Fund   0.25%   Over $500 million  
Short-Term Bond Index Fund   0.15   Over $200 million  
Intermediate-Term Bond Index Fund   0.25   Over $100 million  
Long-Term Bond Index Fund   0.50   Over $100 million  

 

Each Fund may impose these transaction fees if an investor’s aggregate purchases into a Fund over a 12-month period exceed, or are expected to exceed, the indicated amounts upon notice to the client in conjunction with a purchase that triggers application of the fees. The fees will be assessed only if the client elects to proceed with the purchase. Generally, these fees will not apply to transactions coordinated in advance between a client and Vanguard.

How to Pay for a Purchase

By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money from a bank account. To establish the electronic bank transfer service on an account, you must designate the bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can purchase shares by electronic bank transfer

49


 

on a regular schedule (Automatic Investment Plan) or upon request. Your purchase request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.

By check. You may make initial or additional purchases to your fund account by sending a check with a deposit slip or by utilizing our mobile application if you are registered for online access. Also see How to Initiate a Purchase Request. Make your check payable to Vanguard and include the appropriate fund number (e.g., Vanguard—xx). For a list of Fund numbers (for Funds and share classes in this prospectus), see Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail with an exchange form . See Exchanging Shares .

Trade Date

The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For purchases by check into all funds other than money market funds and for purchases by exchange , wire , or electronic bank transfer (not using an Automatic Investment Plan) into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the next business day.

For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date for the purchase will be one business day later than for other funds.

50


 

For purchases by electronic bank transfer using an Automatic Investment Plan : Your trade date generally will be the date you selected for withdrawal of funds from your designated bank account. Your bank account generally will be debited on the business day after your trade date. If the date you selected for withdrawal of funds from your bank account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your designated bank account falls on the last business day of the year, your trade date will be the first business day of the following year. Please note that if you select the first of the month for automated withdrawals from your designated bank account, trades designated for January 1 will receive the next business day’s trade date.

If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know—Good Order .

For further information about purchase transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally begin earning dividends on the business day following your trade date. When buying money market fund shares through a federal funds wire on a business day, however, you generally can begin earning dividends immediately by making a purchase request by telephone to Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund).

Other Purchase Rules You Should Know

Check purchases. All purchase checks must be written in U.S. dollars, b e drawn on a U.S. bank , and be accompanied by good order instructions . Vanguard does not accept cash, traveler’s checks, starter checks, or money orders. In addition, Vanguard may refuse checks that are not made payable to Vanguard.

New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable. Certain types of accounts may require additional documentation.

Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because the investor has a

51


 

history of frequent trading or because the purchase may negatively affect a fund’s operation or performance.

Large purchases. Call Vanguard before attempting to invest a large dollar amount.

No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.

Converting Shares

When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the “new” shares you receive equals the dollar value of the “old” shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the NAVs of the two share classes.

Vanguard will not accept your request to cancel any self-directed conversion request once processing has begun. Please be careful when placing a conversion request.

A conversion between share classes of the same fund is a nontaxable event.

Trade Date

The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.

Conversions to Institutional Shares or Institutional Plus Shares

You are eligible for a self-directed conversion from another share class to Institutional Shares or Institutional Plus Shares of the same Fund, provided that your account meets all eligibility requirements. You may request a conversion through our website (if you are registered for online access), or you may contact Vanguard by telephone or by mail to request this transaction. Accounts that qualify for Institutional Shares or Institutional Plus Shares will not be automatically converted.

52


 

Conversions to Institutional Select Shares

You are eligible for a self-directed conversion from another share class to Institutional Select Shares of the same Fund (if available), provided that your account meets all eligibility requirements. You may request a conversion through our website (if you are registered for online access), through a trading platform, by mail, or by telephone. Accounts that qualify for Institutional Select Shares will not be automatically converted.

Mandatory Conversions to Another Share Class

If an account no longer meets the balance requirements for a share class, Vanguard may automatically convert the shares in the account to another share class, as appropriate. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.

Redeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares or request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to request a redemption of shares or an exchange. See Contacting Vanguard .

By mail. You may send a form (available online) to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard .

How to Receive Redemption Proceeds

By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer service on an account, you must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or upon request. Your redemption request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. To receive your proceeds by wire, you may instruct Vanguard to wire your redemption proceeds ($100 minimum) to a previously designated bank account. To establish the wire redemption service, you generally must designate a bank account

53


 

online, complete a form, or fill out the appropriate section of your account registration form.

Please note that Vanguard charges a $10 wire fee for outgoing wire redemptions. The fee is assessed in addition to, rather than being withheld from, redemption proceeds and is paid directly to the fund in which you invest . For example, if you redeem $100 via a wire, you will receive the full $100, and the $10 fee will be assessed to your fund account with an additional redemption of fund shares . If you redeem your entire fund account, your redemption proceeds will be reduced by the amount of the fee . The wire fee does not apply to accounts held by Flagship and Flagship Select clients; accounts held through intermediaries, including Vanguard Brokerage Services; or accounts held by institutional clients.

By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail. See Exchanging Shares .

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, normally within two business days of your trade date, and generally to the address of record.

Trade Date

The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For redemptions by check , exchange , or wire : If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

• Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.

54


 

• Note on timing of wire redemptions from all other funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.

For redemptions by electronic bank transfer using an Automatic Withdrawal Plan : Your trade date generally will be the date you selected for withdrawal of funds (redemption of shares) from your Vanguard account. Proceeds of redeemed shares generally will be credited to your designated bank account two business days after your trade date. If the date you selected for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your Vanguard account falls on the last day of the year and if that date is a holiday, your trade date will be the first business day of the following year. Please note that if you designate the first of the month for automated withdrawals, trades designated for January 1 will receive the next business day’s trade date.

For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

If your redemption request is received in good order, we typically expect that redemption proceeds will be paid by a Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction. For further information, see “Potentially disruptive redemptions” and “Emergency circumstances.”

55


 

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally will continue earning dividends until the first business day following your trade date.

Other Redemption Rules You Should Know

Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts.

Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limitations for information about Vanguard’s policies to limit frequent trading.

Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to seven calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.

Share certificates. Share certificates are no longer issued for Vanguard funds. Shares currently held in certificates cannot be redeemed, exchanged, converted, or transferred (reregistered) until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard .

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing (using a form available online) at any time. Confirmations of address changes are sent to both the old and new addresses.

Payment to a different person or address. At your request, we can make your redemption check payable, or wire your redemption proceeds, to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require additional documentation, such as a

56


 

signature guarantee or a notarized signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange.

No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.

Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.

Exchanging Shares

An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are registered for online access), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Call Vanguard before attempting to exchange a large dollar amount. By calling us before you attempt to exchange a large dollar amount, you may avoid delayed or rejected transactions.

Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. See Frequent-Trading Limitations for additional restrictions on exchanges.

Frequent-Trading Limitations

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in the funds. Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) limits an investor’s purchases or exchanges into a

57


 

fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to these frequent-trading limits.

For Vanguard Retirement Investment Program pooled plans, the limitations apply to exchanges made online or by telephone.

These frequent-trading limitations do not apply to the following:

• Purchases of shares with reinvested dividend or capital gains distributions.

• Transactions through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online ® .

• Discretionary transactions through Vanguard Personal Advisor Services ® and Vanguard Institutional Advisory Services ® .

• Redemptions of shares to pay fund or account fees.

• Redemptions of shares to remove excess shareholder contributions to certain types of retirement accounts (including, but not limited to, IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans).

• Transfers and reregistrations of shares within the same fund.

• Purchases of shares by asset transfer or direct rollover.

• Conversions of shares from one share class to another in the same fund.

• Checkwriting redemptions.

• Section 529 college savings plans.

• Certain approved institutional portfolios and asset allocation programs, as well as trades made by funds or trusts managed by Vanguard or its affiliates that invest in other Vanguard funds. (Please note that shareholders of Vanguard’s funds of funds are subject to the limitations.)

For participants in employer-sponsored defined contribution plans,* the frequent-trading limitations do not apply to:

• Purchases of shares with participant payroll or employer contributions or loan repayments.

• Purchases of shares with reinvested dividend or capital gains distributions.

• Distributions, loans, and in-service withdrawals from a plan.

• Redemptions of shares as part of a plan termination or at the direction of the plan.

• Transactions executed through the Vanguard Managed Account Program.

• Redemptions of shares to pay fund or account fees.

• Share or asset transfers or rollovers.

• Reregistrations of shares.

58


 

• Conversions of shares from one share class to another in the same fund.

• Exchange requests submitted by written request to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are subject to the limitations.)

* The following Vanguard fund accounts are subject to the frequent-trading limitations: SEP-IRAs, SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans.

Accounts Held by Institutions (Other Than Defined Contribution Plans)

Vanguard will systematically monitor for frequent trading in institutional clients’ accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client’s accounts the 30-day policy previously described, prohibiting a client’s purchases of fund shares, and/or revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries will be asked to assess these fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading limitations. If you invest with Vanguard through an intermediary, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Other Rules You Should Know

Prospectus and Shareholder Report Mailings

When two or more shareholders have the same last name and address, just one summary prospectus (or prospectus) and/or shareholder report may be sent in an attempt to eliminate the unnecessary expense of duplicate mailings. You may request

59


 

individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or online. See Contacting Vanguard .

Vanguard.com

Registration. If you are a registered user of vanguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions through our website. You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, prospectuses, certain tax forms, and shareholder reports electronically. If you are a registered user of vanguard.com , you can consent to the electronic delivery of these documents by logging on and changing your mailing preferences under “Account Maintenance.” You can revoke your electronic consent at any time through our website, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

Telephone Transactions

Automatic. When we set up your account, we will automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.

Tele-Account ® . To obtain fund and account information through Vanguard’s automated telephone service, you must first establish a Personal Identification Number (PIN) by calling Tele-Account at 800-662-6273.

Proof of a caller’s authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:

• Authorization to act on the account (as the account owner or by legal documentation or other means).

• Account registration and address.

• Fund name and account number, if applicable.

• Other information relating to the caller, the account owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

• Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

• Include the fund name and account number.

• Include the amount of the transaction (stated in dollars, shares, or percentage).

60


 

Written instructions also must generally be provided on a Vanguard form and include:

S ignature( s) and date from the authorized person(s).

• Signature guarantees or notarized signatures, if required for the type of transaction.

(Call Vanguard for specific requirements.)

• Any supporting documentation that may be required.

Good order requirements may vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

Future Trade-Date Requests

Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares , Converting Shares , Redeeming Shares, and

Exchanging Shares . Vanguard reserves the right to return future-dated purchase checks.

Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally will accept instructions from any one owner or authorized person.

Responsibility for Fraud

Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. Vanguard may be required to transfer assets related to uncashed checks to a state under the state’s abandoned property law.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law , subject to potential federal or state withholding taxes .

61


 

Unusual Circumstances

If you experience difficulty contacting Vanguard online or by telephone, you can send us your transaction request on a Vanguard form by regular or express mail. See Contacting Vanguard for addresses.

Investing With Vanguard Through Other Firms

You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, a broker, or an investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply. Your financial intermediary can provide you with account information and any required tax forms. You may be required to pay a commission on purchases of mutual fund shares made through a financial intermediary.

Please see Frequent - Trading Limitations Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Low-Balance Accounts

Each Fund reserves the right to convert an investor’s Institutional Shares or Institutional Plus Shares to another share class, as appropriate, if the investor’s fund account balance falls below the account minimum for any reason, including market fluctuation. Any such conversion will be preceded by written notice to the investor.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

62


 

Share Classes

Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.

Fund and Account Updates

Confirmation Statements

We will send (or provide through our website, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.

Portfolio Summaries

We will send (or provide through our website, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter (or month). Promptly review each summary that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.

Tax Information Statements

For most accounts, Vanguard (or your intermediary) is required to provide annual tax forms to assist you in preparing your income tax returns. These forms are generally available for each calendar year early in the following year. Registered users of vanguard.com can also view certain forms through our website. Vanguard (or your intermediary) may also provide you with additional tax-related documentation. For more information, consult our website at vanguard.com or see Contacting Vanguard .

63


 

Annual and Semiannual Reports

We will send (or provide through our website, whichever you prefer) reports about Vanguard Bond Index Funds twice a year, in February and August. These reports include overviews of the financial markets and provide the following specific Fund information:

• Performance assessments and comparisons with industry benchmarks.

• Financial statements with listings of Fund holdings.

Portfolio Holdings

Please consult the Funds‘ Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of a Fund’s portfolio holdings.

Employer-Sponsored Plans

Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option.

• If you have any questions about a Fund or Vanguard, including those about a Fund’s investment objective, strategies, or risks, contact Vanguard Participant Services toll-free at 800-523-1188 or visit our website at vanguard.com.

• If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.

• Be sure to carefully read each topic that pertains to your transactions with Vanguard.

Vanguard reserves the right to change its policies without notice to shareholders.

Transactions

Processing times for your transaction requests may differ among recordkeepers or among transaction and funding types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing time frames for your transaction requests prior to submission to a Fund. Consult your recordkeeper or plan administrator for more information.

If Vanguard is serving as your plan recordkeeper and if your transaction involves one or more investments with an early cut-off time for processing or another trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

64


 

Contacting Vanguard    
 
 
Web    
Vanguard.com   For the most complete source of Vanguard news  
  For fund, account, and service information  
  For most account transactions  
  For literature requests  
  24 hours a day, 7 days a week  
 
Phone    
Vanguard Tele-Account ® 800-662-6273   For automated fund and account information  
  Toll-free, 24 hours a day, 7 days a week  
Investor Information 800-662-7447   For fund and service information  
(Text telephone for people with hearing   For literature requests  
impairment at 800-749-7273)    
Client Services 800-662-2739   For account information  
(Text telephone for people with hearing   For most account transactions  
impairment at 800-749-7273)    
Participant Services 800-523-1188   For information and services for participants in employer-  
(Text telephone for people with hearing   sponsored plans  
impairment at 800-749-7273)    
Institutional Division   For information and services for large institutional investors  
888-809-8102    
Financial Advisor and Intermediary   For information and services for financial intermediaries  
Sales Support 800-997-2798   including financial advisors, broker-dealers, trust institutions,  
  and insurance companies  
Financial Advisory and Intermediary   For account information and trading support for financial  
Trading Support 800-669-0498   intermediaries including financial advisors, broker-dealers,  
  trust institutions, and insurance companies  

 

65


 

Vanguard Addresses

Please be sure to use the correct address and the correct form . Use of an incorrect address or form could delay the processing of your transaction.

Regular Mail (Individuals)   The Vanguard Group      
  P.O. Box 1110      
  Valley Forge, PA 19482-1110    
Regular Mail (Institutions, Intermediaries, and The Vanguard Group      
Employer-Sponsored Plan Participants)   P.O. Box 2900      
  Valley Forge, PA 19482-2900    
Registered, Express, or Overnight Mail   The Vanguard Group      
  455 Devon Park Drive      
  Wayne, PA 19087-1815      
 
Additional Information          
 
      Vanguard    
    Newspaper   Fund   CUSIP  
  Inception Date   Abbreviation   Number   Number  
Total Bond Market Index Fund          
Institutional Shares   9/18/1995   TotBdInst   222   921937504  
Institutional Plus Shares   9/18/1995   TotBdInstPl   850   921937785  
Short-Term Bond Index Fund          
Institutional Shares   9/27/2011   STBondInstl   732   921937777  
Institutional Plus Shares   9/29/2011 STBondInstlPl   733   921937769  
Intermediate-Term Bond Index Fund          
Institutional Shares   1/26/2006   ITBondInstl   504   921937884  
Institutional Plus Shares   11/30/2011   ITBondInstPl   1874   921937751  
Long-Term Bond Index Fund          
Institutional Shares   2/2/2006   LTBondInstl   545   921937876  
Institutional Plus Shares   10/6/2011   LTBondInstPl   1872   921937744  

 

66


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index, Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index, and Bloomberg Barclays U.S. Long Government/Credit Bond Index (the Indices or Bloomberg Barclays Indices).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Bond Index Funds and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Bond Index Funds. The Indices are licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Bond Index Funds. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Indices is the licensing of the Indices, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Bond Index Funds or the owners of the Bond Index Funds.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with the Bond Index Funds. Investors acquire the Bond Index Funds from Vanguard and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Bond Index Funds. The Bond Index Funds are not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Bond Index Funds or the advisability of investing in securities generally or the ability of the Indices to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Bond Index Funds with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Bond Index Funds to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Bond Index Funds or any other third party into consideration in determining, composing or calculating the Indices. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Bond Index Funds.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Bond Index Funds, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Bond Index Funds, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDICES, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE BOND INDEX FUNDS.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

67


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Bloomberg Barclays U.S. 5–10 Year Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds with maturities of 5 to 10 years.

Bloomberg Barclays U.S. Aggregate Bond Index. An index that is the broadest representation of the taxable U.S. bond market, including most U.S. Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Bloomberg Barclays U.S. Long Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 10 years or more.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

68


 

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. Each Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Funds’ board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

69


 

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

70


 

This page intentionally left blank.


 

This page intentionally left blank.


 

This page intentionally left blank.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Bond Index Funds, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Funds’ investments is available in the Funds’ annual and semiannual reports to shareholders. In the annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during their last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Funds and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a client of Vanguard’s Institutional Division:

The Vanguard Group

Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Funds are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.go v.

Funds’ Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 0504 042019


 

Vanguard Total Bond Market Index Fund  
Prospectus  
 
April 26, 2019  
 
Institutional Select Shares  
Vanguard Total Bond Market Index Fund Institutional Select Shares (VTBSX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Investing With Vanguard   24  
Investing in Index Funds   6   Purchasing Shares   25  
More on the Fund   7   Converting Shares   28  
The Fund and Vanguard   18   Redeeming Shares   29  
Investment Advisor   18   Exchanging Shares   32  
Dividends, Capital Gains, and Taxes   19   Plan Participant Transactions   32  
Share Price   21   Frequent-Trading Limitations   33  
Financial Highlights   23   Other Rules You Should Know   36  
    Fund and Account Updates   39  
    Contacting Vanguard   41  
    Additional Information   42  
    Glossary of Investment Terms   44  

 


 

Fund Summary

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Select Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Sales Charge (Load) Imposed on Purchases   None  
Purchase Fee   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None  
Redemption Fee   None  
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.01%  
12b-1 Distribution Fee   None  
Other Expenses   0.00%  
Total Annual Fund Operating Expenses   0.01%  

 

Example

The following example is intended to help you compare the cost of investing in the Fund’s Institutional Select Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$1   $3   $6   $13  

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 8.3 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

2


 

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund’s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates . Extension risk should be moderate for the Fund.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such redemptions and subsequent reinvestments would also increase the Fund‘s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund’s Institutional Select Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Select Shares compare with those of the Fund’s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Institutional Select Shares

 


During the periods shown in the bar chart, the highest return for a calendar quarter was 1.62% (quarter ended December 31, 2018), and the lowest return for a quarter was –1.46% (quarter ended March 31, 2018).

Average Annual Total Returns for Periods Ended December 31, 2018      
    Since  
    Inception  
    (Jun. 24,  
  1 Year   2016)  
Vanguard Total Bond Market Index Fund Institutional Select Shares      
Return Before Taxes   0.01%   0.53%  
Return After Taxes on Distributions   –1.14   –0.60  
Return After Taxes on Distributions and Sale of Fund Shares   0.00   –0.09  
Bloomberg Barclays U.S. Aggregate Float Adjusted Index      
(reflects no deduction for fees, expenses, or taxes)   –0.08%   0.56%  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time

4


 

of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

Institutional clients (such as defined contribution or benefit plans, endowments, foundations, and 529 plans) may purchase or redeem shares online (if you are registered for online access); through a trading platform; by mail (Vanguard, P.O. Box 1101, Valley Forge, PA 19482-1101); or by telephone (800-523-1036). The minimum investment amount required to open and maintain a Fund account for Institutional Select Shares is generally $3 billion. The minimum investment amount required to add to an existing Fund account is generally $1.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as a 401(k) plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

5


 

Investing in Index Funds

What Is Indexing?

Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bond s. One cannot invest directly in an index.

The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. Generally, the index sponsor does not provide any warranty, or accept any liability, with respect to the quality, accuracy, or completeness of either the target index or its related data. Errors made by the index sponsor may occur from time to time and Vanguard does not provide any warranty or guarantee against such errors. Therefore, the gains, losses, or costs associated with the index sponsor’s errors will generally be borne by the index fund and its shareholders .

An index fund seeks to hold all, or a representative sample, of the securities that make up its target index. Index funds attempt to mirror the performance of the target index, for better or worse. However, an index fund generally does not perform exactly like its target index. For example, index funds have operating expenses and transaction costs. Market indexes do not, and therefore they will usually have a slight performance advantage over funds that track them.

Index funds typically have the following characteristics:

Variety of investments. Index funds generally invest in the securities of a variety of companies and industries.

Relative performance consistency . Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.

Low cost . Index funds are generally inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity—and thus dealer markups and other transaction costs—to a minimum compared with actively managed funds.

6


 

More on the Fund

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Fund’s Institutional Select Shares, which are generally for investors who invest a minimum of $3 billion. A separate prospectus offers the Fund’s Investor Shares and Admiral Shares, which generally have investment minimums of $3,00 0. Another prospectus offers the Fund’s Institutional Shares and Institutional Plus Shares, which are generally for investors who invest a minimum of $5 million and $100 million, respectively. In addition, the Fund issues ETF Shares (an exchange-traded class of shares), which are also offered through a separate prospectus.

All share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund’s performance.  

 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund‘s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. The Fund‘s policy of investing at least 80% of its assets in bonds that are part of its target index may be changed only upon 60 days‘ notice to shareholders.

7


 

Market Exposure


The Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Fund in particular.

8


 

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .


The Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund‘s monthly income to fluctuate accordingly.

9


 

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.


The Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

10


 


The Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate.

Call risk should be low for the Fund.


The Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

The credit quality of the Fund is expected to be very high, and thus credit risk is expected to be low.

To a limited extent, the Fund is subject to event risk, which is the chance that corporate fixed income securities held by the Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell.

11


 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in its target index, the Fund uses index “sampling” techniques to select securities. Using computer programs, the Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, the Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Fund does not hold all of the securities included in its target index, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target index. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


The Fund is subject to index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund is expected to be low.

The number of bonds held by the Fund and the number of bonds in the Fund’s target index were 8,582 and 10,248, respectively, as of December 31, 2018 .

Types of bonds. The Fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. The Bloomberg Barclays U.S. Aggregate Float Adjusted Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

As of December 31, 2018 , the Fund was composed of the following types of bonds:

U.S.       International      
Government/     Mortgage-   Dollar-      
Agency   Corporate   Backed   Denominated   Other   Total  
 
43.3%   28.9%   22.1%   5.2%   0.5%   100%  

 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

12


 

Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). The Fund expects to purchase only investment-grade corporate bonds.

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments. Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance the Fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the Fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the Fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that the Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—

13


 

such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

Other Investment Policies and Risks

The Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of the Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The Fund’s advisor expects that vast majority of these securities will have characteristics similar to those in the target index. Subject to the same 20% limit, the Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Fund may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk,

14


 

these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

The Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market index, or a reference rate . Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

The Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. The Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, the Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio; see

15


 

“Potentially disruptive redemptions” under Redeeming Shares in the Investing With Vanguard section.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days; see “Emergency circumstances” under Redeeming Shares in the Investing With Vanguard section. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-

16


 

term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

See the Investing With Vanguard section of this prospectus for further details on Vanguard’s transaction policies.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests from shareholders of conventional (not exchange-traded) shares or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

17


 

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

18


 

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, t he Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Fund is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, and has managed the Fund since 2013. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings . Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December. In addition, the Fund may occasionally make a supplemental distribution at some other time during the year. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund.

19


 

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to

20


 

interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as a 401(k) plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Fund offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares.

21


 

However, on those days the value of the Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

22


 

Financial Highlights

The following financial highlights table is intended to help you understand the Institutional Select Shares’ financial performance for the periods shown, and certain information reflects financial results for a single Institutional Select Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Institutional Select Shares (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund’s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market Index Fund Institutional Select Shares        
      June 24,  
  Year Ended December 31,   2016 1 to  
      Dec. 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016  
Net Asset Value, Beginning of Period   $10.75   $10.65   $11.03  
Investment Operations        
Net Investment Income   .295 2   .275 2   .135  
Net Realized and Unrealized Gain (Loss)        
on Investments   (.298)   .105   (.375)  
Total from Investment Operations   (.003)   .380   (.240)  
Distributions        
Dividends from Net Investment Income   (.294)   (.275)   (.135)  
Distributions from Realized Capital Gains   (.003)   (.005)   (.005)  
Total Distributions   (.297)   (.280)   (.140)  
Net Asset Value, End of Period   $10.45   $10.75   $10.65  
Total Return   0.01%   3.60%   –2.20%  
Ratios/Supplemental Data        
Net Assets, End of Period (Millions)   $14,821   $12,031   $5,438  
Ratio of Total Expenses to Average Net Assets   0.01%   0.01%   0.01% 3  
Ratio of Net Investment Income to Average Net Assets   2.82%   2.56%   2.41% 3  
Portfolio Turnover Rate 4,5   54%   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 13%, 15%, and 23% attributable to mortgage-dollar-roll activity.        
6 Reflects the Fund’s portfolio turnover for the fiscal year ended December 31, 2016.      

 

23


 

Investing With Vanguard

This section of the prospectus explains the basics of doing business with Vanguard. Vanguard fund shares can be held directly with Vanguard or indirectly through an intermediary, such as a bank, a broker, or an investment advisor. If you hold Vanguard fund shares directly with Vanguard, you should carefully read each topic within this section that pertains to your relationship with Vanguard. If you hold Vanguard fund shares indirectly through an intermediary (including shares held in a brokerage account through Vanguard Brokerage Services ® ), please see Investing With Vanguard Through Other Firms , and also refer to your account agreement with the intermediary for information about transacting in that account. Vanguard reserves the right to change the following policies without notice. Please call or check online for current information. See Contacting Vanguard.

For Vanguard fund shares held directly with Vanguard, each fund you hold in an account is a separate “fund account.” For example, if you hold three funds in a corporate account and offer six funds in a defined contribution plan account, you have two fund accounts—and this is true even if you hold the same fund in multiple accounts. Note that each reference to “you” in this prospectus applies to any one or more registered account owners or persons authorized to transact on your account.

For Plan Participants

If Institutional Select Shares of the Fund are an investment option in your retirement or savings plan, your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option. If you have any questions about the Fund or Vanguard, including those about the Fund’s investment objective, strategies, or risks, contact Vanguard Participant Services toll-free at 800-523-1188.

• If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.

• Be sure to carefully read each topic that pertains to plan participant transactions with Vanguard.

Vanguard reserves the right to change its policies without notice to shareholders.

Investment Options and Allocations

Your plan’s specific provisions may allow you to change your investment selections, the amount of your contributions, or the allocation of your contributions among the investment choices available to you. Contact your plan administrator or employee benefits office for more details.

See Plan Participant Transactions.

24


 

Purchasing Shares

Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account or to add to an existing fund account.

Investment minimums may differ for certain categories of investors.

Account Minimums for Institutional Select Shares

To open and maintain an account. Generally $3 billion. Available only to institutional clients (such as defined contribution or benefit plans, endowments, foundations, and 529 plans). If you request Institutional Select Shares when you open a new account but the investment amount does not meet the account minimum for Institutional Select Shares, your investment will be placed in another share class of the Fund, as appropriate.

Investment minimums may differ for a Vanguard collective investment trust with a similar mandate.

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations, and Other Rules You Should Know before placing your purchase request.

New clients interested in purchasing Institutional Select Shares in a fund account should contact their Vanguard Sales Executive or call 800-523-1036.

Existing clients interested in purchasing additional shares or exchanging shares may make a request by contacting their Vanguard Relationship Manager, submitting a request through a trading platform, or making a request by mail (Vanguard, P.O. Box 1101, Valley Forge, PA 19482-1101).

Certain Vanguard institutional clients may meet the minimum investment amount by aggregating separate accounts within the same fund. This aggregation policy does not apply to financial intermediaries.

Vanguard may charge additional recordkeeping fees for institutional clients whose accounts are recordkept by Vanguard. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your account.

To add to an existing account . Generally $1.

Transaction Fees on Purchases

The Fund reserves the right to charge a 0.25% transaction fee to investors whose aggregate share purchases into the Fund exceed $500 million. The Fund may impose this transaction fee if an investor’s aggregate purchases into the Fund over a 12-month

25


 

period exceed, or are expected to exceed, the indicated amount upon notice to the client in conjunction with a purchase that triggers application of the fee. The fee will be assessed only if the client elects to proceed with the purchase. Generally, this fee will not apply to transactions coordinated in advance between a client and Vanguard.

How to Pay for a Purchase

By electronic bank transfer or wire. You may purchase Institutional Select Shares by an electronic bank transfer or by wire. Wiring instructions vary for different types of purchases. Please contact your Vanguard Relationship Manager or Vanguard Sales Executive for instructions and policies on purchasing shares by wire. See

Contacting Vanguard.

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail with an exchange form . See Exchanging Shares.

Your purchase or exchange request can be initiated online (if you are registered for online access), by telephone, or by mail. All new and existing clients are encouraged to contact their Vanguard Relationship Manager or Vanguard Sales Executive to discuss options for purchasing or exchanging shares.

Trade Date

The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NA V as calculated on the trade date. NAVs are calculated only on days that th e NYS E is open for trading (a business day).

For purchases by check into all funds other than money market funds and for purchases by exchange , wire , or electronic bank transfer (not using an Automatic Investment Plan) into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the next business day.

For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the second business day following the day Vanguard receives the purchase

26


 

request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date for the purchase will be one business day later than for other funds.

If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know—Good Order .

For further information about purchase transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally begin earning dividends on the business day following your trade date (or your contribution trade date for plan participants). When buying money market fund shares through a federal funds wire on a business day, however, you generally can begin earning dividends immediately by making a purchase request by telephone to Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund).

Other Purchase Rules You Should Know

New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable. Certain types of accounts may require additional documentation.

Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because the investor has a history of frequent trading or because the purchase may negatively affect a fund’s operation or performance.

Large purchases. Call Vanguard before attempting to invest a large dollar amount.

No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.

27


 

Converting Shares

When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the “new” shares you receive equals the dollar value of the “old” shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the NAVs of the two share classes.

Vanguard will not accept your request to cancel any self-directed conversion request once processing has begun. Please be careful when placing a conversion request.

A conversion between share classes of the same fund is a nontaxable event.

Trade Date

The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For a conversion request (other than a request to convert to ETF Shares) received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know .

Conversions to Institutional Select Shares

You are eligible for a self-directed conversion from another share class to Institutional Select Shares of the Fund, provided that your account meets all eligibility requirements. You may request a conversion through our website (if you are registered for online access), through a trading platform, by mail, or by telephone. Accounts that qualify for Institutional Select Shares will not be automatically converted.

Mandatory Conversions to Another Share Class

If an account no longer meets the balance requirements for a share class, Vanguard may automatically convert the shares in the account to another share class, as appropriate. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.

28


 

Redeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares or request an exchange through our website if you are registered for online access. In addition, clients may also process redemption requests through a trading platform.

By telephone. You may call your Vanguard Relationship Manager or Vanguard Client Account Manager to request a redemption of shares or an exchange. See Contacting Vanguard .

By mail. You may send a form (available online) to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard .

How to Receive Redemption Proceeds

By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. Your redemption request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. To receive your proceeds by wire, you may instruct Vanguard to wire your redemption proceeds to a previously designated bank account. To establish the wire redemption service, you generally must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form.

By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail. See Exchanging Shares .

Trade Date

The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For redemptions by check , exchange , or wire : If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

29


 

• Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.

• Note on timing of wire redemptions from all other funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

If your redemption request is received in good order, we typically expect that redemption proceeds will be paid by the Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction. For more information, see “Potentially disruptive redemptions” and “Emergency circumstances.”

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally will continue earning dividends until the first business day following your redemption or exchange trade date.

Other Redemption Rules You Should Know

Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or

30


 

retirement accounts. Please call us before attempting to redeem from these types of accounts.

Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limitations for information about Vanguard’s policies to limit frequent trading.

Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to seven calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing (using a form available online) at any time. Confirmations of address changes are sent to both the old and new addresses.

Payment to a different person or address. At your request, we can make your redemption check payable, or wire your redemption proceeds, to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require additional documentation, such as a signature guarantee or a notarized signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange.

No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.

Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.

31


 

Exchanging Shares

An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are registered for online access), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Call Vanguard before attempting to exchange a large dollar amount. By calling us before you attempt to exchange a large dollar amount, you may avoid delayed or rejected transactions.

Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. See Frequent-Trading Limitations for additional restrictions on exchanges.

Plan participants should consider the following before making an exchange to or from another fund available in your plan:

• Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions.

• Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan.

Before making an exchange into another fund, it is important to read that fund’s prospectus. To obtain a copy, please contact Vanguard Participant Services toll-free at 800-523-1188.

Plan Participant Transactions

Plan participant transaction requests (e.g., a contribution, an exchange, or a redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received or, if funded via ACH, credited to your account.

Processing times for your transaction requests may differ among recordkeepers or among transaction and funding types. Your plan’s recordkeeper (which may also be

32


 

Vanguard) will determine the necessary processing time frames for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

Your transaction will then be based on the next-determined NAV of the Fund’s Institutional Select Shares. If your transaction request is received in good order before the close of regular trading on the N YSE (generally 4 p.m., Eastern time), you will receive that day’s NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.

If Vanguard is serving as your plan recordkeeper and if your transaction involves one or more investments with an early cut-off time for processing or another trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

Frequent-Trading Limitations

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in the funds. Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) limits an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to these frequent-trading limits.

For Vanguard Retirement Investment Program pooled plans, the limitations apply to exchanges made online or by telephone.

These frequent-trading limitations do not apply to the following:

• Purchases of shares with reinvested dividend or capital gains distributions.

• Transactions through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online ® .

• Discretionary transactions through Va nguard Personal Advisor Services ® and Vanguard Institutional Advisory Services ® .

• Redemptions of shares to pay fund or account fees.

• Redemptions of shares to remove excess shareholder contributions to certain types of retirement accounts (including, but not limited to, IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans).

• Transfers and reregistrations of shares within the same fund.

• Purchases of shares by asset transfer or direct rollover.

• Conversions of shares from one share class to another in the same fund.

33


 

• Checkwriting redemptions.

• Section 529 college savings plans.

• Certain approved institutional portfolios and asset allocation programs, as well as trades made by funds or trusts managed by Vanguard or its affiliates that invest in other Vanguard funds. (Please note that shareholders of Vanguard’s funds of funds are subject to the limitations.)

For participants in employer-sponsored defined contribution plans,* the frequent-trading limitations do not apply to:

• Purchases of shares with participant payroll or employer contributions or loan repayments.

• Purchases of shares with reinvested dividend or capital gains distributions.

• Distributions, loans, and in-service withdrawals from a plan.

• Redemptions of shares as part of a plan termination or at the direction of the plan.

• Transactions executed through the Vanguard Managed Account Program.

• Redemptions of shares to pay fund or account fees.

• Share or asset transfers or rollovers.

• Reregistrations of shares.

• Conversions of shares from one share class to another in the same fund.

• Exchange requests submitted by written request to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are subject to the limitations.)

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege.

If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund), you must wait 30 calendar days before exchanging back into the fund. This policy applies regardless of the dollar amount . Please note that the 30-day clock restarts after every exchange out of the fund.

* The following Vanguard fund accounts are subject to the frequent-trading limitations: SEP-IRAs, SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans.

34


 

Plans for which Vanguard does not serve as recordkeeper . If Vanguard does not serve as recordkeeper for your plan, your plan’s recordkeeper will establish accounts in Vanguard funds for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor participants’ trading activity with respect to Vanguard funds.

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess these fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading limitations. If a firm other than Vanguard serves as recordkeeper for your plan, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Accounts Held by Institutions (Other Than Defined Contribution Plans)

Vanguard will systematically monitor for frequent trading in institutional clients’ accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client’s accounts the 30-day policy previously described, prohibiting a client’s purchases of fund shares, and/or revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries will be asked to assess these fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will

35


 

properly assess purchase and redemption fees or administer frequent-trading limitations. If you invest with Vanguard through an intermediary, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Other Rules You Should Know

Prospectus and Shareholder Report Mailings

When two or more shareholders have the same last name and address, just one summary prospectus (or prospectus) and/or shareholder report may be sent in an attempt to eliminate the unnecessary expense of duplicate mailings. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or online. See Contacting Vanguard .

Vanguard.com

Registration. If you are a registered user of vanguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions through our website. You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, prospectuses, certain tax forms, and shareholder reports electronically. If you are a registered user of vanguard.com , you can consent to the electronic delivery of these documents by logging on and changing your mailing preferences under “Account Maintenance.” You can revoke your electronic consent at any time through our website, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

Telephone Transactions

Automatic. When we set up your account, we will automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.

Tele-Account ® . To obtain fund and account information through Vanguard’s automated telephone service, you must first establish a Personal Identification Number (PIN) by calling Tele-Account at 800-662-6273.

Proof of a caller’s authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:

• Authorization to act on the account (as the account owner or by legal documentation or other means).

• Account registration and address.

36


 

• Fund name and account number, if applicable.

• Other information relating to the caller, the account owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

• Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

• Include the fund name and account number.

• Include the amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must generally be provided on a Vanguard form and include:

S ignature( s) and date from the authorized person(s).

• Signature guarantees or notarized signatures, if required for the type of transaction.

(Call Vanguard for specific requirements.)

• Any supporting documentation that may be required.

Good order requirements may vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

Future Trade-Date Requests

Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares , Converting Shares , Redeeming Shares, and

Exchanging Shares . Vanguard reserves the right to return future-dated purchase checks.

Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally will accept instructions from any one owner or authorized person.

37


 

Responsibility for Fraud

Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. Vanguard may be required to transfer assets related to uncashed checks to a state under the state’s abandoned property law.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law, subject to potential federal or state withholding taxes .

Unusual Circumstances

If you experience difficulty contacting Vanguard online or by telephone, you can send us your transaction request on a Vanguard form by regular or express mail. See Contacting Vanguard for addresses.

Investing With Vanguard Through Other Firms

You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, a broker, or an investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply. Your financial intermediary can provide you with account information and any required tax forms. You may be required to pay a commission on purchases of mutual fund shares made through a financial intermediary.

Please see Frequent - Trading Limitations Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Low-Balance Accounts

The Fund reserves the right to convert an investor’s Institutional Select Shares to another share class, as appropriate, if the fund account balance falls below the

38


 

account minimum for any reason, including market fluctuation. Any such conversion will be preceded by written notice to the investor.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

Share Classes

Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.

Fund and Account Updates

Confirmation Statements

We will send (or provide through our website, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.

39


 

Portfolio Summaries

We will send (or provide through our website, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter (or month). Promptly review each summary that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.

Tax Information Statements

For many accounts, we (or your intermediary) are required to provide annual tax forms to assist you in preparing your income tax returns. We will send (or provide through our website, whichever you prefer) tax forms for each calendar year early in the following year. For taxable accounts, these forms will generally report the previous year’s dividends, capital gains distributions, and proceeds from the sale of shares. For 401(k) plans and other retirement plans and accounts, these forms will generally report distributions from those accounts during the previous year. Registered users of vanguard.com can also view certain forms through our website. Vanguard (or your intermediary) may also provide you with additional tax-related documentation. For more information, consult our website at vanguard.com or see Contacting Vanguard .

Annual and Semiannual Reports

We will send (or provide through our website, whichever you prefer) reports about Vanguard Total Bond Market Index Fund twice a year, in February and August. These reports include overviews of the financial markets and provide the following specific Fund information:

• Performance assessments and comparisons with industry benchmarks.

• Financial statements with listings of Fund holdings.

Portfolio Holdings

Please consult the Fund‘s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

40


 

Contacting Vanguard    
 
 
Web    
Vanguard.com   For the most complete source of Vanguard news  
  For fund, account, and service information  
  For most account transactions  
  For literature requests  
  24 hours a day, 7 days a week  
 
Phone    
Vanguard Tele-Account ® 800-662-6273   For automated fund and account information  
  Toll-free, 24 hours a day, 7 days a week  
Client Services 800-662-2739   For account information  
(Text telephone for people with hearing   For most account transactions  
impairment at 800-749-7273)    
Participant Services 800-523-1188   For information and services for participants in employer-  
(Text telephone for people with hearing   sponsored plans  
impairment at 800-749-7273)    
Institutional Division   For information and services for large institutional investors  
888-809-8102    
Financial Advisor and Intermediary   For information and services for financial intermediaries  
Sales Support 800-997-2798   including financial advisors, broker-dealers, trust institutions,  
  and insurance companies  
Financial Advisory and Intermediary   For account information and trading support for financial  
Trading Support 800-669-0498   intermediaries including financial advisors, broker-dealers,  
  trust institutions, and insurance companies  

 

41


 

Vanguard Addresses

Please be sure to use the correct address and the correct form . Use of an incorrect address or form could delay the processing of your transaction.

Regular Mail (Individuals)   The Vanguard Group      
  P.O. Box 1110      
  Valley Forge, PA 19482-1110    
Regular Mail (Institutions, Intermediaries, and The Vanguard Group      
Employer-Sponsored Plan Participants)   P.O. Box 2900      
  Valley Forge, PA 19482-2900    
Registered, Express, or Overnight Mail   The Vanguard Group      
  455 Devon Park Drive      
  Wayne, PA 19087-1815      
 
 
Additional Information          
 
 
      Vanguard    
    Newspaper   Fund   CUSIP  
Inception Date   Abbreviation   Number   Number  
Total Bond Market Index Fund          
Institutional Select Shares   6/24/2016   VanTBdMIxInsSel   1884   921937660  
(Institutional Shares        
  9/18/1995)        

 

42


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index (the Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Total Bond Market Index Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Total Bond Market Index Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Total Bond Market Index Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Total Bond Market Index Fund or the owners of the Total Bond Market Index Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Total Bond Market Index Fund. Investors acquire the Total Bond Market Index Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Total Bond Market Index Fund. The Total Bond Market Index Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Total Bond Market Index Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Total Bond Market Index Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Total Bond Market Index Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Total Bond Market Index Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Total Bond Market Index Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Total Bond Market Index Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Total Bond Market Index Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF A BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE TOTAL BOND MARKET INDEX FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

43


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

44


 

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Fund‘s board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Total Bond Market Index Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are a client of Vanguard’s Institutional Division:

The Vanguard Group

Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

Reports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec. gov.

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 1884 042019


 

Vanguard Bond ETFs ®  
Prospectus  
 
April 26, 2019  
 
Exchange-traded fund shares that are not individually redeemable and are  
listed on Nasdaq  
 
Vanguard Total Bond Market Index Fund ETF Shares (BND)  
Vanguard Short-Term Bond Index Fund ETF Shares (BSV)  
Vanguard Intermediate-Term Bond Index Fund ETF Shares (BIV)  
Vanguard Long-Term Bond Index Fund ETF Shares (BLV)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents

Vanguard ETF Summaries     More on the Funds and ETF Shares   25  
Total Bond Market ETF   1   The Funds and Vanguard   37  
Short-Term Bond ETF   7   Investment Advisor   38  
Intermediate-Term Bond ETF   12   Dividends, Capital Gains, and Taxes   39  
Long-Term Bond ETF   17   Share Price and Market Price   40  
Investing in Vanguard ETF Shares   22   Additional Information   42  
Investing in Index Funds   24   Financial Highlights   43  
    Glossary of Investment Terms   48  

 


 

Vanguard Total Bond Market ETF

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales   None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends   None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees     0.025%  
12b-1 Distribution Fee     None  
Other Expenses     0.01%  
Total Annual Fund Operating Expenses     0.035%  
 
Example      

 

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to sell your shares at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$4   $11   $20   $45  

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 8.3 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in

2


 

prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund’s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates . Extension risk should be moderate for the Fund.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such redemptions and subsequent reinvestments would also increase the Fund‘s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq , it is possible that an active trading market may not be maintained.

3


 

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 3.98% (quarter ended September 30, 2011), and the lowest return for a quarter was –3.22% (quarter ended December 31, 2016).

4


 

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Total Bond Market Index Fund ETF Shares        
Based on NAV        
Return Before Taxes   –0.04%   2.47%   3.42%  
Return After Taxes on Distributions   –1.18   1.34   2.21  
Return After Taxes on Distributions and Sale of Fund Shares   –0.03   1.39   2.17  
Based on Market Price        
Return Before Taxes   –0.08   2.45   3.14  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Aggregate Float Adjusted Index   –0.08%   2.50%   %  
Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index   –0.08   2.50   3.49  
Bloomberg Barclays U.S. Aggregate Bond Index   0.01   2.52   3.48  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

5


 

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth $1 million or more , typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

Vanguard Short-Term Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales   None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends   None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees     0.06%  
12b-1 Distribution Fee     None  
Other Expenses     0.01%  
Total Annual Fund Operating Expenses     0.07%  
 
Example      

 

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to sell your shares at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$7   $23   $40   $90  

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

7


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 48 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally does not exceed 3 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 2.8 years.

Principal Risks

The Fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds, so investors should expect the Fund’s monthly income to fluctuate.

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for the Fund because it invests primarily in short-term bonds, whose prices are less sensitive to interest rate changes than are the prices of longer-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

8


 

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq , it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. 1-5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

9


 

Annual Total Returns — Vanguard Short-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 2.01% (quarter ended September 30, 2009), and the lowest return for a quarter was –1.10% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Short-Term Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes   1.34%   1.24%   1.98%  
Return After Taxes on Distributions   0.51   0.57   1.26  
Return After Taxes on Distributions and Sale of Fund Shares   0.79   0.65   1.25  
Based on Market Price        
Return Before Taxes   1.35   1.24   1.68  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float Adjusted        
Index   1.38%   1.32%   %  
Spliced Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float        
Adjusted Index   1.38   1.32   2.09  
Bloomberg Barclays U.S. 1-5 Year Gov/Credit Bond Index   1.38   1.32   2.09  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After

10


 

Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth $1 million or more , typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

11


 

Vanguard Intermediate-Term Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales   None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends   None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees     0.06%  
12b-1 Distribution Fee     None  
Other Expenses     0.01%  
Total Annual Fund Operating Expenses     0.07%  
 
Example      

 

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to sell your shares at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$7   $23   $40   $90  

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

12


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 53 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 5–10 Year Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 5 and 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 7.2 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 6.3 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such

13


 

payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq , it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform

14


 

in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.38% (quarter ended June 30, 2010), and the lowest return for a quarter was –4.15% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Intermediate-Term Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes   –0.09%   2.93%   4.45%  
Return After Taxes on Distributions   –1.26   1.68   3.03  
Return After Taxes on Distributions and Sale of Fund Shares   –0.07   1.71   2.95  
Based on Market Price        
Return Before Taxes   –0.13   2.92   4.15  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float Adjusted        
Index   –0.07%   2.98%   %  
Spliced Bloomberg Barclays U.S. 5-10 Year Gov/Credit Float        
Adjusted Index   –0.07   2.98   4.48  
Bloomberg Barclays U.S. 5-10 Year Gov/Credit Bond Index   –0.07   2.98   4.47  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local

15


 

income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth $1 million or more , typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

16


 

Vanguard Long-Term Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales   None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends   None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees     0.06%  
12b-1 Distribution Fee     None  
Other Expenses     0.01%  
Total Annual Fund Operating Expenses     0.07%  
 
Example      

 

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to sell your shares at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$7   $23   $40   $90  

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

17


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 38 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index. This Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 15 and 30 years. As of December 31, 2018, the dollar-weighted average maturity of the Index was 24.1 years. The Fund also maintains an average duration consistent with that of the Index; as of December 31, 2018, the average duration of the Index was 15 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be high for the Fund because it invests primarily in long-term bonds, whose prices are more sensitive to interest rate changes than are the prices of shorter-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk should be low for the Fund because it invests primarily in long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such

18


 

payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund‘s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq , it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Long Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index thereafter . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in

19


 

the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 15.94% (quarter ended September 30, 2011), and the lowest return for a quarter was –8.31% (quarter ended December 31, 2016).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Long-Term Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes   –4.46%   5.49%   5.87%  
Return After Taxes on Distributions   –6.00   3.71   4.02  
Return After Taxes on Distributions and Sale of Fund Shares   –2.62   3.45   3.84  
Based on Market Price        
Return Before Taxes   –4.26   5.51   5.75  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Long Gov/Credit Float Adjusted Index   –4.68%   5.37%   %  
Spliced Bloomberg Barclays U.S. Long Gov/Credit Float        
Adjusted Index   –4.68   5.37   5.88  
Bloomberg Barclays U.S. Long Gov/Credit Bond Index   –4.68   5.37   5.88  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are

20


 

not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth $1 million or more , typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

21


 

Investing in Vanguard ETF ® Shares

What Are Vanguard ETF Shares?

Vanguard ETF Shares are an exchange-traded class of shares issued by certain Vanguard funds. ETF Shares represent an interest in the portfolio of stocks or bonds held by the issuing fund. The following ETF Shares are offered through this prospectus:

Vanguard Fund   Vanguard ETF Shares   Seeks to Track  
Total Bond Market Index Fund   Total Bond Market ETF   The overall taxable U.S.  
    bond market  
Short-Term Bond Index Fund   Short-Term Bond ETF   Short-term U.S. bonds  
Intermediate-Term Bond Index Fund   Intermediate-Term Bond ETF   Intermediate-term U.S. bonds  
Long-Term Bond Index Fund   Long-Term Bond ETF   Long-term U.S. bonds  

 

In addition to ETF Shares, each Fund offers three or more conventional (not exchange-traded) classes of shares. This prospectus, however, relates only to ETF Shares.

How Are Vanguard ETF Shares Different From Conventional Mutual Fund Shares?

Conventional mutual fund shares can be directly purchased from and redeemed with the issuing fund for cash at the net asset value (NAV), typically calculated once a day. ETF Shares, by contrast, cannot be purchased directly from or redeemed directly with the issuing fund by an individual investor. Rather, ETF Shares can only be purchased or redeemed directly from the issuing fund by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth $1 million or more , usually in exchange for baskets of securities and not for cash (although some funds issue and redeem Creation Units in exchange for cash or a combination of cash and securities).

An organized secondary trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on a national securities exchange. Individual investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that are subject to change throughout the day based on the supply of and demand for ETF Shares, changes in the prices of the fund’s portfolio holdings, and other factors.

The market price of a fund’s ETF Shares typically will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of market disruption or extreme market volatility, the difference may become significant.

22


 

How Do I Buy and Sell Vanguard ETF Shares?

ETF Shares of the Funds are listed for trading on Nasdaq . You can buy and sell ETF Shares on the secondary market in the same way you buy and sell any other exchange-traded security—through a broker. Your broker may charge a commission to execute a transaction. You will also incur the cost of the “bid-ask spread,” which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. Because secondary-market transactions occur at market prices, you may pay more (premium) or less (discount) than NAV when you buy ETF Shares and receive more or less than NAV when you sell those shares. In times of severe market disruption, the bid-ask spread and premiums/ discounts can increase significantly. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must buy.

Your ownership of ETF Shares will be shown on the records of the broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of ETF Shares, and tax information. Your broker also will be responsible for ensuring that you receive income and capital gains distributions, as well as shareholder reports and other communications from the fund whose ETF Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services.

23


 

Investing in Index Funds

What Is Indexing?

Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bond s. One cannot invest directly in an index.

The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. Generally, the index sponsor does not provide any warranty, or accept any liability, with respect to the quality, accuracy, or completeness of either the target index or its related data. Errors made by the index sponsor may occur from time to time and Vanguard does not provide any warranty or guarantee against such errors. Therefore, the gains, losses, or costs associated with the index sponsor’s errors will generally be borne by the index fund and its shareholders .

An index fund seeks to hold all, or a representative sample, of the securities that make up its target index. Index funds attempt to mirror the performance of the target index, for better or worse. However, an index fund generally does not perform exactly like its target index. For example, index funds have operating expenses and transaction costs. Market indexes do not, and therefore they will usually have a slight performance advantage over funds that track them.

Index funds typically have the following characteristics:

Variety of investments. Index funds generally invest in the securities of a variety of companies and industries.

Relative performance consistency . Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.

Low cost . Index funds are generally inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity—and thus dealer markups and other transaction costs—to a minimum compared with actively managed funds.

24


 

More on the Funds and ETF Shares

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Funds’ ETF Shares, an exchange-traded class of shares. A separate prospectus offers the Funds’ Investor Shares and Admiral TM Shares, which generally have investment minimums of $3,000 . Another prospectus offers Institutional Shares and Institutional Plus Shares of the Funds, which are generally for investors who invest a minimum of $5 million and $100 million, respectively. In addition, the Total Bond Market Index Fund offers Institutional Select Shares, which are generally for investors who invest a minimum of $3 billion.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

A Note to Investors

Vanguard ETF Shares can be purchased directly from the issuing Fund only by certain authorized broker-dealers in exchange for a basket of securities (or, in some cases, for cash or a combination of cash and securities) that is expected to be worth $1 million or more . Most individual investors, therefore, will not be able to purchase ETF Shares directly from a Fund. Instead, these investors will purchase ETF Shares on the secondary market through a broker.

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing an ETF. That is because you, as  
a shareholder, pay a proportionate share of the costs of operating a fund and any  
transaction costs incurred when the fund buys or sells securities. These costs  
can erode a substantial portion of the gross income or the capital appreciation a  
fund achieves. Even seemingly small differences in expenses can, over time,  
have a dramatic effect on a fund’s performance.  

 

25


 

The following sections explain the principal investment strategies and policies that each Fund uses in pursuit of its objective. The Funds’ board of trustees, which oversees each Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Each Fund’s policy of investing at least 80% of its assets in bonds that are part of its target index may be changed only upon 60 days’ notice to shareholders.

Market Exposure


Each Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for short-term bond funds, moderate for intermediate-term bond funds, and high for long-term bond funds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Funds in particular.

26


 

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .


Each Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally higher for short-term bond funds and lower for long-term bond funds.

27


 

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Total Bond Market Index Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund‘s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.


The Total Bond Market Index Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

28


 


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate.

Call risk should be low for the Total Bond Market Index Fund and very low for the other Funds.


Each Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

The credit quality of each Fund is expected to be very high, and thus credit risk is expected to be low.

To a limited extent, the Funds are subject to event risk, which is the chance that corporate fixed income securities held by a Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


Each Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell.

29


 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in their target indexes, each Fund uses index “sampling” techniques to select securities. Using computer programs, each Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, each Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Funds do not hold all of the securities included in their target indexes, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target indexes. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


Each Fund is subject to index sampling risk, which is the chance that the securities selected for a Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for each Fund is expected to be low.

The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target index, as of December 31, 2018 .

  Number of   Number of Bonds  
Vanguard Fund   Bonds Held   in Target Index  
Total Bond Market Index Fund   8,582   10,248  
Short-Term Bond Index Fund   2,552   2,908  
Intermediate-Term Bond Index Fund   1,842   1,963  
Long-Term Bond Index Fund   2,149   2,233  

 

Types of bonds. The Total Bond Market ETF tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index; the Short-Term, Intermediate-Term, and Long-Term Bond ETFs track subsets of that Index. The Bloomberg Barclays U.S. Aggregate Float Adjusted Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

30


 

As of December 31, 2018 , each Fund was composed of the following types of bonds:

  U.S.       International      
  Government/     Mortgage-   Dollar-      
Vanguard Fund   Agency   Corporate   Backed   Denominated   Other   Total  
Total Bond Market              
Index Fund   43.3%   28.9%   22.1%   5.2%   0.5%   100%  
Short-Term Bond              
Index Fund   65.6   27.0     7.3   0.1   100  
Intermediate-Term              
Bond Index Fund   54.0   40.4     5.3   0.3   100  
Long-Term Bond              
Index Fund   43.5   48.7     7.6   0.2   100  

 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). Each Fund expects to purchase only investment-grade corporate bonds.

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments.

31


 

Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Total Bond Market Index Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance the Fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the Fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the Fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that a Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

32


 

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

Other Investment Policies and Risks

Each Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of each Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The Fund’s advisor expects that vast majority of these securities will have characteristics similar to those in the target indexes. Subject to the same 20% limit, the Funds may also purchase other investments that are outside of their target indexes or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Funds may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

33


 

Each Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market index, or a reference rate . Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

Each Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. A Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

Cash Management

Each Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, each Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Redemptions of ETF Shares are typically met through a combination of cash and securities held by each Fund; see “How Are Vanguard ETF Shares Different From Conventional Mutual Fund Shares?” If cash is used to meet redemptions, the Fund typically obtains such cash through positive cash flows or the sale of Fund holdings consistent with the Fund’s investment objective and strategy. Please consult the Funds‘ Statement of Additional Information for further information on redemptions of ETF Shares.

Under certain circumstances, a Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

34


 

Temporary Investment Measures

Each Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Special Risks of Exchange-Traded Shares


ETF Shares are not individually redeemable. They can be redeemed with the issuing Fund at NAV only by certain authorized broker-dealers and only in large blocks known as Creation Units, which would cost $1 million or more to assemble. Consequently, if you want to liquidate some or all of your ETF Shares, you must sell them on the secondary market at prevailing market prices.


The market price of ETF Shares may differ from NAV. Although it is expected that the market price of an ETF Share typically will approximate its NAV, there may be times when the market price and the NAV differ significantly. Thus, you may pay more (premium) or less (discount) than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares. These discounts and premiums are likely to be greatest during times of market disruption or extreme market volatility.

Vanguard’s website at vanguard.com shows the previous day’s closing NAV and closing market price for each Fund’s ETF Shares. The website also discloses, in the Premium/Discount Analysis section of the ETF Shares’ Price & Performance page, how frequently each Fund’s ETF Shares traded at a premium or discount to NAV (based on closing NAVs and market prices) and the magnitudes of such premiums and discounts.


An active trading market may not exist. Although Vanguard ETF Shares are listed on a national securities exchange, it is possible that an active trading market may not be maintained. Although this could happen at any time, it is more likely to occur during times of severe market disruption. If you attempt to sell your ETF Shares when an active trading market is not functioning, you may have to sell at a significant discount to NAV. In extreme cases, you may not be able to sell your shares at all.

35


 


Trading may be halted . Trading of Vanguard ETF Shares on an exchange may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of ETF Shares may also be halted if (1) the shares are delisted from the listing exchange without first being listed on another exchange or (2) exchange officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors .

A precautionary note to investment companies: Vanguard ETF Shares are issued by registered investment companies, and therefore the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the Investment Company Act of 1940. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard.

Frequent Trading and Market-Timing

Unlike frequent trading of a Vanguard fund’s conventional (i.e., not exchange-traded) classes of shares, frequent trading of ETF Shares does not disrupt portfolio management or otherwise harm fund shareholders. The vast majority of trading in ETF Shares occurs on the secondary market. Because these trades do not involve the issuing fund, they do not harm the fund or its shareholders. Certain broker-dealers are authorized to purchase and redeem ETF Shares directly with the issuing fund. Because these trades typically are effected in kind ( i.e., for securities and not for cash), or are assessed a transaction fee when effected in cash, they do not cause any of the harmful effects to the issuing fund (as previously noted) that may result from frequent trading . For these reasons, the board of trustees of each fund that issues ETF Shares has determined that it is not necessary to adopt policies and procedures to detect and deter frequent trading and market-timing of ETF Shares.

Portfolio Holdings

Please consult the Funds‘ Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of a Fund’s portfolio holdings.

36


 

Turnover Rate

Although the Funds generally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests from shareholders of conventional (not exchange-traded) shares or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in an ETF, you should review its turnover rate. This rate gives an  
indication of how transaction costs, which are not included in the fund’s expense  
ratio, could affect the fund’s future returns. In general, the greater the volume of  
buying and selling by the fund, the greater the impact that dealer markups and  
other transaction costs will have on its return. Also, funds with high turnover  
rates may be more likely to generate capital gains, including short-term capital  
gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

37


 

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds. Most other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve.  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Funds pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Funds.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of each Fund’s average net assets.

Under the terms of an SEC exemption, the Funds‘ board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in a Fund’s advisory arrangements will be communicated to shareholders in writing. As the Funds‘ sponsor and overall manager, Vanguard may provide investment advisory services to a Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Funds have filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, t he Funds may rely on the new SEC relief.

For a discussion of why the board of trustees approved each Fund’s investment advisory arrangement, see the most recent semiannual reports to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Funds is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, has managed the Intermediate-Term Bond Index Fund since 2008, and has managed

38


 

the Total Bond Market Index, Short-Term Bond Index, and Long-Term Bond Index Funds since 2013. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Funds‘ Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Funds.

Dividends, Capital Gains, and Taxes

Fund Distributions

Each Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings. For holders of the Funds’ ETF Shares, income dividends generally are declared and distributed monthly. Capital gains distributions, if any, generally occur annually in December. In addition, each Fund may occasionally make a supplemental distribution at some other time during the year.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

Reinvestment of Distributions

In order to reinvest dividend and capital gains distributions, investors in a Fund’s ETF Shares must hold their shares at a broker that offers a reinvestment service. This can be the broker’s own service or a service made available by a third party, such as the broker’s outside clearing firm or the Depository Trust Company (DTC). If a reinvestment service is available, distributions of income and capital gains can automatically be reinvested in additional whole and fractional ETF Shares of the Fund. If a reinvestment service is not available, investors will receive their distributions in cash. To determine whether a reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker.

As with all exchange-traded funds, reinvestment of dividend and capital gains distributions in additional ETF Shares will occur four business days or more after the ex-dividend date (the date when a distribution of dividends or capital gains is deducted from the price of a Fund’s shares). The exact number of days depends on your broker.

39


 

During that time, the amount of your distribution will not be invested in the Fund and therefore will not share in the Fund’s income, gains, and losses.

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional ETF Shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned ETF Shares.

• Capital gains distributions may vary considerably from year to year as a result of the Funds‘ normal investment activities and cash flows.

• A sale of ETF Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on ”net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale of ETF Shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

Share Price and Market Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated

40


 

disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Funds do not sell or redeem shares. However, on those days the value of a Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Remember: If you buy or sell ETF Shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your ETF Shares in Creation Unit blocks (an option available only to certain authorized broker-dealers).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard’s website will show the previous day’s closing NAV and closing market price for each Fund’s ETF Shares.

41


 

Additional Information        
 
 
    Vanguard   CUSIP  
  Inception Date   Fund Number   Number  
Total Bond Market Index Fund        
ETF Shares   4/3/2007   928   921937835  
  (Investor Shares      
  12/11/1986)      
Short-Term Bond Index Fund        
ETF Shares   4/3/2007   924   921937827  
  (Investor Shares      
  3/1/1994)      
Intermediate-Term Bond Index Fund        
ETF Shares   4/3/2007   925   921937819  
  (Investor Shares      
  3/1/1994)      
Long-Term Bond Index Fund        
ETF Shares   4/3/2007   927   921937793  
  (Investor Shares      
  3/1/1994)      

 

Certain affiliates of the Funds and the advisor may purchase and resell ETF Shares pursuant to the prospectus.

42


 

Financial Highlights

The following financial highlights tables are intended to help you understand each Fund‘s financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose reports—along with each Fund’s financial statements—are included in the Funds’ most recent annual reports to shareholders. You may obtain a free copy of the latest annual or semiannual reports by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market Index Fund ETF Shares

      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $81.46   $80.64   $80.58   $82.33   $79.91  
Investment Operations            
Net Investment Income   2.209 1   2.053 1   1.995   2.000   2.073  
Net Realized and Unrealized Gain (Loss)            
on Investments   (2.280)   .842   .096   (1.671)   2.641  
Total from Investment Operations   (.071)   2.895   2.091   .329   4.714  
Distributions            
Dividends from Net Investment Income   (2.210)   (2.038)   (1.995)   (2.001)   (2.073)  
Distributions from Realized Capital Gains   (.019)   (.037)   (.036)   (.078)   (.221)  
Total Distributions   (2.229)   (2.075)   (2.031)   (2.079)   (2.294)  
Net Asset Value, End of Period   $79.16   $81.46   $80.64   $80.58   $82.33  
Total Return   –0.04%   3.62%   2.57%   0.39%   5.96%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $36,528   $37,247   $31,445   $27,279   $26,041  
Ratio of Total Expenses to Average Net Assets   0.035%   0.05%   0.05%   0.06%   0.07%  
Ratio of Net Investment Income to Average            
Net Assets   2.79%   2.52%   2.40%   2.44%   2.57%  
Portfolio Turnover Rate 2,3   54%   55%   61%   84%   72%  

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 13%, 15%, 23%, 45%, and 38% attributable to mortgage-dollar-roll activity.

43


 

Short-Term Bond Index Fund ETF Shares            
 
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $79.09   $79.44   $79.49   $79.87   $79.89  
Investment Operations            
Net Investment Income   1.580 1   1.314 1   1.172   1.039   .959  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.545)   (.362)   (.037 )   (.303 )   .094  
Total from Investment Operations   1.035   .952   1.135   .736   1.053  
Distributions            
Dividends from Net Investment Income   (1.565)   (1.300)   (1.172)   (1.039)   (.959)  
Distributions from Realized Capital Gains     (.002)   (.013)   (.077)   (.114)  
Total Distributions   (1.565)   (1.302)   (1.185)   (1.116)   (1.073)  
Net Asset Value, End of Period   $78.56   $79.09   $79.44   $79.49   $79.87  
Total Return   1.34%   1.20%   1.42%   0.92%   1.32%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $27,946   $23,902   $19,576   $17,402   $15,655  
Ratio of Total Expenses to Average Net Assets   0.07%   0.07%   0.07%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   2.02%   1.65%   1.46%   1.30%   1.20%  
Portfolio Turnover Rate 2   48%   50%   51%   52%   45%  

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.

44


 

Intermediate-Term Bond Index Fund ETF Shares          
 
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $83.73   $82.86   $82.95   $84.41   $81.65  
Investment Operations            
Net Investment Income   2.320 1   2.199 1   2.163   2.227   2.403  
Net Realized and Unrealized Gain (Loss)            
on Investments   (2.442)   .925   .244   (1.177)   3.254  
Total from Investment Operations   (.122)   3.124   2.407   1.050   5.657  
Distributions            
Dividends from Net Investment Income   (2.338)   (2.174)   (2.163)   (2.227)   (2.403)  
Distributions from Realized Capital Gains     (.080)   (.334)   (.283)   (.494)  
Total Distributions   (2.338)   (2.254)   (2.497)   (2.510)   (2.897)  
Net Asset Value, End of Period   $81.27   $83.73   $82.86   $82.95   $84.41  
Total Return   0.09%   3.80%   2.86%   1.23%   7.00%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $12,772   $15,328   $11,241   $7,569   $4,858  
Ratio of Total Expenses to Average Net Assets   0.07%   0.07%   0.07%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   2.87%   2.62%   2.56%   2.69%   2.86%  
Portfolio Turnover Rate 2   53%   55%   57%   51%   60%  

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.

45


 

Long-Term Bond Index Fund ETF Shares            
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $94.91   $88.86   $86.80   $93.73   $81.45  
Investment Operations            
Net Investment Income   3.461 1   3.487 1   3.558   3.565   3.639  
Net Realized and Unrealized Gain (Loss)            
on Investments   (7.728)   6.019   2.212   (6.700)   12.300  
Total from Investment Operations   (4.267)   9.506   5.770   (3.135)   15.939  
Distributions            
Dividends from Net Investment Income   (3.420)   (3.456)   (3.558)   (3.565)   (3.639)  
Distributions from Realized Capital Gains   (.143)     (.152)   (.230)   (.020)  
Total Distributions   (3.563)   (3.456)   (3.710)   (3.795)   (3.659)  
Net Asset Value, End of Period   $87.08   $94.91   $88.86   $86.80   $93.73  
Total Return   –4.46%   10.89%   6.53%   –3.45%   19.89%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $2,708   $2,392   $1,671   $1,693   $1,068  
Ratio of Total Expenses to Average Net Assets   0.07%   0.07%   0.07%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   3.93%   3.79%   3.80%   4.02%   4.20%  
Portfolio Turnover Rate 2   38%   41%   45%   42%   39%  

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.

46


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 1-5 Year Government/Credit Bond Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index, Bloomberg Barclays U.S. 5-10 Year Government/Credit Bond Index, Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index, and Bloomberg Barclays U.S. Long Government/Credit Bond Index (the Indices or Bloomberg Barclays Indices).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Bond ETFs and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Bond ETFs. The Indices are licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Bond ETFs. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Indices is the licensing of the Indices, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Bond ETFs or the owners of the Bond ETFs.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with the Bond ETFs. Investors acquire the Bond ETFs from Vanguard and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Bond ETFs. The Bond ETFs are not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Bond ETFs or the advisability of investing in securities generally or the ability of the Indices to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Bond ETFs with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Bond ETFs to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Bond ETFs or any other third party into consideration in determining, composing or calculating the Indices. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Bond ETFs.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Bond ETFs, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Bond ETFs, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDICES, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE BOND ETFS.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

47


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Authorized Participant. Institutional investors that are permitted to purchase Creation Units directly from, and redeem Creation Units directly with, the issuing fund. To be an Authorized Participant, an entity must be a participant in the Depository Trust Company and must enter into an agreement with the fund’s Distributor.

Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years.

Bloomberg Barclays U.S. 5–10 Year Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds with maturities of 5 to 10 years.

Bloomberg Barclays U.S. Aggregate Bond Index. An index that is the broadest representation of the taxable U.S. bond market, including most U.S. Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Bloomberg Barclays U.S. Long Government/Credit Bond Index. An index that includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 10 years or more.

Bid-Ask Spread. The difference between the price a dealer is willing to pay for a security (the bid price) and the somewhat higher price at which the dealer is willing to sell the same security (the ask price).

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Creation Unit. A large block of a specified number of ETF Shares. Certain broker-dealers known as “Authorized Participants” may purchase and redeem ETF Shares from the issuing fund in Creation Unit size blocks.

48


 

Dividend Distributions. Payments to fund shareholders of income from interest or dividends generated by a fund’s investments.

Ex-Dividend Date. The date when a distribution of dividends and/or capital gains is deducted from the share price of a mutual fund, ETF, or stock. On the ex-dividend date, the share price drops by the amount of the distribution per share (plus or minus any market activity).

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

49


 

Joint Committed Credit Facility. Each Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Funds‘ board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

50


 

This page intentionally left blank.


 

This page intentionally left blank.


 

This page intentionally left blank.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Bond ETFs, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Funds’ investments is available in the Funds’ annual and semiannual reports to shareholders. In the annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during their last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Funds’ ETF Shares and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about Vanguard ETF Shares, please visit vanguard.com or contact us as follows:

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Funds ar e a vailable in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.go v.

Funds’ Investment Company Act file number: 811-04681

The Vanguard Group
Institutional Investor Information
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 866-499-8473

© 2019 The Vanguard Group, Inc. All rights reserved.

U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

Vanguard Marketing Corporation, Distributor.

P 984 042019


 

Vanguard Total Bond Market II Index Fund  
Prospectus  
 
April 26, 2019  
 
Investor Shares  
Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Financial Highlights   23  
More on the Fund   7   Investing With Vanguard   24  
The Fund and Vanguard   17   Additional Information   24  
Investment Advisor   18   Glossary of Investment Terms   26  
Dividends, Capital Gains, and Taxes   19      
Share Price   21      

 


 

Fund Summary

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Sales Charge (Load) Imposed on Purchases   None  
Purchase Fee   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None  
Redemption Fee   None  
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.07%  
12b-1 Distribution Fee   None  
Other Expenses   0.02%  
Total Annual Fund Operating Expenses   0.09%  

 

Example

The following example is intended to help you compare the cost of investing in the Fund’s Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$9   $29   $51   $115  

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 90 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighed average maturity of the Index was 8.3 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

2


 

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund’s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

Call risk , which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Investor Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market II Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 3.98% (quarter ended September 30, 2011), and the lowest return for a quarter was –3.24% (quarter ended December 31, 2016).

4


 

Average Annual Total Returns for Periods Ended December 31, 2018      
      Since  
      Inception  
      (Jan. 26,  
  1 Year   5 Years   2009)  
Vanguard Total Bond Market II Index Fund Investor Shares        
Return Before Taxes   –0.10%   2.41%   3.39%  
Return After Taxes on Distributions   –1.21   1.33   2.25  
Return After Taxes on Distributions and Sale of Fund Shares   –0.07   1.37   2.17  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Aggregate Float Adjusted Index   –0.08%   2.50%   %  
Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index   –0.08   2.50   3.56  
Bloomberg Barclays U.S. Aggregate Bond Index   0.01   2.52   3.55  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

5


 

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2010.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

More on the Fund

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Fund’s Investor Shares. A separate prospectus offers the Fund’s Institutional Shares, which are generally for investors who invest a minimum of $5 million.

Both share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds of funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Plain Talk About Fund Expenses  
 
All mutual funds have operating expenses. These expenses, which are deducted  
from a fund’s gross income, are expressed as a percentage of the net assets of  
the fund. Assuming that operating expenses remain as stated in the Fees and  
Expenses section, Vanguard Total Bond Market II Index Fund Investor Shares’  
expense ratio would be 0.09% , or $0.90 per $1,000 of average net assets. The  
average expense ratio for core bond funds in 2018 was 0.72% , or $7.20 per  
$1,000 of average net assets (derived from data provided by Lipper, a Thomson  
Reuters Company, which reports on the mutual fund industry).  

 

7


 

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund‘s performance.  

 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Under normal circumstances, the Fund will invest at least 80% of its assets in the bonds that make up its target index. The Fund may change its 80% policy only upon 60 days‘ notice to shareholders.

Market Exposure


The Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

8


 

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Fund in particular.

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .

9


 


The Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund‘s monthly income to fluctuate accordingly.

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

10


 


The Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates.


The Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.


The Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

To a limited extent, the Fund is subject to event risk, which is the chance that corporate fixed income securities held by the Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

11


 

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell.

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in its target index, the Fund uses index “sampling” techniques to select securities. Using computer programs, the Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, the Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Fund does not hold all of the securities included in its target index, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target index. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


The Fund is subject to index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund is expected to be low.

The number of bonds held by the Fund and the number of bonds in the Fund’s target index were 8,112 and 10,248 respectively, as of December 31, 2018 .

Types of bonds. The Fund’s target index is the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

As of December 31, 2018 , the Fund was composed of the following types of bonds:

  U.S.       International      
  Government/     Mortgage-   Dollar-      
  Agency   Corporate   Backed   Denominated   Other   Total  
 
Total Bond Market II              
Index Fund   43.0 %   27.1 %   23.7 %   5.1 %   1.1%   100%  

 

12


 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). The Fund expects to purchase only investment-grade corporate bonds.

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments. Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to

13


 

enhance the fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that the fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

Other Investment Policies and Risks

The Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of the Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue.

14


 

The Fund’s advisor expects that vast majority of these securities will have characteristics similar to those in the target index. Subject to the same 20% limit, the Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Fund may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

The Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market inde x, or a reference rate . Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

The Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. The Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/ or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

15


 

Methods Used to Meet Redemption Requests

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, since the Fund is only available for limited purchase by certain institutional accounts for which Vanguard or its affiliates has discretionary authority, the Fund’s portfolio manage r is typically aware of upcoming redemption requests. The Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Investors eligible to purchase shares of the Fund seek to maintain target asset allocations, which may require frequent rebalancing trades. Because the Fund is available only to such investors, the costs imposed by frequent trading are appropriately borne by the investors who cause them. For this reason, the board of trustees of the Fund has determined that it is not necessary to adopt policies and procedures designed to detect and deter frequent trading and market-timing in the Fund’s shares. For information on frequent-trading limits of other Vanguard funds, please see the appropriate fund’s prospectus.

16


 

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

17


 

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, t he Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

18


 

The manager primarily responsible for the day-to-day management of the Fund is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, and has managed the Fund since 2010. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings . Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December. In addition, the Fund may occasionally make a supplemental distribution at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional Fund shares.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

19


 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

20


 

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Fund offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares. However, on those days the value of the Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do

21


 

not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

22


 

Financial Highlights

The following financial highlights table is intended to help you understand the Investor Shares‘ financial performance for the periods shown, and certain information reflects financial results for a single Investor Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Investor Shares (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund’s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market II Index Fund Investor Shares          
 
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.72   $10.61   $10.60   $10.84   $10.49  
Investment Operations            
Net Investment Income   .285 1   .259 1   .251   .248   .242  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.301)   .112   .022   (.216)   .375  
Total from Investment Operations   (.016)   .371   .273   .032   .617  
Distributions            
Dividends from Net Investment Income   (.284)   (.259)   (.252)   (.248)   (.242)  
Distributions from Realized Capital Gains   (.000) 2   (.002)   (.011)   (.024)   (.025)  
Total Distributions   (.284)   (.261)   (.263)   (.272)   (.267)  
Net Asset Value, End of Period   $10.42   $10.72   $10.61   $10.60   $10.84  
Total Return 3   –0.10%   3.53%   2.55%   0.28%   5.93%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $91,653   $89,183   $68,381   $55,392   $54,268  
Ratio of Total Expenses to Average Net Assets   0.09%   0.09%   0.09%   0.09%   0.10%  
Ratio of Net Investment Income to Average            
Net Assets   2.74%   2.42%   2.31%   2.30%   2.26%  
Portfolio Turnover Rate 4   90%   80%   88%   116%   108% 5  

1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share.

3 Total returns do not include account service fees that may have applied in the periods shown. 4 Includes 22%, 26%, 24%, 46%, and 56% attributable to mortgage-dollar-roll activity.

5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund’s capital shares.

23


 

Investing With Vanguard

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds of funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Purchases, redemptions, and exchanges of shares issued by Vanguard Total Bond Market II Index Fund are conducted by Vanguard or its affiliates on behalf of the participating funds, trusts, and accounts.

Transactions will be based on the next-determined net asset value (NAV) of the Fund’s Investor Shares after Vanguard receives the request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the purchase request). If the request is received before the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the investor will receive that day’s NAV and trade date. Transaction requests received after that time will receive a trade date of the first business day following the date of receipt. The trade date may vary, depending on the method of payment for the transaction.

If a redemption request is received in good order, Vanguard typically expects that redemption proceeds will be paid by the Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction.

Portfolio Holdings

Please consult the Fund‘s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

Additional Information        
 
    Vanguard   CUSIP  
  Inception Date   Fund Number   Number  
Total Bond Market II Index Fund        
Investor Shares   1/26/2009   635   92203C105  

 

24


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and Bloomberg Barclays U.S Aggregate Bond Index (the Indices or Bloomberg Barclays Indices).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Total Bond Market II Index Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Total Bond Market II Index Fund. The Indices are licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Total Bond Market II Index Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Indices is the licensing of the Indices, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Total Bond Market II Index Fund or the owners of the Total Bond Market II Index Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with the Total Bond Market II Index Fund. Investors acquire the Total Bond Market II Index Fund from Vanguard and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Total Bond Market II Index Fund. The Total Bond Market II Index Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Total Bond Market II Index Fund or the advisability of investing in securities generally or the ability of the Indices to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Total Bond Market II Index Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Total Bond Market II Index Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Total Bond Market II Index Fund or any other third party into consideration in determining, composing or calculating the Indices. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Total Bond Market II Index Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Total Bond Market II Index Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Total Bond Market II Index Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDICES, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE TOTAL BOND MARKET II INDEX FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

25


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Bloomberg Barclays U.S. Aggregate Bond Index. An index that is the broadest representation of the taxable U.S. bond market, including most U.S. Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

26


 

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Fund's board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

27


 

This page intentionally left blank.


 

This page intentionally left blank.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Total Bond Market II Index Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a client of Vanguard’s Institutional Division:

The Vanguard Group

Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.gov.

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 635 042019


 

Vanguard Total Bond Market II Index Fund  
Prospectus  
 
April 26, 2019  
 
Institutional Shares  
Vanguard Total Bond Market II Index Fund Institutional Shares (VTBNX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Financial Highlights   23  
More on the Fund   7   Investing With Vanguard   24  
The Fund and Vanguard   17   Additional Information   24  
Investment Advisor   18   Glossary of Investment Terms   26  
Dividends, Capital Gains, and Taxes   19      
Share Price   21      

 


 

Fund Summary

Investment Objective

The Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Sales Charge (Load) Imposed on Purchases   None  
Purchase Fee   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None  
Redemption Fee   None  
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.02%  
12b-1 Distribution Fee   None  
Other Expenses   0.00%  
Total Annual Fund Operating Expenses   0.02%  

 

Example

The following example is intended to help you compare the cost of investing in the Fund’s Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$2   $6   $11   $26  

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 90 % of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. As of December 31, 2018, the dollar-weighed average maturity of the Index was 8.3 years.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Income risk , which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

2


 

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

Extension risk , which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities and delay a fund‘s ability to reinvest proceeds at higher interest rates, making a fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates. Extension risk should be moderate for the Fund.

Call risk , which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund's target index. Index sampling risk for the Fund is expected to be low.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund. The Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market II Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.01% (quarter ended September 30, 2011), and the lowest return for a quarter was –3.23% (quarter ended December 31, 2016).

4


 

Average Annual Total Returns for Periods Ended December 31, 2018      
      Since  
      Inception  
      (Feb. 17,  
  1 Year   5 Years   2009)  
Vanguard Total Bond Market II Index Fund Institutional Shares        
Return Before Taxes   –0.03%   2.48%   3.42%  
Return After Taxes on Distributions   –1.17   1.36   2.25  
Return After Taxes on Distributions and Sale of Fund Shares   –0.03   1.40   2.19  
Comparative Indexes        
(reflect no deduction for fees, expenses, or taxes)        
Bloomberg Barclays U.S. Aggregate Float Adjusted Index   –0.08%   2.50%   %  
Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index   –0.08   2.50   3.54  
Bloomberg Barclays U.S. Aggregate Bond Index   0.01   2.52   3.52  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

5


 

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2010.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan , special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

More on the Fund

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Fund’s Institutional Shares, which are generally for investors who invest a minimum of $5 million. A separate prospectus offers the Fund’s Investor Shares.

Both share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds of funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Plain Talk About Fund Expenses  
 
All mutual funds have operating expenses. These expenses, which are deducted  
from a fund’s gross income, are expressed as a percentage of the net assets of  
the fund. Assuming that operating expenses remain as stated in the Fees and  
Expenses section, Vanguard Total Bond Market II Index Fund Institutional Shares’  
expense ratio would be 0.02% , or $0.20 per $1,000 of average net assets. The  
average expense ratio for core bond funds in 2018 was 0.72% , or $7.20 per  
$1,000 of average net assets (derived from data provided by Lipper, a Thomson  
Reuters Company, which reports on the mutual fund industry).  

 

7


 

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund‘s performance.  

 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Under normal circumstances, the Fund will invest at least 80% of its assets in the bonds that make up its target index. The Fund may change its 80% policy only upon 60 days‘ notice to shareholders.

Market Exposure


The Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable bonds (i.e., bonds that cannot be redeemed by the issuer) of different maturities, each with a face value of $1,000.

8


 

How Interest Rate Changes Affect the Value of a $1,000 Bond 1      
  After a 1%   After a 1%   After a 2%   After a 2%  
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease  
Short-Term (2.5 years)   $977   $1,024   $954   $1,049  
Intermediate-Term (10 years)   922   1,086   851   1,180  
Long-Term (20 years)   874   1,150   769   1,328  
1 Assuming a 4% coupon rate.          

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Fund in particular.

Plain Talk About Bonds and Interest Rates  
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:  
Bond prices go up when interest rates fall. Why do bond prices and interest rates  
move in opposite directions? Let’s assume that you hold a bond offering a 4%  
yield. A year later, interest rates are on the rise and bonds of comparable quality  
and maturity are offered with a 5% yield. With higher-yielding bonds available,  
you would have trouble selling your 4% bond for the price you paid—you would  
probably have to lower your asking price. On the other hand, if interest rates were  
falling and 3% bonds were being offered, you should be able to sell your 4%  
bond for more than you paid.  
 
How mortgage-backed securities are different: In general, declining interest rates  
will not lift the prices of mortgage-backed securities—such as those guaranteed  
by the Government National Mortgage Association—as much as the prices of  
comparable bonds. Why? Because when interest rates fall, the bond market  
tends to discount the prices of mortgage-backed securities for prepayment risk—  
the possibility that homeowners will refinance their mortgages at lower rates and  
cause the bonds to be paid off prior to maturity. In part to compensate for this  
prepayment possibility, mortgage-backed securities tend to offer higher yields  
than other bonds of comparable credit quality and maturity. In contrast, when  
interest rates rise, prepayments tend to slow down, subjecting mortgage-backed  
securities to extension risk—the possibility that homeowners will repay their  
mortgages at slower rates. This will lengthen the duration or average life of  
mortgage-backed securities held by a fund and delay the fund’s ability to reinvest  
proceeds at higher interest rates, making the fund more sensitive to changes in  
interest rates.  

 

Changes in interest rates can affect bond income as well as bond prices .

9


 


The Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally high for short-term bond funds and moderate for intermediate-term bond funds, so investors should expect the Fund‘s monthly income to fluctuate accordingly.

Plain Talk About Bond Maturities  
 
A bond is issued with a specific maturity date—the date when the issuer must pay  
back the bond’s principal (face value). Bond maturities range from less than 1 year  
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk  
you, as a bond investor, will face as interest rates rise—but also the higher the  
potential yield you could receive. Longer-term bonds are more suitable for  
investors willing to take a greater risk of price fluctuations to get higher and more  
stable interest income. Shorter-term bond investors should be willing to accept  
lower yields and greater income variability in return for less fluctuation in the value  
of their investment. The stated maturity of a bond may differ from the effective  
maturity of a bond, which takes into consideration that an action such as a call or  
refunding may cause bonds to be repaid before their stated maturity dates.  

 

Although falling interest rates tend to strengthen bond prices, they can cause other problems for bond fund investors—bond calls and prepayments.


The Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such prepayments and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Prepayment risk should be moderate for the Fund.

10


 


The Fund is subject to extension risk, which is the chance that during periods of rising interest rates, certain debt securities will be paid off substantially more slowly than originally anticipated, and the value of those securities may fall. This will lengthen the duration or average life of those securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates, making the Fund more sensitive to changes in interest rates. For funds that invest in mortgage-backed securities, extension risk is the chance that during periods of rising interest rates, homeowners will repay their mortgages at slower rates.


The Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupon rates or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover rate. Call risk should be low for the Fund because it invests only a small portion of its assets in callable bonds.


The Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be low for the Fund because it purchases only bonds that are of investment-grade quality.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

To a limited extent, the Fund is subject to event risk, which is the chance that corporate fixed income securities held by the Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting the issuers.


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

11


 

Corporate bonds are traded among dealers and brokers that connect buyers with sellers. Liquidity in the corporate bond market may be challenged depending on overall economic conditions and credit tightening. There may be little trading in the secondary market for particular bonds and other debt securities, which may make them more difficult to value or sell .

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in its target index, the Fund uses index “sampling” techniques to select securities. Using computer programs, the Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, the Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Fund does not hold all of the securities included in its target index, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target index. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


The Fund is subject to index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund is expected to be low.

The number of bonds held by the Fund and the number of bonds in the Fund’s target index were 8,112 and 10,248 respectively, as of December 31, 2018 .

Types of bonds. The Fund’s target index is the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This Index measures the total universe of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities—all with maturities of more than 1 year.

As of December 31, 2018 , the Fund was composed of the following types of bonds:

  U.S.       International      
  Government/     Mortgage-   Dollar-      
  Agency   Corporate   Backed   Denominated   Other   Total  
 
Total Bond Market II              
Index Fund   43.0 %   27.1 %   23.7 %   5.1 %   1.1%   100%  

 

12


 

An explanation of each type of bond follows:

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Corporate bonds are IOUs issued by businesses that want to borrow money for some purpose—often to develop a new product or service, to expand into a new market, or to buy another company. As with other types of bonds, the issuer promises to repay the principal on a specific date and to make interest payments in the meantime. The amount of interest offered depends both on market conditions and on the financial health of the corporation issuing the bonds; a company whose credit rating is not strong will have to offer a higher interest rate to obtain buyers for its bonds. For purposes of the preceding table, corporate bonds include securities that are backed by a pool of underlying assets (asset-backed securities) or commercial mortgages (commercial mortgage-backed bonds). The Fund expects to purchase only investment-grade corporate bonds.

Mortgage-backed securities represent interests in underlying pools of mortgages.

Unlike ordinary bonds, which generally pay a fixed rate of interest at regular intervals and then repay principal upon maturity, mortgage-backed securities pass through both interest and principal from underlying mortgages as part of their regular payments. Because the mortgages underlying the securities can be prepaid at any time by homeowners or by corporate borrowers, mortgage-backed securities are subject to prepayment risk. These types of securities are issued by a number of government agencies, including the GNMA, the FHLMC, and the FNMA. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The Fund may also invest in conventional mortgage-backed securities—which are packaged by private corporations and are not guaranteed by the U.S. government—and enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to

13


 

enhance the fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the fund’s portfolio turnover rate. Mortgage dollar rolls will be used only to the extent that they are consistent with the fund’s investment objective and risk profile.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that the fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

Plain Talk About U.S. Government-Sponsored Entities  
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal  
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage  
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and  
mortgage-backed securities. Although GSEs may be chartered or sponsored by  
acts of Congress, they are not funded by congressional appropriations. In  
September of 2008, the U.S. Treasury placed FNMA and FHLMC under  
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to  
manage their daily operations. In addition, the U.S. Treasury entered into  
purchase agreements with FNMA and FHLMC to provide them with capital in  
exchange for senior preferred stock. Generally, a GSE’s securities are neither  
issued nor guaranteed by the U.S. Treasury and are not backed by the full faith  
and credit of the U.S. government. In most cases, these securities are supported  
only by the credit of the GSE, standing alone. In some cases, a GSE’s securities  
may be supported by the ability of the GSE to borrow from the U.S. Treasury or  
may be supported by the U.S. government in some other way. Securities issued  
by the Government National Mortgage Association (GNMA), however, are backed  
by the full faith and credit of the U.S. government.  

 

14


 

Other Investment Policies and Risks

The Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of the Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The Fund’s advisor expects that the vast majority of these securities will have characteristics similar to those in the target index. Subject to the same 20% limit, the Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Fund may also invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.

The Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market inde x, or a reference rate . Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of investments directly in the underlying securities or assets. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

The Fund may invest a small portion of its assets in fixed income futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These fixed income futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, th e Fund seeks to track. The Fund may purchase futures or ETFs when doing so will reduce the Fund‘s transaction costs, facilitate cash management, mitigate risk, or have the potential to add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

15


 

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, since the Fund is only available for limited purchase by certain institutional accounts for which Vanguard or its affiliates has discretionary authority, the Fund’s portfolio manage r is typically aware of upcoming redemption requests. The Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Investors eligible to purchase shares of the Fund seek to maintain target asset allocations, which may require frequent rebalancing trades. Because the Fund is available only to such investors, the costs imposed by frequent trading are

16


 

appropriately borne by the investors who cause them. For this reason, the board of trustees of the Fund has determined that it is not necessary to adopt policies and procedures designed to detect and deter frequent trading and market-timing in the Fund’s shares. For information on frequent-trading limits of other Vanguard funds, please see the appropriate fund’s prospectus.

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

17


 

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of less than 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, the Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

18


 

The manager primarily responsible for the day-to-day management of the Fund is:

Joshua C. Barrickman , CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998, has worked in investment management since 1999, has managed investment portfolios since 2005, and has managed the Fund since 2010. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings . Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December. In addition, the Fund may occasionally make a supplemental distribution at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional Fund shares.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

19


 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan , special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

20


 

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Fund offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares. However, on those days the value of the Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do

21


 

not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

22


 

Financial Highlights

The following financial highlights table is intended to help you understand the Institutional Shares‘ financial performance for the periods shown, and certain information reflects financial results for a single Institutional Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Institutional Shares (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund’s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Total Bond Market II Index Fund Institutional Shares

 

      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.72   $10.61   $10.60   $10.84   $10.49  
Investment Operations            
Net Investment Income   .292 1   .267 1   .259   .256   .248  
Net Realized and Unrealized Gain (Loss) on            
Investments   (.300)   .112   .022   (.216)   .375  
Total from Investment Operations   (.008)   .379   .281   .040   .623  
Distributions            
Dividends from Net Investment Income   (.292)   (.267)   (.260)   (.256)   (.248)  
Distributions from Realized Capital Gains   (.000) 2   (.002)   (.011)   (.024)   (.025)  
Total Distributions   (.292)   (.269)   (.271)   (.280)   (.273)  
Net Asset Value, End of Period   $10.42   $10.72   $10.61   $10.60   $10.84  
Total Return   –0.03%   3.60%   2.62%   0.35%   5.99%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $62,455   $59,299   $45,632   $36,760   $36,485  
Ratio of Total Expenses to Average Net Assets   0.02%   0.02%   0.02%   0.02%   0.05%  
Ratio of Net Investment Income to Average            
Net Assets   2.81%   2.49%   2.38%   2.37%   2.31%  
Portfolio Turnover Rate 3   90%   80%   88%   116%   108% 4  

 

1 Calculated based on average shares outstanding. 2 Distribution was less than $.001 per share.

3 Includes 22%, 26%, 24%, 46%, and 56% attributable to mortgage-dollar roll activity.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund’s capital shares.

23


 

Investing With Vanguard

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds of funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Purchases, redemptions, and exchanges of shares issued by Vanguard Total Bond Market II Index Fund are conducted by Vanguard or its affiliates on behalf of the participating funds, trusts, and accounts.

Transactions will be based on the next-determined net asset value (NAV) of the Fund’s Institutional Shares after Vanguard receives the request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the purchase request). If the request is received before the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the investor will receive that day’s NAV and trade date. Transaction requests received after that time will receive a trade date of the first business day following the date of receipt. The trade date may vary, depending on the method of payment for the transaction.

If a redemption request is received in good order, Vanguard typically expects that redemption proceeds will be paid by the Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction.

Portfolio Holdings

Please consult the Fund‘s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

Additional Information        
 
    Vanguard   CUSIP  
  Inception Date   Fund Number   Number  
Total Bond Market II Index Fund        
Institutional Shares   2/17/2009   660   92203C204  

 

24


 

CFA ® is a registered trademark owned by CFA Institute.

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and Bloomberg Barclays U.S. Aggregate Bond Index (the Indices or Bloomberg Barclays Indices).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Total Bond Market II Index Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Total Bond Market II Index Fund. The Indices are licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Total Bond Market II Index Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Indices is the licensing of the Indices, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Total Bond Market II Index Fund or the owners of the Total Bond Market II Index Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with the Total Bond Market II Index Fund. Investors acquire the Total Bond Market II Index Fund from Vanguard and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Total Bond Market II Index Fund. The Total Bond Market II Index Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Total Bond Market II Index Fund or the advisability of investing in securities generally or the ability of the Indices to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Total Bond Market II Index Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Total Bond Market II Index Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Total Bond Market II Index Fund or any other third party into consideration in determining, composing or calculating the Indices. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Total Bond Market II Index Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Total Bond Market II Index Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Total Bond Market II Index Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDICES, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDICES. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF BLOOMBERG BARCLAYS INDICES OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE TOTAL BOND MARKET II INDEX FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

25


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Bloomberg Barclays U.S. Aggregate Bond Index. An index that is the broadest representation of the taxable U.S. bond market, including most U.S. Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a

26


 

subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the fund's board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

27


 

This page intentionally left blank.


 

This page intentionally left blank.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Total Bond Market II Index Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a client of Vanguard’s Institutional Division:

The Vanguard Group

Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.gov.

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 660 042019


 

Vanguard Inflation-Protected Securities Fund  
Prospectus  
 
April 26, 2019  
 
Investor Shares & Admiral™ Shares  
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)  
Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Investing With Vanguard   24  
More on the Fund   6   Purchasing Shares   24  
The Fund and Vanguard   16   Converting Shares   28  
Investment Advisor   16   Redeeming Shares   29  
Dividends, Capital Gains, and Taxes   17   Exchanging Shares   33  
Share Price   21   Frequent-Trading Limitations   33  
Financial Highlights   22   Other Rules You Should Know   35  
    Fund and Account Updates   40  
    Employer-Sponsored Plans   41  
    Contacting Vanguard   42  
    Additional Information   43  
    Glossary of Investment Terms   45  

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
  Investor Shares   Admiral Shares  
Sales Charge (Load) Imposed on Purchases   None   None  
Purchase Fee   None   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None   None  
Redemption Fee   None   None  
Account Service Fee (for certain fund account balances below   $20/year   $20/year  
$10,000)      
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
  Investor Shares   Admiral Shares  
Management Fees   0.18%   0.09%  
12b-1 Distribution Fee   None   None  
Other Expenses   0.02%   0.01%  
Total Annual Fund Operating Expenses   0.20%   0.10%  

 

1


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. These examples assume that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years  
Investor Shares   $20   $64   $113   $255  
Admiral Shares   $10   $32   $56   $128  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 27 % of the average value of its portfolio.

Principal Investment Strategies

The Fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. The Fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years. At a minimum, all bonds purchased by the Fund will be rated investment-grade or, if unrated, will be considered by the advisor to be investment-grade.

2


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Income fluctuations . The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Manager risk , which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Derivatives risk . The Fund may invest in derivatives, which may involve risks different from, and possibly greater than, those of investments directly in the underlying securities or assets.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of a relevant market index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

3


 

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.25% (quarter ended March 31, 2009), and the lowest return for a quarter was –7.34% (quarter ended June 30, 2013).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund Investor Shares        
Return Before Taxes   –1.49%   1.53%   3.41%  
Return After Taxes on Distributions   –2.67   0.65   2.47  
Return After Taxes on Distributions and Sale of Fund Shares   –0.88   0.79   2.30  
Vanguard Inflation-Protected Securities Fund Admiral Shares        
Return Before Taxes   –1.39%   1.65%   3.52%  
Bloomberg Barclays U.S. Treasury Inflation Protected        
Securities Index        
(reflects no deduction for fees, expenses, or taxes)   –1.26%   1.69%   3.64%  

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and may differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

4


 

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Gemma Wright-Casparius, Principal of Vanguard. She has managed the Fund since 2011.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Investor Shares or Admiral Shares is $3,000 or $50,000, respectively. The minimum investment amount required to add to an existing Fund account is generally $1. Financial intermediaries, institutional clients, and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

5


 

More on the Fund

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Fund’s Investor Shares and Admiral Shares. A separate prospectus offers the Fund’s Institutional Shares, which are generally for investors who invest a minimum of $5 million.

All share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Plain Talk About Fund Expenses  
 
All mutual funds have operating expenses. These expenses, which are deducted  
from a fund’s gross income, are expressed as a percentage of the net assets of  
the fund. Assuming that operating expenses remain as stated in the Fees and  
Expenses section, Vanguard Inflation-Protected Securities Fund’s expense ratios  
would be as follows: for Investor Shares, 0.20%, or $2.00 per $1,000 of average  
net assets; for Admiral Shares, 0.10%, or $1.00 per $1,000 of average net  
assets. The average expense ratio for inflation-protected bond funds in 2018 was  
0.68% , or $6.80 per $1,000 of average net assets (derived from data provided by  
Lipper, a Thomson Reuters Company, which reports on the mutual fund industry).  

 

6


 

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund‘s performance.  

 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Note that the Fund’s investment objective is not fundamental and may be changed without a shareholder vote. However, the Fund‘s policy of investing at least 80% of its assets in inflation-indexed bonds may be changed only upon 60 days‘ notice to shareholders.

Market Exposure

The Fund invests mainly in investment-grade, inflation-indexed bonds. As a result of this investment strategy, the Fund is subject to certain risks.

7


 

Plain Talk About Inflation-Indexed Securities  
 
Unlike a conventional bond, whose issuer makes regular fixed interest payments  
and repays the face value of the bond at maturity, an inflation-indexed security  
(IIS) provides principal and interest payments that are adjusted over time to reflect  
a rise (inflation) or a drop (deflation) in the general price level for goods and  
services. This adjustment is a key feature, given that inflation has typically  
occurred. However, there have been periods of deflation, such as in 1954 when  
the Consumer Price Index (CPI) declined by 0.7%. (Source: Bureau of Labor  
Statistics.) Importantly, in the event of deflation, the U.S. Treasury has guaranteed  
that it will repay at least the face value of an IIS issued by the U.S. government.  
However, if an IIS is purchased by a fund at a premium, deflation could cause a  
fund to experience a loss.  
 
Inflation measurement and adjustment for an IIS have two important features.  
There is a two-month lag between the time that inflation occurs in the economy  
and when it is factored into IIS valuations. This is due to the time required to  
measure and calculate the CPI and for the U.S. Treasury to adjust the inflation  
accrual schedules for an IIS. For example, inflation that occurs in January is  
calculated and announced during February and affects IIS valuations throughout  
the month of March. In addition, the inflation index used is the nonseasonally  
adjusted index. It differs from the CPI that is reported by most news  
organizations, which is statistically smoothed to overcome highs and lows  
observed at different points each year. The use of the nonseasonally adjusted  
index can cause a fund’s income level to fluctuate.  

 


The Fund is subject to income fluctuations. The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Although fluctuations in quarterly income distributions are expected to be high, distributions should provide an income yield that adjusts with inflation. In periods of extreme deflation, the Fund may have no income to distribute. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

Changes in interest rates can affect bond income as well as bond prices .

8


 


The Fund is subject to interest rate risk, which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Plain Talk About Real Returns  
 
Inflation-indexed securities are designed to provide a “real rate of return”—a  
return after adjusting for the impact of inflation. Inflation—a rise in the general  
price level—erodes the purchasing power of an investor’s portfolio. For example,  
if an investment provides a “nominal” total return of 5% in a given year and  
inflation is 2% during that period, the inflation-adjusted, or real, return is 3%.  
Investors should be conscious of both the nominal and the real returns on their  
investments. Investors in inflation-indexed bond funds who do not reinvest the  
portion of the income distribution that comes from inflation adjustments will not  
maintain the purchasing power of the investment over the long term. This is  
because interest earned depends on the amount of principal invested, and that  
principal will not grow with inflation if the investor does not reinvest the principal  
adjustment paid out as part of a fund’s income distributions.  

 

Plain Talk About Inflation-Indexed Securities and Interest Rates  
 
Interest rates on conventional bonds have two primary components: a “real”  
yield and an increment that reflects investor expectations of future inflation. By  
contrast, interest rates on an IIS are adjusted for inflation and, therefore, are not  
affected meaningfully by inflation expectations. This leaves only real rates to  
influence the price of an IIS. A rise in real rates will cause the price of an IIS to  
fall, while a decline in real rates will boost the price of an IIS.  

 


The Fund is subject, to a limited extent, to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

The credit quality of the Fund depends on the quality of its investments. Because the Fund emphasizes securities backed by the full faith and credit of the U.S. government, the average credit quality of the Fund’s holdings is expected to be high, and consequently credit risk should be low for the Fund. At a minimum, all bonds purchased

9


 

by the Fund will be rated investment-grade (in one of the four highest rating categories) or, if unrated, will be considered by the advisor to be investment-grade.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

Plain Talk About Inflation-Indexed Securities and Taxes  
 
Any increase in principal for an IIS resulting from inflation adjustments is  
considered by the IRS to be taxable income in the year it occurs. For direct  
holders of an IIS, this means that taxes must be paid on principal adjustments,  
even though these amounts are not received until the bond matures. By contrast,  
a mutual fund holding an IIS pays out (to shareholders) both interest income and  
the income attributable to principal adjustments each quarter in the form of cash  
or reinvested shares, and the shareholders must pay taxes on the distributions.  

 


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Security Selection

The Fund emphasizes inflation-indexed bonds issued by the U.S. government, although it may also purchase inflation-indexed bonds issued by agencies and instrumentalities of the U.S. government and by corporations. The Fund may invest in bonds of any maturity, but is expected to maintain a dollar-weighted average maturity in the range of 7 to 20 years.

Vanguard, advisor to the Fund, buys and sells securities based on its judgment about issuers, the prices of the securities, and other economic factors. Although the advisor uses the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index as a benchmark for the Fund’s performance, the Fund’s average maturity and mix of bonds may differ from those of the Index. This may occur, for example, when the advisor sees an opportunity to enhance returns.

10


 


The Fund is subject to manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Other Investment Policies and Risks

In addition to investing in inflation-indexed securities, the Fund may make other kinds of investments to achieve its objective.

Up to 20% of the Fund’s assets may be invested in holdings that are not inflation-indexed. The Fund typically will make such investments when inflation-indexed bonds are less attractive. The Fund’s non-inflation-indexed holdings may include the following:

Corporate debt obligations —usually called bonds—represent loans by an investor to a corporation.

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a Fund to banks or large securities dealers.

Illiquid securities are i nvestments that a fun d r easonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment . The Fund may invest up to 15% of its net assets in these securities. Restricted securities are a special type of illiquid security; these securities have not been publicly issued and legally can be resold only to qualified buyers. From time to time, the board of trustees may determine that particular restricted securities are not illiquid, and those securities may then be purchased by the Fund without limit.

11


 

Mortgage dollar rolls are transactions in which a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance a fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase a fund’s portfolio turnover rate. Mortgage dollar rolls will be used only if consistent with the Fund’s investment objective and risk profile.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market inde x , or a reference rat e . The Fund may invest in derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of the Fund as disclosed in this prospectus. In particular, derivatives will be used only when they may help the advisor to accomplish one or more of the following :

• Invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment.

• Add value when these instruments are attractively priced.

• Adjust sensitivity to changes in interest rates.

The Fund‘s derivative investments may include fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives. Losses (or gains) involving futures contracts can sometimes be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for other types of derivatives.

Plain Talk About Derivatives  
 
Derivatives can take many forms. Some forms of derivatives—such as exchange-  
traded futures and options on securities, commodities, or indexes—have been  
trading on regulated exchanges for decades. These types of derivatives are  
standardized contracts that can easily be bought and sold and whose market  
values are determined and published daily. On the other hand, non-exchange-  
traded derivatives—such as certain swap agreements—tend to be more  
specialized or complex and may be more difficult to accurately value.  

 

12


 

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/ or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, the Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio; see “Potentially disruptive redemptions” under Redeeming Shares in the Investing With Vanguard section.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days; see “Emergency circumstances” under Redeeming Shares in the Investing With Vanguard section. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case if the Fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.

13


 

In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash equivalent investments or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

14


 

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

See the Investing With Vanguard section of this prospectus for further details on Vanguard’s transaction policies.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

15


 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly

16


 

owned subsidiaries of Vanguard. If the exemption is granted, the Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Fund is:

Gemma Wright-Casparius , Principal of Vanguard. She has worked in investment management since 2005, has managed investment portfolios since 2008, and has managed the Fund since joining Vanguard in 2011. Education: B.B.A. and M.B.A., Bernard M. Baruch College of The City University of New York.

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings. From time to time , the Fund may also make distributions that are treated as a return of capital . Income dividends are generally declared and distributed quarterly in March, June, September, and December; in certain circumstances, the Fund may determine not to pay income dividends every quarter of a year. Capital gains distributions, if any, generally occur annually in December . In addition, the Fund may occasionally make a supplemental distribution at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional fund shares.

17


 

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

Plain Talk About Return of Capital  
 
Return of capital is the portion of a distribution representing the return of your  
original investment in a fund. Return of capital reduces your cost basis in the  
fund’s shares and is not taxable to you until your cost basis has been reduced  
to zero. During periods of deflation, the fund’s inflation-indexed bonds may  
experience a downward adjustment in their value. These downward  
adjustments can partially or entirely offset, or more than offset, the income  
earned on the bonds. Under certain circumstances, these downward  
adjustments could require the fund to reclassify a portion of the income  
dividends previously distributed to shareholders as return of capital. To reduce  
the possibility of a reclassification, the fund may determine to pay income  
dividends less frequently than quarterly in a year.  

 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

18


 

• Your cost basis in the Fund will be decreased by the amount of any return of capital that you receive. This, in turn, will affect the amount of any capital gain or loss that you realize when selling or exchanging your Fund shares.

• Return of capital distributions generally are not taxable to you until your cost basis has been reduced to zero. If your cost basis is at zero, return of capital distributions will be treated as capital gains.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event.

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

19


 

Plain Talk About Buying a Dividend  
 
Unless you are a tax-exempt investor or investing through a tax-advantaged  
account (such as an IRA or an employer-sponsored retirement or savings plan),  
you should consider avoiding a purchase of fund shares shortly before the fund  
makes a distribution, because doing so can cost you money in taxes. This is  
known as “buying a dividend.” For example: On December 15, you invest $5,000,  
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on  
December 16, its share price will drop to $19 (not counting market change). You  
still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares  
x $1 = $250 in distributions), but you owe tax on the $250 distribution you  
received—even if you reinvest it in more shares. To avoid buying a dividend, check  
a fund’s distribution schedule before you invest.  

 

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Fund offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

20


 

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares.

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

21


 

Financial Highlights

The following financial highlights tables are intended to help you understand the Fund’s financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund‘s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Inflation-Protected Securities Fund Investor Shares          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $13.04   $12.98   $12.84   $13.18   $12.98  
Investment Operations            
Net Investment Income   .379 1   .310 1   .263   .098   .224  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.572)   .053   .315   (.339)   .273  
Total from Investment Operations   (.193)   .363   .578   (.241)   .497  
Distributions            
Dividends from Net Investment Income   (.377)   (.303)   (.266)   (.098)   (.281)  
Distributions from Realized Capital Gains       (.017)   (.001)   (.016)  
Return of Capital       (.155)      
Total Distributions   (.377)   (.303)   (.438)   (.099)   (.297)  
Net Asset Value, End of Period   $12.47   $13.04   $12.98   $12.84   $13.18  
 
Total Return 2   –1.49%   2.81%   4.52%   –1.83%   3.83%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $3,526   $4,139   $4,496   $4,746   $5,604  
Ratio of Total Expenses to            
Average Net Assets   0.20%   0.20%   0.20%   0.20%   0.20%  
Ratio of Net Investment Income to            
Average Net Assets   2.96%   2.38%   1.99%   0.72%   2.01%  
Portfolio Turnover Rate   27%   22%   27% 3   43% 3   39% 3  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

22


 

In flation-Protected Securities Fund Admiral Shar es          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $25.60   $25.48   $25.21   $25.87   $25.47  
Investment Operations            
Net Investment Income   .767 1   .640 1   .544   .221   .468  
Net Realized and Unrealized Gain (Loss)            
on Investments   (1.122)   .097   .615   (.658)   .544  
Total from Investment Operations   (.355)   .737   1.159   (.437)   1.012  
Distributions            
Dividends from Net Investment Income   (.765)   (.617)   (.541)   (.220)   (.581)  
Distributions from Realized Capital Gains       (.034)   (.003)   (.031)  
Return of Capital       (.314)      
Total Distributions   (.765)   (.617)   (.889)   (.223)   (.612)  
Net Asset Value, End of Period   $24.48   $25.60   $25.48   $25.21   $25.87  
 
Total Return 2   –1.39%   2.91%   4.62%   –1.69%   3.97%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $13,661   $13,917   $12,205   $10,533   $10,778  
Ratio of Total Expenses to            
Average Net Assets   0.10%   0.10%   0.10%   0.10%   0.10%  
Ratio of Net Investment Income to            
Average Net Assets   3.06%   2.48%   2.09%   0.82%   2.11%  
Portfolio Turnover Rate   27%   22%   27% 3   43% 3   39% 3  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

23


 

Investing With Vanguard

This section of the prospectus explains the basics of doing business with Vanguard. Vanguard fund shares can be held directly with Vanguard or indirectly through an intermediary, such as a bank, a broker, or an investment advisor. If you hold Vanguard fund shares directly with Vanguard, you should carefully read each topic within this section that pertains to your relationship with Vanguard. If you hold Vanguard fund shares indirectly through an intermediary (including shares held in a brokerage account through Vanguard Brokerage Services ® ), please see Investing With Vanguard Through Other Firms , and also refer to your account agreement with the intermediary for information about transacting in that account. If you hold Vanguard fund shares through an employer-sponsored retirement or savings plan, please see Employer-Sponsored Plans . Vanguard reserves the right to change the following policies without notice. Please call or check online for current information. See Contacting Vanguard.

For Vanguard fund shares held directly with Vanguard, each fund you hold in an account is a separate “fund account.” For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accounts—and this is true even if you hold the same fund in multiple accounts. Note that each reference to “you” in this prospectus applies to any one or more registered account owners or persons authorized to transact on your account.

Purchasing Shares

Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account or to add to an existing fund account.

Investment minimums may differ for certain categories of investors.

Account Minimums for Investor Shares To open and maintain an account. $3,000.

To add to an existing account. Generally $1.

24


 

Account Minimums for Admiral Shares

To open and maintain an account. $50,000. If you request Admiral Shares when you open a new account but the investment amount does not meet the account minimum for Admiral Shares, your investment will be placed in Investor Shares of the Fund . Financial intermediaries, institutional clients , and Vanguard-advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares. If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility.

To add to an existing account. Generally $1.

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also call Vanguard to request a purchase of shares in your account or to request an exchange. See

Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from a transaction confirmation or your account statement) or with a deposit slip (available online). For a list of Vanguard addresses, see Contacting Vanguard .

How to Pay for a Purchase

By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money from a bank account. To establish the electronic bank transfer service on an account, you must designate the bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or upon request. Your purchase request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.

25


 

By check. You may make initial or additional purchases to your fund account by sending a check with a deposit slip or by utilizing our mobile application if you are registered for online access. Also see How to Initiate a Purchase Request. Make your check payable to Vanguard and include the appropriate fund number (e.g., Vanguard—xx). For a list of Fund numbers (for share classes in this prospectus), see Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail with an exchange form . See Exchanging Shares .

Trade Date

The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For purchases by check into all funds other than money market funds and for purchases by exchange , wire , or electronic bank transfer (not using an Automatic Investment Plan) into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the next business day.

For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date for the purchase will be one business day later than for other funds.

For purchases by electronic bank transfer using an Automatic Investment Plan : Your trade date generally will be the date you selected for withdrawal of funds from your designated bank account. Your bank account generally will be debited on the business day after your trade date. If the date you selected for withdrawal of funds from your bank account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you

26


 

selected for withdrawal of funds from your designated bank account falls on the last business day of the year, your trade date will be the first business day of the following year. Please note that if you select the first of the month for automated withdrawals from your designated bank account, trades designated for January 1 will receive the next business day’s trade date.

If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know—Good Order .

For further information about purchase transactions, consult our website at vanguard.com or see Contacting Vanguard .

Other Purchase Rules You Should Know

Admiral Shares. Admiral Shares generally are not available for SIMPLE IRAs and Vanguard Individual 401(k) Plans.

Check purchases. All purchase checks must be written in U.S. dollars, be drawn on a U.S. bank , and be accompanied by good order instructions . Vanguard does not accept cash, traveler’s checks, starter checks, or money orders. In addition, Vanguard may refuse checks that are not made payable to Vanguard.

New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable. Certain types of accounts may require additional documentation.

Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because the investor has a history of frequent trading or because the purchase may negatively affect a fund’s operation or performance.

Large purchases. Call Vanguard before attempting to invest a large dollar amount.

No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.

27


 

Converting Shares

When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the “new” shares you receive equals the dollar value of the “old” shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the NAVs of the two share classes.

Vanguard will not accept your request to cancel any self-directed conversion request once processing has begun. Please be careful when placing a conversion request.

A conversion between share classes of the same fund is a nontaxable event.

Trade Date

The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.

Conversions From Investor Shares to Admiral Shares

Self-directed conversions. If your account balance in the Fund is at least $50,000, you may ask Vanguard to convert your Investor Shares to Admiral Shares. You may request a conversion through our website (if you are registered for online access), by telephone, or by mail. Financial intermediaries, institutional clients , and Vanguard- advised clients should contact Vanguard for information on special eligibility rules that may apply to them regarding Admiral Shares . See Contacting Vanguard . If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility.

Automatic conversions. Vanguard conducts periodic reviews of account balances and may, if your account balance in the Fund exceeds $50,000, automatically convert your Investor Shares to Admiral Shares. You will be notified before an automatic conversion occurs and will have an opportunity to instruct Vanguard not to effect the conversion. Financial intermediaries, institutional clients , and Vanguard- advised clients should contact Vanguard for information on special eligibility rules that may apply to them

28


 

regarding Admiral Shares . If you are investing through an intermediary, please contact that firm directly for more information regarding your eligibility.

Conversions to Institutional Shares

You are eligible for a self-directed conversion from another share class to Institutional Shares of the Fund, provided that your account meets all Institutional Shares’ eligibility requirements. You may request a conversion through our website (if you are registered for online access), or you may contact Vanguard by telephone or by mail to request this transaction. Accounts that qualify for Institutional Shares will not be automatically converted.

Mandatory Conversions to Another Share Class

If an account no longer meets the balance requirements for a share class, Vanguard may automatically convert the shares in the account to another share class, as appropriate. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.

Redeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares or request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to request a redemption of shares or an exchange. See Contacting Vanguard .

By mail. You may send a form (available online) to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard .

By writing a check. If you have established the checkwriting service on your account, you can redeem shares by writing a check for $250 or more.

How to Receive Redemption Proceeds

By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer service on an account, you must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule

29


 

(Automatic Withdrawal Plan) or upon request. Your redemption request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. To receive your proceeds by wire, you may instruct Vanguard to wire your redemption proceeds ($100 minimum) to a previously designated bank account. To establish the wire redemption service, you generally must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form.

Please note that Vanguard charges a $10 wire fee for outgoing wire redemptions. The fee is assessed in addition to, rather than being withheld from, redemption proceeds and is paid directly to the fund in which you invest . For example, if you redeem $100 via a wire, you will receive the full $100, and the $10 fee will be assessed to your fund account with an additional redemption of fund shares . If you redeem your entire fund account, your redemption proceeds will be reduced by the amount of the fee . The wire fee does not apply to accounts held by Flagship and Flagship Select clients; accounts held through intermediaries, including Vanguard Brokerage Services; or accounts held by institutional clients.

By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail. See Exchanging Shares .

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, normally within two business days of your trade date, and generally to the address of record.

Trade Date

The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For redemptions by check , exchange , or wire : If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

• Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone

30


 

requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.

• Note on timing of wire redemptions from all other funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.

For redemptions by electronic bank transfer using an Automatic Withdrawal Plan : Your trade date generally will be the date you selected for withdrawal of funds (redemption of shares) from your Vanguard account. Proceeds of redeemed shares generally will be credited to your designated bank account two business days after your trade date. If the date you selected for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your Vanguard account falls on the last day of the year and if that date is a holiday, your trade date will be the first business day of the following year. Please note that if you designate the first of the month for automated withdrawals, trades designated for January 1 will receive the next business day’s trade date.

For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

If your redemption request is received in good order, we typically expect that redemption proceeds will be paid by the Fund within one business day of the trade

31


 

date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction. For further information, see “Potentially disruptive redemptions” and “Emergency circumstances.”

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Other Redemption Rules You Should Know

Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts.

Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limitations for information about Vanguard’s policies to limit frequent trading.

Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to seven calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing (using a form available online) at any time. Confirmations of address changes are sent to both the old and new addresses.

Payment to a different person or address. At your request, we can make your redemption check payable, or wire your redemption proceeds, to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require additional documentation, such as a signature guarantee or a notarized signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange.

32


 

No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.

Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.

Exchanging Shares

An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are registered for online access), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Call Vanguard before attempting to exchange a large dollar amount. By calling us before you attempt to exchange a large dollar amount, you may avoid delayed or rejected transactions.

Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. See Frequent-Trading Limitations for additional restrictions on exchanges.

Frequent-Trading Limitations

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in the funds. Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) limits an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to these frequent-trading limits.

For Vanguard Retirement Investment Program pooled plans, the limitations apply to exchanges made online or by telephone.

33


 

These frequent-trading limitations do not apply to the following:

• Purchases of shares with reinvested dividend or capital gains distributions.

• Transactions through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online ® .

• Discretionary transactions through Vanguard Personal Advisor Services ® and Vanguard Institutional Advisory Services ® .

• Redemptions of shares to pay fund or account fees.

• Redemptions of shares to remove excess shareholder contributions to certain types of retirement accounts (including, but not limited to, IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans).

• Transfers and reregistrations of shares within the same fund.

• Purchases of shares by asset transfer or direct rollover.

• Conversions of shares from one share class to another in the same fund.

• Checkwriting redemptions.

• Section 529 college savings plans.

• Certain approved institutional portfolios and asset allocation programs, as well as trades made by funds or trusts managed by Vanguard or its affiliates that invest in other Vanguard funds. (Please note that shareholders of Vanguard’s funds of funds are subject to the limitations.)

For participants in employer-sponsored defined contribution plans,* the frequent-trading limitations do not apply to:

• Purchases of shares with participant payroll or employer contributions or loan repayments.

• Purchases of shares with reinvested dividend or capital gains distributions.

• Distributions, loans, and in-service withdrawals from a plan.

• Redemptions of shares as part of a plan termination or at the direction of the plan.

• Transactions executed through the Vanguard Managed Account Program.

• Redemptions of shares to pay fund or account fees.

• Share or asset transfers or rollovers.

• Reregistrations of shares.

• Conversions of shares from one share class to another in the same fund.

• Exchange requests submitted by written request to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are subject to the limitations.)

34


 

* The following Vanguard fund accounts are subject to the frequent-trading limitations: SEP-IRAs, SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans.

Accounts Held by Institutions (Other Than Defined Contribution Plans)

Vanguard will systematically monitor for frequent trading in institutional clients’ accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client’s accounts the 30-day policy previously described, prohibiting a client’s purchases of fund shares, and/or revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries will be asked to assess these fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading limitations. If you invest with Vanguard through an intermediary, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Other Rules You Should Know

Prospectus and Shareholder Report Mailings

When two or more shareholders have the same last name and address, just one summary prospectus (or prospectus) and/or shareholder report may be sent in an attempt to eliminate the unnecessary expense of duplicate mailings. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or online. See Contacting Vanguard .

35


 

Vanguard.com

Registration. If you are a registered user of vanguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions through our website. You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, prospectuses, certain tax forms, and shareholder reports electronically. If you are a registered user of vanguard.com , you can consent to the electronic delivery of these documents by logging on and changing your mailing preferences under “Account Maintenance.” You can revoke your electronic consent at any time through our website, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

Telephone Transactions

Automatic. When we set up your account, we will automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.

Tele-Account ® . To obtain fund and account information through Vanguard’s automated telephone service, you must first establish a Personal Identification Number (PIN) by calling Tele-Account at 800-662-6273.

Proof of a caller’s authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:

• Authorization to act on the account (as the account owner or by legal documentation or other means).

• Account registration and address.

• Fund name and account number, if applicable.

• Other information relating to the caller, the account owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

• Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

• Include the fund name and account number.

• Include the amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must generally be provided on a Vanguard form and include:

S ignature( s) and date from the authorized person(s).

36


 

• Signature guarantees or notarized signatures, if required for the type of transaction.

(Call Vanguard for specific requirements.)

• Any supporting documentation that may be required.

Good order requirements may vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

Future Trade-Date Requests

Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares , Converting Shares , Redeeming Shares, and

Exchanging Shares . Vanguard reserves the right to return future-dated purchase checks.

Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally will accept instructions from any one owner or authorized person.

Responsibility for Fraud

Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. Vanguard may be required to transfer assets related to uncashed checks to a state under the state’s abandoned property law.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law , subject to potential federal or state withholding taxes .

37


 

Unusual Circumstances

If you experience difficulty contacting Vanguard online or by telephone, you can send us your transaction request on a Vanguard form by regular or express mail. See Contacting Vanguard for addresses.

Investing With Vanguard Through Other Firms

You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, a broker, or an investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply. Your financial intermediary can provide you with account information and any required tax forms. You may be required to pay a commission on purchases of mutual fund shares made through a financial intermediary.

Please see Frequent - Trading Limitations Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Account Service Fee

Vanguard charges a $20 account service fee on fund accounts that have a balance below $10,000 for any reason, including market fluctuation. The account service fee applies to both retirement and nonretirement fund accounts and will be assessed on fund accounts in all Vanguard funds, regardless of the account minimum. The fee, which will be collected by redeeming fund shares in the amount of $20, will be deducted from a fund account only once per calendar year.

If you register on vanguard.com and elect to receive electronic delivery of statements, reports, and other materials for all of your fund accounts, the account service fee for balances below $10,000 will not be charged, so long as that election remains in effect.

The account service fee also does not apply to the following:

• Money market sweep accounts owned in connection with a Vanguard Brokerage Services account.*

• Accounts held through intermediaries.*

• Accounts held by institutional clients.

• Accounts held by Voyager, Voyager Select, Flagship, and Flagship Select clients.

Eligibility is based on total household assets held at Vanguard, with a minimum of $50,000 to qualify for Vanguard Voyager Services ® , $500,000 for Vanguard Voyager Select Services ® , $1 million for Vanguard Flagship Services ® , and $5 million for Vanguard Flagship Select Services ® . Vanguard determines eligibility by aggregating assets of all qualifying accounts held by the investor and immediate family members who reside at the same address. Aggregate assets include investments in Vanguard

38


 

mutual funds, Vanguard ETFs ® , certain annuities through Vanguard, the Vanguard 529 Plan, and certain small-business accounts. Assets in employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if the investor also has a personal account holding Vanguard mutual funds. Note that assets held in a Vanguard Brokerage Services account (other than Vanguard funds, including Vanguard ETFs) are not included when determining a household’s eligibility.

• Participant accounts in employer-sponsored defined contribution plans.** Please consult your enrollment materials for the rules that apply to your account.

• Section 529 college savings plans.

* Please note that intermediaries, including Vanguard Brokerage Services, may charge a separate fee.

** The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Individual 401(k) Plans.

Low-Balance Accounts

The Fund reserves the right to liquidate a fund account whose balance falls below the account minimum for any reason, including market fluctuation. This liquidation policy applies to nonretirement fund accounts and accounts that are held through intermediaries. Any such liquidation will be preceded by written notice to the investor.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

39


 

Share Classes

Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.

Fund and Account Updates

Confirmation Statements

We will send (or provide through our website, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.

Portfolio Summaries

We will send (or provide through our website, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter (or month). Promptly review each summary that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.

Tax Information Statements

For most accounts, Vanguard (or your intermediary) is required to provide annual tax forms to assist you in preparing your income tax returns. These forms are generally available for each calendar year early in the following year. Registered users of vanguard.com can also view certain forms through our website. Vanguard (or your intermediary) may also provide you with additional tax-related documentation. For more information, consult our website at vanguard.com or see Contacting Vanguard .

40


 

Annual and Semiannual Reports

We will send (or provide through our website, whichever you prefer) reports about Vanguard Inflation-Protected Securities Fund twice a year, in February and August. These reports include overviews of the financial markets and provide the following specific Fund information:

• Performance assessments and comparisons with industry benchmarks.

• Reports from the advisor.

• Financial statements with listings of Fund holdings.

Portfolio Holdings

Please consult the Fund‘s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

Employer-Sponsored Plans

Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option.

• If you have any questions about the Fund or Vanguard, including those about the Fund’s investment objective, strategies, or risks, contact Vanguard Participant Services toll-free at 800-523-1188 or visit our website at vanguard.com.

• If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.

• Be sure to carefully read each topic that pertains to your transactions with Vanguard.

Vanguard reserves the right to change its policies without notice to shareholders.

Transactions

Processing times for your transaction requests may differ among recordkeepers or among transaction and funding types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing time frames for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

If Vanguard is serving as your plan recordkeeper and if your transaction involves one or more investments with an early cut-off time for processing or another trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

41


 

Contacting Vanguard    
 
 
Web    
Vanguard.com   For the most complete source of Vanguard news  
  For fund, account, and service information  
  For most account transactions  
  For literature requests  
  24 hours a day, 7 days a week  
 
Phone    
Vanguard Tele-Account ® 800-662-6273   For automated fund and account information  
  Toll-free, 24 hours a day, 7 days a week  
Investor Information 800-662-7447   For fund and service information  
(Text telephone for people with hearing   For literature requests  
impairment at 800-749-7273)    
Client Services 800-662-2739   For account information  
(Text telephone for people with hearing   For most account transactions  
impairment at 800-749-7273)    
Participant Services 800-523-1188   For information and services for participants in employer-  
(Text telephone for people with hearing   sponsored plans  
impairment at 800-749-7273)    
Institutional Division   For information and services for large institutional investors  
888-809-8102    
Financial Advisor and Intermediary   For information and services for financial intermediaries  
Sales Support 800-997-2798   including financial advisors, broker-dealers, trust institutions,  
  and insurance companies  
Financial Advisory and Intermediary   For account information and trading support for financial  
Trading Support 800-669-0498   intermediaries including financial advisors, broker-dealers,  
  trust institutions, and insurance companies  

 

42


 

Vanguard Addresses

Please be sure to use the correct address and the correct form . Use of an incorrect address or form could delay the processing of your transaction.

Regular Mail (Individuals)     The Vanguard Group      
    P.O. Box 1110      
    Valley Forge, PA 19482-1110    
Regular Mail (Institutions, Intermediaries, and   The Vanguard Group      
Employer-Sponsored Plan Participants)     P.O. Box 2900      
    Valley Forge, PA 19482-2900    
Registered, Express, or Overnight Mail     The Vanguard Group      
    455 Devon Park Drive      
    Wayne, PA 19087-1815    
 
 
Additional Information            
 
 
  Inception   Newspaper   Vanguard   CUSIP  
    Date   Abbreviation   Fund Number   Number  
Inflation-Protected Securities Fund            
Investor Shares   6/29/2000   InflaPro   119   922031869  
Admiral Shares   6/10/2005   InfProAd   5119   922031737  

 

43


 

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index (the Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Inflation-Protected Securities Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Inflation-Protected Securities Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Inflation-Protected Securities Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Inflation-Protected Securities Fund or the owners of the Inflation-Protected Securities Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Inflation-Protected Securities Fund. Investors acquire the Inflation-Protected Securities Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Inflation-Protected Securities Fund. The Inflation-Protected Securities Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Inflation-Protected Securities Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Inflation-Protected Securities Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Inflation-Protected Securities Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Inflation-Protected Securities Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Inflation-Protected Securities Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF A BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE INFLATION-PROTECTED SECURITIES FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

44


 

Glossary of Investment Terms

Average Maturity. The average length of time until bonds held by a fund reach maturity and are repaid. In general, the longer the average maturity, the more a fund’s share price fluctuates in response to changes in market interest rates. In calculating average maturity, a fund uses a bond’s maturity or, if applicable, an earlier date on which the advisor believes it is likely that a maturity-shortening device (such as a call, a put, a refunding, a prepayment, or a redemption provision or an adjustable coupon rate) will cause the bond to be repaid.

Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index. An index that includes the inflation-indexed securities within the Bloomberg Barclays Treasury Index, which represents U.S. Treasury obligations with maturities of more than one year.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Cash Equivalent Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker’s acceptances.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

45


 

Inflation-Indexed Securities. Bonds issued by the U.S. government, government agencies, or corporations, whose principal and interest payments—unlike those of conventional bonds—are adjusted over time to reflect inflation.

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Fund‘s board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Return of Capital. A return of all or part of your original investment in a fund. In general, return of capital reduces your cost basis in a fund’s shares and is not taxable to you until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

46


 

This page intentionally left blank.


 

This page intentionally left blank.


 

This page intentionally left blank.


 

P.O. Box 2600

Valley Forge, PA 19482-2600

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Inflation-Protected Securities Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a participant in an employer-sponsored plan:

The Vanguard Group Participant Services P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-523-1188; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.gov .

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 119 042019


 

Vanguard Inflation-Protected Securities Fund  
Prospectus  
 
April 26, 2019  
 
Investor Shares  
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Financial Highlights   16  
More on the Fund   5   General Information   18  
The Fund and Vanguard   13   Glossary of Investment Terms   21  
Investment Advisor   14      
Taxes   15      
Share Price   15      

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Sales Charge (Load) Imposed on Purchases   None  
Purchase Fee   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None  
Redemption Fee   None  
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.18%  
12b-1 Distribution Fee   None  
Other Expenses   0.02%  
Total Annual Fund Operating Expenses   0.20%  

 

Example

The following example is intended to help you compare the cost of investing in the Fund’s Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$20   $64   $113   $255  

 

1


 

This example does not include fees associated with the income annuity program through which you invest. Detailed information about the annuity program fees is presented in the “Fee Table” section of the accompanying prospectus of the insurance company that offers your annuity program .

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 27 % of the average value of its portfolio.

Principal Investment Strategies

The Fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. The Fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years. At a minimum, all bonds purchased by the Fund will be rated investment-grade or, if unrated, will be considered by the advisor to be investment-grade.

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Income fluctuations . The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Manager risk , which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

2


 

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Derivatives risk . The Fund may invest in derivatives, which may involve risks different from, and possibly greater than, those of investments directly in the underlying securities or assets.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Investor Shares compare with those of a relevant market index, which has investment characteristics similar to those of the Fund. The bar chart and table do not reflect additional fees and expenses that are deducted by the income annuity program through which you invest. If such fees and expenses were included in the calculation of the Fund’s returns, the returns would be lower. Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.25% (quarter ended March 31, 2009), and the lowest return for a quarter was –7.34% (quarter ended June 30, 2013).

3


 

Average Annual Total Returns for Periods Ended December 31, 2018      
 
  1 Year   5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund Investor        
Shares   –1.49%   1.53%   3.41%  
Bloomberg Barclays U.S. Treasury Inflation Protected        
Securities Index        
(reflects no deduction for fees or expenses)   –1.26%   1.69%   3.64%  

 

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Gemma Wright-Casparius, Principal of Vanguard. She has managed the Fund since 2011.

Tax Information

The tax consequences of your investment in the Fund depend on the provisions of the income annuity program through which you invest. For more information on taxes, please refer to the accompanying prospectus of the insurance company that offers your annuity program.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

4


 

More on the Fund

This prospectus describes the principal risks you would face as an investor in this Fund. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund investor. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

This prospectus offers the Fund’s Investor Shares and is intended for investors who would like to open an income annuity (also referred to as an immediate annuity) account through a contract offered by an insurance company. Another version—for investors who would like to open a personal investment account—can be obtained by visiting our website at vanguard.com or by calling Vanguard at 800-662-7447.

A Note About Investing in the Fund

The Fund is a mutual fund used as an investment option for income annuity programs offered by insurance companies and for personal investment accounts. When investing through an insurance company, you cannot purchase shares of the Fund directly, but only through a contract offered by the insurance company.

The performance of the Fund‘s income annuity accounts will differ from the performance of personal investment accounts because of administrative and insurance costs associated with the income annuity programs.

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a contract owner, pay a proportionate share of the costs of operating a  
fund and any transaction costs incurred when the fund buys or sells securities.  
These costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund‘s performance.  

 

5


 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Note that the Fund’s investment objective is not fundamental and may be changed without a shareholder vote. However, the Fund‘s policy of investing at least 80% of its assets in inflation-indexed bonds may be changed only upon 60 days‘ notice to shareholders.

Market Exposure

The Fund invests mainly in investment-grade, inflation-indexed bonds. As a result of this investment strategy, the Fund is subject to certain risks.

Plain Talk About Inflation-Indexed Securities  
 
Unlike a conventional bond, whose issuer makes regular fixed interest payments  
and repays the face value of the bond at maturity, an inflation-indexed security  
(IIS) provides principal and interest payments that are adjusted over time to reflect  
a rise (inflation) or a drop (deflation) in the general price level for goods and  
services. This adjustment is a key feature, given that inflation has typically  
occurred. However, there have been periods of deflation, such as in 1954 when  
the Consumer Price Index (CPI) declined by 0.7%. (Source: Bureau of Labor  
Statistics.) Importantly, in the event of deflation, the U.S. Treasury has guaranteed  
that it will repay at least the face value of an IIS issued by the U.S. government.  
However, if an IIS is purchased by a fund at a premium, deflation could cause a  
fund to experience a loss.  
 
Inflation measurement and adjustment for an IIS have two important features.  
There is a two-month lag between the time that inflation occurs in the economy  
and when it is factored into IIS valuations. This is due to the time required to  
measure and calculate the CPI and for the U.S. Treasury to adjust the inflation  
accrual schedules for an IIS. For example, inflation that occurs in January is  
calculated and announced during February and affects IIS valuations throughout  
the month of March. In addition, the inflation index used is the nonseasonally  
adjusted index. It differs from the CPI that is reported by most news  
organizations, which is statistically smoothed to overcome highs and lows  
observed at different points each year. The use of the nonseasonally adjusted  
index can cause a fund’s income level to fluctuate.  

 

6


 


The Fund is subject to income fluctuations. The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Although fluctuations in quarterly income distributions are expected to be high, distributions should provide an income yield that adjusts with inflation. In periods of extreme deflation, the Fund may have no income to distribute. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

Changes in interest rates can affect bond income as well as bond prices .


The Fund is subject to interest rate risk, which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Plain Talk About Real Returns  
 
Inflation-indexed securities are designed to provide a “real rate of return”—a  
return after adjusting for the impact of inflation. Inflation—a rise in the general  
price level—erodes the purchasing power of an investor’s portfolio. For example,  
if an investment provides a “nominal” total return of 5% in a given year and  
inflation is 2% during that period, the inflation-adjusted, or real, return is 3%.  
Investors should be conscious of both the nominal and the real returns on their  
investments. Investors in inflation-indexed bond funds who do not reinvest the  
portion of the income distribution that comes from inflation adjustments will not  
maintain the purchasing power of the investment over the long term. This is  
because interest earned depends on the amount of principal invested, and that  
principal will not grow with inflation if the investor does not reinvest the principal  
adjustment paid out as part of a fund’s income distributions.  

 

7


 

Plain Talk About Inflation-Indexed Securities and Interest Rates  
 
Interest rates on conventional bonds have two primary components: a “real”  
yield and an increment that reflects investor expectations of future inflation. By  
contrast, interest rates on an IIS are adjusted for inflation and, therefore, are not  
affected meaningfully by inflation expectations. This leaves only real rates to  
influence the price of an IIS. A rise in real rates will cause the price of an IIS to  
fall, while a decline in real rates will boost the price of an IIS.  

 


The Fund is subject, to a limited extent, to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

The credit quality of the Fund depends on the quality of its investments. Because the Fund emphasizes securities backed by the full faith and credit of the U.S. government, the average credit quality of the Fund’s holdings is expected to be high, and consequently credit risk should be low for the Fund. At a minimum, all bonds purchased by the Fund will be rated investment-grade (in one of the four highest rating categories) or, if unrated, will be considered by the advisor to be investment-grade.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

Plain Talk About Inflation-Indexed Securities and Taxes  
 
Any increase in principal for an IIS resulting from inflation adjustments is  
considered by the IRS to be taxable income in the year it occurs. For direct  
holders of an IIS, this means that taxes must be paid on principal adjustments,  
even though these amounts are not received until the bond matures. By contrast,  
a mutual fund holding an IIS pays out (to shareholders) both interest income and  
the income attributable to principal adjustments each quarter in the form of cash  
or reinvested shares, and the shareholders must pay taxes on the distributions.  

 

8


 


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Security Selection

The Fund emphasizes inflation-indexed bonds issued by the U.S. government, although it may also purchase inflation-indexed bonds issued by agencies and instrumentalities of the U.S. government and by corporations. The Fund may invest in bonds of any maturity, but is expected to maintain a dollar-weighted average maturity in the range of 7 to 20 years.

Vanguard, advisor to the Fund, buys and sells securities based on its judgment about issuers, the prices of the securities, and other economic factors. Although the advisor uses the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index as a benchmark for the Fund’s performance, the Fund’s average maturity and mix of bonds may differ from those of the Index. This may occur, for example, when the advisor sees an opportunity to enhance returns.


The Fund is subject to manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Other Investment Policies and Risks

In addition to investing in inflation-indexed securities, the Fund may make other kinds of investments to achieve its objective.

Up to 20% of the Fund’s assets may be invested in holdings that are not inflation-indexed. The Fund typically will make such investments when inflation-indexed bonds are less attractive. The Fund’s non-inflation-indexed holdings may include the following:

Corporate debt obligations —usually called bonds—represent loans by an investor to a corporation.

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

9


 

Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a fund to banks or large securities dealers.

Illiquid securities are i nvestments that a fun d r easonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment . The Fund may invest up to 15% of its net assets in these securities. Restricted securities are a special type of illiquid security; these securities have not been publicly issued and legally can be resold only to qualified buyers. From time to time, the board of trustees may determine that particular restricted securities are not illiquid, and those securities may then be purchased by the Fund without limit.

Mortgage dollar rolls are transactions in which a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance a fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase a fund’s portfolio turnover rate. Mortgage dollar rolls will be used only if consistent with the Fund’s investment objective and risk profile.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market inde x , or a reference rat e . The Fund may invest in derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of the Fund as disclosed in this prospectus. In particular, derivatives will be used only when they may help the advisor to accomplish one or more of the following:

• Invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment.

• Add value when these instruments are attractively priced.

• Adjust sensitivity to changes in interest rates.

The Fund‘s derivative investments may include fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives. Losses (or gains) involving futures contracts can sometimes be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for other types of derivatives.

10


 

Plain Talk About Derivatives  
 
Derivatives can take many forms. Some forms of derivatives—such as exchange-  
traded futures and options on securities, commodities, or indexes—have been  
trading on regulated exchanges for decades. These types of derivatives are  
standardized contracts that can easily be bought and sold and whose market  
values are determined and published daily. On the other hand, non-exchange-  
traded derivatives—such as certain swap agreements—tend to be more  
specialized or complex and may be more difficult to accurately value.  

 

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/ or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case if the Fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.

In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash equivalent investments or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is

11


 

shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits a contract owner or annuitant from exchanging into a fund contract for 30 calendar days after the contract owner or annuitant has exchanged out of that fund contract.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for

12


 

example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

13


 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, the Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Fund is:

Gemma Wright-Casparius , Principal of Vanguard. She has worked in investment management since 2005, has managed investment portfolios since 2008, and has managed the Fund since joining Vanguard in 2011. Education: B.B.A. and M.B.A., Bernard M. Baruch College of The City University of New York.

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

14


 

Taxes

The tax consequences of your investment in the Fund depend on the provisions of the income annuity program through which you invest. For more information on taxes, please refer to the accompanying prospectus of the insurance company that offers your annuity program.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares.

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

The Fund’s NAV is used to determine the annuity’s unit value for the income annuity program through which you invest. For more information on unit values, please refer to the accompanying prospectus of the insurance company that offers your annuity program.

15


 

Financial Highlights

The following financial highlights table is intended to help you understand the Investor Shares‘ financial performance for the periods shown, and certain information reflects financial results for a single Investor Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Investor Shares (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund’s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Yields and total returns presented for the Fund are net of the Fund’s operating expenses, but they do not take into account charges and expenses attributable to the income annuity program through which you invest. The expenses of the annuity program reduce the returns and yields you ultimately receive, so you should bear those expenses in mind when evaluating the performance of the Fund and when comparing the yields and returns of the Fund with those of other mutual funds.

16


 

Inflation-Protected Securities Fund Investor Shares          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $13.04   $12.98   $12.84   $13.18   $12.98  
Investment Operations            
Net Investment Income   .379 1   .310 1   .263   .098   .224  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.572)   .053   .315   (.339)   .273  
Total from Investment Operations   (.193)   .363   .578   (.241)   .497  
Distributions            
Dividends from Net Investment Income   (.377)   (.303)   (.266)   (.098)   (.281)  
Distributions from Realized Capital Gains       (.017)   (.001)   (.016)  
Return of Capital       (.155)      
Total Distributions   (.377)   (.303)   (.438)   (.099)   (.297)  
Net Asset Value, End of Period   $12.47   $13.04   $12.98   $12.84   $13.18  
 
Total Return 2   –1.49%   2.81%   4.52%   –1.83%   3.83%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $3,526   $4,139   $4,496   $4,746   $5,604  
Ratio of Total Expenses to            
Average Net Assets   0.20%   0.20%   0.20%   0.20%   0.20%  
Ratio of Net Investment Income to            
Average Net Assets   2.96%   2.38%   1.99%   0.72%   2.01%  
Portfolio Turnover Rate   27%   22%   27% 3   43% 3   39% 3  

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown.

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.

17


 

General Information

The Fund offers its shares to insurance companies that offer income annuity programs. Because of differences in tax treatment or other considerations, the interests of various contract owners participating in the Fund might at some time be in conflict. The Fund‘s board of trustees will monitor for any material conflicts and determine what action, if any, should be taken.

If the board of trustees determines that continued offering of shares would be detrimental to the best interests of the Fund’s shareholders, the Fund may suspend the offering of shares for a period of time. If the board of trustees determines that a specific purchase acceptance would be detrimental to the best interests of the Fund’s shareholders, the Fund may reject such a purchase request.

If you wish to redeem money from the Fund, please refer to the instructions provided in the accompanying prospectus of the insurance company that offers your annuity program. Shares of the Fund may be redeemed on any business day that the NYSE is open for trading. The redemption price of shares will be the next-determined NAV per share. Redemption proceeds generally will be wired to the administrator for distribution to the contract owner on the business day following receipt of the redemption request, but no later than seven business days. Contract owners will receive a check from the administrator for the redemption amount.

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund‘s holdings to meet redemptions, while also factoring in transaction costs. Additionally, the Fund may work with the insurance companies through which contract owners participate in the Fund to implement redemptions in a manner that is least disruptive to the portfolio.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

The Fund can postpone payment of redemption proceeds beyond seven calendar days or suspend the redemption right at times when the NYSE is closed or during any emergency circumstances, as determined by the SEC.

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of shares of another fund) may be available to you

18


 

through your program. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice.

If the board of trustees determines that it would be detrimental to the best interests of the Fund’s remaining shareholders to make payment in cash, the Fund may pay redemption proceeds in whole or in part by a distribution in kind of readily marketable securities.

For certain categories of investors, the Fund has authorized one or more brokers to accept on its behalf purchase and redemption orders. The brokers are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund’s behalf. The Fund will be deemed to have received a purchase or redemption order when an authorized broker, or a broker’s authorized designee, accepts the order in accordance with the Fund’s instructions. In most instances, for these categories of investors, a contract owner’s properly transmitted order will be priced at the Fund‘s next-determined NAV after the order is accepted by the authorized broker or the broker’s designee. The contract owner should review the authorized broker’s policies relating to trading in the Vanguard funds.

When insurance companies establish omnibus accounts in the Fund for the benefit of their clients, we cannot monitor the trading activity of the individual clients. However, we review trading activity at the omnibus account level, and we look for activity that may indicate potential frequent trading or market-timing. If we detect suspicious activity, we will seek the assistance of the insurance company to investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of Fund shares by an insurance company, including for the benefit of certain of the insurance company’s clients. Also, insurance companies may apply frequent-trading policies that differ from one another.

Please read the insurance company contract and program materials carefully to learn of any rules or fees that may apply. See the accompanying prospectus for the annuity or insurance program through which Fund shares are offered for further details on transaction policies.

Please consult the Fund’s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

19


 

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index (the Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Inflation-Protected Securities Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Inflation-Protected Securities Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Inflation-Protected Securities Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Inflation-Protected Securities Fund or the owners of the Inflation-Protected Securities Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Inflation-Protected Securities Fund. Investors acquire the Inflation-Protected Securities Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Inflation-Protected Securities Fund. The Inflation-Protected Securities Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Inflation-Protected Securities Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Inflation-Protected Securities Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Inflation-Protected Securities Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Inflation-Protected Securities Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Inflation-Protected Securities Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF A BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE INFLATION-PROTECTED SECURITIES FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

20


 

Glossary of Investment Terms

Average Maturity. The average length of time until bonds held by a fund reach maturity and are repaid. In general, the longer the average maturity, the more a fund’s share price fluctuates in response to changes in market interest rates. In calculating average maturity, a fund uses a bond’s maturity or, if applicable, an earlier date on which the advisor believes it is likely that a maturity-shortening device (such as a call, a put, a refunding, a prepayment, or a redemption provision or an adjustable coupon rate) will cause the bond to be repaid.

Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index. An index that includes the inflation-indexed securities within the Bloomberg Barclays Treasury Index, which represents U.S. Treasury obligations with maturities of more than one year.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distribution s. Payment s to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Cash Equivalent Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker’s acceptances.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distribution s . Payment s to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

21


 

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Inflation-Indexed Securities. Bonds issued by the U.S. government, government agencies, or corporations, whose principal and interest payments—unlike those of conventional bonds—are adjusted over time to reflect inflation.

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Fund‘s board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Return of Capital. A return of all or part of your original investment in a fund. In general, return of capital reduces your cost basis in a fund’s shares and is not taxable to you until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other investments.

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

22


 

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.

23


 

This page intentionally left blank.


 

This page intentionally left blank.


 

P.O. Box 2600

Valley Forge, PA 19482-2600

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Inflation-Protected Securities Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

Vanguard Annuity and Insurance Services P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-522-5555

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.gov .

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 119A 042019


 

Vanguard Inflation-Protected Securities Fund  
Prospectus  
 
April 26, 2019  
 
Institutional Shares  
Vanguard Inflation-Protected Securities Fund Institutional Shares (VIPIX)  
 
 
 
 
See the inside front cover for important information about access to your fund’s  
annual and semiannual shareholder reports.  
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2018 .  
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or  
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.  

 


 

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this prospectus or by logging on to vanguard.com.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this prospectus or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Contents        
 
 
Fund Summary   1   Investing With Vanguard   23  
More on the Fund   6   Purchasing Shares   23  
The Fund and Vanguard   15   Converting Shares   26  
Investment Advisor   16   Redeeming Shares   27  
Dividends, Capital Gains, and Taxes   17   Exchanging Shares   31  
Share Price   20   Frequent-Trading Limitations   32  
Financial Highlights   22   Other Rules You Should Know   34  
    Fund and Account Updates   37  
    Employer-Sponsored Plans   39  
    Contacting Vanguard   40  
    Additional Information   41  
    Glossary of Investment Terms   43  

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Sales Charge (Load) Imposed on Purchases   None  
Purchase Fee   None  
Sales Charge (Load) Imposed on Reinvested Dividends   None  
Redemption Fee   None  
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.07%  
12b-1 Distribution Fee   None  
Other Expenses   None  
Total Annual Fund Operating Expenses   0.07%  

 

1


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you were to invest $10,000 in the Fund’s shares. This example assumes that the shares provide a return of 5% each year and that total annual fund operating expenses remain as stated in the preceding table. You would incur these hypothetical expenses whether or not you were to redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year   3 Years   5 Years   10 Years  
$7   $23   $40   $90  

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 27 % of the average value of its portfolio.

Principal Investment Strategies

The Fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. The Fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years. At a minimum, all bonds purchased by the Fund will be rated investment-grade or, if unrated, will be considered by the advisor to be investment-grade.

2


 

Principal Risks

An investment in the Fund could lose money over short or long periods of time. You should expect the Fund’s share price and total return to fluctuate within a wide range. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk , which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Income fluctuations . The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Manager risk , which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Liquidity risk , which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Derivatives risk . The Fund may invest in derivatives, which may involve risks different from, and possibly greater than, those of investments directly in the underlying securities or assets.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Shares compare with those of a relevant market index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

3


 

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.37% (quarter ended March 31, 2009), and the lowest return for a quarter was –7.35% (quarter ended June 30, 2013).

Average Annual Total Returns for Periods Ended December 31, 2018      
  1 Year   5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund Institutional Shares      
Return Before Taxes   –1.40%   1.68%   3.55%  
Return After Taxes on Distributions   –2.63   0.74   2.56  
Return After Taxes on Distributions and Sale of Fund Shares   –0.83   0.88   2.39  
Bloomberg Barclays U.S. Treasury Inflation Protected        
Securities Index        
(reflects no deduction for fees, expenses, or taxes)   –1.26%   1.69%   3.64%  

 

4


 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Gemma Wright-Casparius, Principal of Vanguard. She has managed the Fund since 2011.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (vanguard.com) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The minimum investment amount required to open and maintain a Fund account for Institutional Shares is $5 million. The minimum investment amount required to add to an existing Fund account is generally $1. If you are investing through an employer-sponsored retirement or savings plan, your plan administrator or your benefits office can provide you with detailed information on how you can invest through your plan.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

5


 

More on the Fund

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main principles of investing: generally, the higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: the lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Fund’s Institutional Shares, which are generally for investors who invest a minimum of $5 million. A separate prospectus offers the Fund’s Investor Shares and Admiral™ Shares, which generally have investment minimums of $3,000 and $50,000, respectively.

All share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment returns will differ.

Plain Talk About Fund Expenses  
 
All mutual funds have operating expenses. These expenses, which are deducted  
from a fund’s gross income, are expressed as a percentage of the net assets of  
the fund. Assuming that operating expenses remain as stated in the Fees and  
Expenses section, Vanguard Inflation-Protected Securities Fund Institutional  
Shares’ expense ratio would be 0.07%, or $0.70 per $1,000 of average net  
assets. The average expense ratio for inflation-protected bond funds in 2018 was  
0.68% , or $6.80 per $1,000 of average net assets (derived from data provided by  
Lipper, a Thomson Reuters Company, which reports on the mutual fund industry).  

 

6


 

Plain Talk About Costs of Investing  
 
Costs are an important consideration in choosing a mutual fund. That is because  
you, as a shareholder, pay a proportionate share of the costs of operating a fund  
and any transaction costs incurred when the fund buys or sells securities. These  
costs can erode a substantial portion of the gross income or the capital  
appreciation a fund achieves. Even seemingly small differences in expenses can,  
over time, have a dramatic effect on a fund‘s performance.  

 

The following sections explain the principal investment strategies and policies that the Fund uses in pursuit of its objective. The Fund‘s board of trustees, which oversees the Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Note that the Fund’s investment objective is not fundamental and may be changed without a shareholder vote. However, the Fund‘s policy of investing at least 80% of its assets in inflation-indexed bonds may be changed only upon 60 days‘ notice to shareholders.

Market Exposure

The Fund invests mainly in investment-grade, inflation-indexed bonds. As a result of this investment strategy, the Fund is subject to certain risks.

7


 

Plain Talk About Inflation-Indexed Securities  
 
Unlike a conventional bond, whose issuer makes regular fixed interest payments  
and repays the face value of the bond at maturity, an inflation-indexed security  
(IIS) provides principal and interest payments that are adjusted over time to reflect  
a rise (inflation) or a drop (deflation) in the general price level for goods and  
services. This adjustment is a key feature, given that inflation has typically  
occurred. However, there have been periods of deflation, such as in 1954 when  
the Consumer Price Index (CPI) declined by 0.7%. (Source: Bureau of Labor  
Statistics.) Importantly, in the event of deflation, the U.S. Treasury has guaranteed  
that it will repay at least the face value of an IIS issued by the U.S. government.  
However, if an IIS is purchased by a fund at a premium, deflation could cause a  
fund to experience a loss.  
 
Inflation measurement and adjustment for an IIS have two important features.  
There is a two-month lag between the time that inflation occurs in the economy  
and when it is factored into IIS valuations. This is due to the time required to  
measure and calculate the CPI and for the U.S. Treasury to adjust the inflation  
accrual schedules for an IIS. For example, inflation that occurs in January is  
calculated and announced during February and affects IIS valuations throughout  
the month of March. In addition, the inflation index used is the nonseasonally  
adjusted index. It differs from the CPI that is reported by most news  
organizations, which is statistically smoothed to overcome highs and lows  
observed at different points each year. The use of the nonseasonally adjusted  
index can cause a fund’s income level to fluctuate.  

 


The Fund is subject to income fluctuations. The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. In fact, under certain conditions, the Fund may not have any income to distribute. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.

Although fluctuations in quarterly income distributions are expected to be high, distributions should provide an income yield that adjusts with inflation. In periods of extreme deflation, the Fund may have no income to distribute. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

Changes in interest rates can affect bond income as well as bond prices .

8


 


The Fund is subject to interest rate risk, which is the chance that the value of a bond will fluctuate because of a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be in the range of 7 to 20 years, interest rate risk is expected to be moderate to high for the Fund.

Plain Talk About Real Returns  
 
Inflation-indexed securities are designed to provide a “real rate of return”—a  
return after adjusting for the impact of inflation. Inflation—a rise in the general  
price level—erodes the purchasing power of an investor’s portfolio. For example,  
if an investment provides a “nominal” total return of 5% in a given year and  
inflation is 2% during that period, the inflation-adjusted, or real, return is 3%.  
Investors should be conscious of both the nominal and the real returns on their  
investments. Investors in inflation-indexed bond funds who do not reinvest the  
portion of the income distribution that comes from inflation adjustments will not  
maintain the purchasing power of the investment over the long term. This is  
because interest earned depends on the amount of principal invested, and that  
principal will not grow with inflation if the investor does not reinvest the principal  
adjustment paid out as part of a fund’s income distributions.  

 

Plain Talk About Inflation-Indexed Securities and Interest Rates  
 
Interest rates on conventional bonds have two primary components: a “real”  
yield and an increment that reflects investor expectations of future inflation. By  
contrast, interest rates on an IIS are adjusted for inflation and, therefore, are not  
affected meaningfully by inflation expectations. This leaves only real rates to  
influence the price of an IIS. A rise in real rates will cause the price of an IIS to  
fall, while a decline in real rates will boost the price of an IIS.  

 


The Fund is subject, to a limited extent, to credit risk, which is the chance that a bond issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

9


 

The credit quality of the Fund depends on the quality of its investments. Because the Fund emphasizes securities backed by the full faith and credit of the U.S. government, the average credit quality of the Fund’s holdings is expected to be high, and consequently credit risk should be low for the Fund. At a minimum, all bonds purchased by the Fund will be rated investment-grade (in one of the four highest rating categories) or, if unrated, will be considered by the advisor to be investment-grade.

Plain Talk About Credit Quality  
 
A bond’s credit quality rating is an assessment of the issuer’s ability to pay interest  
on the bond and, ultimately, to repay the principal. The lower the credit quality, the  
greater the perceived chanc e t hat the bond issuer will default, or fail to meet its  
payment obligations. All things being equal, the lower a bond’s credit quality, the  
higher its yield should be to compensate investors for assuming additional risk.  

 

Plain Talk About Inflation-Indexed Securities and Taxes  
 
Any increase in principal for an IIS resulting from inflation adjustments is  
considered by the IRS to be taxable income in the year it occurs. For direct  
holders of an IIS, this means that taxes must be paid on principal adjustments,  
even though these amounts are not received until the bond matures. By contrast,  
a mutual fund holding an IIS pays out (to shareholders) both interest income and  
the income attributable to principal adjustments each quarter in the form of cash  
or reinvested shares, and the shareholders must pay taxes on the distributions.  

 


The Fund is subject to liquidity risk, which is the chance that the Fund may not be able to sell a security in a timely manner at a desired price.

Security Selection

The Fund emphasizes inflation-indexed bonds issued by the U.S. government, although it may also purchase inflation-indexed bonds issued by agencies and instrumentalities of the U.S. government and by corporations. The Fund may invest in bonds of any maturity, but is expected to maintain a dollar-weighted average maturity in the range of 7 to 20 years.

Vanguard, advisor to the Fund, buys and sells securities based on its judgment about issuers, the prices of the securities, and other economic factors. Although the advisor uses the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index as a benchmark for the Fund’s performance, the Fund’s average maturity and mix of bonds

10


 

may differ from those of the Index. This may occur, for example, when the advisor sees an opportunity to enhance returns.


The Fund is subject to manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Other Investment Policies and Risks

In addition to investing in inflation-indexed securities, the Fund may make other kinds of investments to achieve its objective.

Up to 20% of the Fund’s assets may be invested in holdings that are not inflation-indexed. The Fund typically will make such investments when inflation-indexed bonds are less attractive. The Fund’s non-inflation-indexed holdings may include the following:

Corporate debt obligations —usually called bonds—represent loans by an investor to a corporation.

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a fund to banks or large securities dealers.

Illiquid securities are i nvestments that a fun d r easonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment . The Fund may invest up to 15% of its net assets in these securities. Restricted securities are a special type of illiquid security; these securities have not been publicly issued and legally can be resold only to qualified buyers. From time to time, the board of trustees may determine that particular restricted securities are not illiquid, and those securities may then be purchased by the Fund without limit.

11


 

Mortgage dollar rolls are transactions in which a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance a fund’s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase a fund’s portfolio turnover rate. Mortgage dollar rolls will be used only if consistent with the Fund’s investment objective and risk profile.

The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a market inde x , or a reference rat e . The Fund may invest in derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of the Fund as disclosed in this prospectus. In particular, derivatives will be used only when they may help the advisor to accomplish one or more of the following :

• Invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment.

• Add value when these instruments are attractively priced.

• Adjust sensitivity to changes in interest rates.

The Fund‘s derivative investments may include fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives. Losses (or gains) involving futures contracts can sometimes be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for other types of derivatives.

Plain Talk About Derivatives  
 
Derivatives can take many forms. Some forms of derivatives—such as exchange-  
traded futures and options on securities, commodities, or indexes—have been  
trading on regulated exchanges for decades. These types of derivatives are  
standardized contracts that can easily be bought and sold and whose market  
values are determined and published daily. On the other hand, non-exchange-  
traded derivatives—such as certain swap agreements—tend to be more  
specialized or complex and may be more difficult to accurately value.  

 

12


 

Cash Management

The Fund‘s daily cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost money market funds. When investing in a CMT Fund, the Fund bears its proportionate share of the expenses of the CMT Fund in which it invests. Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.

Methods Used to Meet Redemption Requests

Under normal circumstances, the Fund typically expects to meet redemptions with positive cash flows. When this is not an option, the Fund seeks to maintain its risk exposure by selling a cross section of the Fund’s holdings to meet redemptions, while also factoring in transaction costs. Additionally, the Fund may work with larger clients to implement their redemptions in a manner that is least disruptive to the portfolio; see “Potentially disruptive redemptions” under Redeeming Shares in the Investing With Vanguard section.

Under certain circumstances, including under stressed market conditions, there are additional tools that the Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments or delaying settlement of an investor’s transaction to match trade settlement within regulatory requirements. The Fund may also suspend payment of redemption proceeds for up to seven days; see “Emergency circumstances” under Redeeming Shares in the Investing With Vanguard section. Additionally under these unusual circumstances, the Fund may borrow money (subject to certain regulatory conditions and if available under board-approved procedures) through an interfund lending facility or through a bank line-of-credit, including a joint committed credit facility, in order to meet redemption requests.

Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the strategy or policy employed is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case if the Fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.

In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash equivalent investments or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the

13


 

Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.

Frequent Trading or Market-Timing

Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund’s shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, the fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor’s ability to efficiently manage the fund.

Policies to address frequent trading. The Vanguard funds (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. These policies and procedures do not apply to ETF Shares because frequent trading in ETF Shares generally does not disrupt portfolio management or otherwise harm fund shareholders. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:

• Each Vanguard fund reserves the right to reject any purchase request—including exchanges from other Vanguard funds—without notice and regardless of size. For example, a purchase request could be rejected because the investor has a history of frequent trading or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account.

• Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.

14


 

See the Investing With Vanguard section of this prospectus for further details on Vanguard’s transaction policies.

Each Vanguard fund (other than retail and government money market funds), in determining its net asset value, will use fair-value pricing when appropriate, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.

Do not invest with Vanguard if you are a market-timer.

Turnover Rate

Although the Fund generally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds.

Plain Talk About Turnover Rate  
 
Before investing in a mutual fund, you should review its turnover rate. This rate  
gives an indication of how transaction costs, which are not included in the fund’s  
expense ratio, could affect the fund’s future returns. In general, the greater the  
volume of buying and selling by the fund, the greater the impact that dealer  
markups and other transaction costs will have on its return. Also, funds with high  
turnover rates may be more likely to generate capital gains, including short-term  
capital gains, that must be distributed to shareholders and will be taxable to  
shareholders investing through a taxable account.  

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of over 200 funds holding assets of approximately $4.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, and equipment.

Vanguard Marketing Corporation provides marketing services to the funds. Although fund shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of the Vanguard funds’ marketing costs.

15


 

Plain Talk About Vanguard’s Unique Corporate Structure  
 
The Vanguard Group is owned jointly by the funds it oversees and thus indirectly  
by the shareholders in those funds . M ost other mutual funds are operated by  
management companies that are owned by third parties—either public or private  
stockholders—and not by the funds they serve .  

 

Investment Advisor

The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Fixed Income Group. As of December 31, 2018 , Vanguard served as advisor for approximately $3.9 trillion in assets. Vanguard provides investment advisory services to the Fund pursuant to the Funds’ Service Agreement and subject to the supervision and oversight of the trustees and officers of the Fund.

For the fiscal year ended December 31, 2018 , the advisory expenses represented an effective annual rate of 0.01% of the Fund’s average net assets.

Under the terms of an SEC exemption, the Fund‘s board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement with a third-party investment advisor or hire a new third-party investment advisor—either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund’s advisory arrangements will be communicated to shareholders in writing. As the Fund‘s sponsor and overall manager, Vanguard may provide investment advisory services to the Fund at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced or that the terms of an existing advisory agreement be revised. The Fund has filed an application seeking a similar SEC exemption with respect to investment advisors that are wholly owned subsidiaries of Vanguard. If the exemption is granted, the Fund may rely on the new SEC relief.

For a discussion of why the board of trustees approved the Fund’s investment advisory arrangement, see the most recent semiannual report to shareholders covering the fiscal period ended June 30.

The manager primarily responsible for the day-to-day management of the Fund is:

Gemma Wright-Casparius , Principal of Vanguard. She has worked in investment management since 2005, has managed investment portfolios since 2008, and has managed the Fund since joining Vanguard in 2011. Education: B.B.A. and M.B.A., Bernard M. Baruch College of The City University of New York.

16


 

The Fund‘s Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings. From time to time , the Fund may also make distributions that are treated as a return of capital . Income dividends are generally declared and distributed quarterly in March, June, September, and December; in certain circumstances, the Fund may determine not to pay income dividends every quarter of a year. Capital gains distributions, if any, generally occur annually in December . In addition, the Fund may occasionally make a supplemental distribution at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. However, if you are investing through an employer-sponsored retirement or savings plan, your distributions will be automatically reinvested in additional Fund shares.

Plain Talk About Distributions  
 
As a shareholder, you are entitled to your portion of a fund’s income from  
interest as well as capital gains from the fund’s sale of investments. Income  
consists of interest the fund earns from its money market and bond  
investments. Capital gains are realized whenever the fund sells securities for  
higher prices than it paid for them. These capital gains are either short-term or  
long-term, depending on whether the fund held the securities for one year or less  
or for more than one year.  

 

17


 

Plain Talk About Return of Capital  
 
Return of capital is the portion of a distribution representing the return of your  
original investment in a fund. Return of capital reduces your cost basis in the  
fund’s shares and is not taxable to you until your cost basis has been reduced  
to zero. During periods of deflation, the fund’s inflation-indexed bonds may  
experience a downward adjustment in their value. These downward  
adjustments can partially or entirely offset, or more than offset, the income  
earned on the bonds. Under certain circumstances, these downward  
adjustments could require the fund to reclassify a portion of the income  
dividends previously distributed to shareholders as return of capital. To reduce  
the possibility of a reclassification, the fund may determine to pay income  
dividends less frequently than quarterly in a year.  

 

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund.

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• Your cost basis in the Fund will be decreased by the amount of any return of capital that you receive. This, in turn, will affect the amount of any capital gain or loss that you realize when selling or exchanging your Fund shares.

• Return of capital distributions generally are not taxable to you until your cost basis has been reduced to zero. If your cost basis is at zero, return of capital distributions will be treated as capital gains.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

• Any conversion between classes of shares of the same fund is a nontaxable event.

By contrast, an exchange between classes of shares of different funds is a taxable event.

18


 

• Vanguard (or your intermediary) will send you a statement each year showing the tax status of all of your distributions.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on “net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-advantaged account, such as an IRA or an employer-sponsored retirement or savings plan, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

Plain Talk About Buying a Dividend  
 
Unless you are a tax-exempt investor or investing through a tax-advantaged  
account (such as an IRA or an employer-sponsored retirement or savings plan),  
you should consider avoiding a purchase of fund shares shortly before the fund  
makes a distribution, because doing so can cost you money in taxes. This is  
known as “buying a dividend.” For example: On December 15, you invest $5,000,  
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on  
December 16, its share price will drop to $19 (not counting market change). You  
still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares  
x $1 = $250 in distributions), but you owe tax on the $250 distribution you  
received—even if you reinvest it in more shares. To avoid buying a dividend, check  
a fund’s distribution schedule before you invest.  

 

General Information

Backup withholding. By law, Vanguard must withhold 24% of any taxable distributions or redemptions from your account if you do not:

• Provide your correct taxpayer identification number.

• Certify that the taxpayer identification number is correct.

• Confirm that you are not subject to backup withholding.

Similarly, Vanguard (or your intermediary) must withhold taxes from your account if the IRS instructs us to do so.

19


 

Foreign investors. Vanguard funds offered for sale in the United States (Vanguard U.S. funds), including the Fund offered in this prospectus, are not widely available outside the United States. Non-U.S. investors should be aware that U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments in Vanguard U.S. funds. Foreign investors should visit the non-U.S. investors page on our website at vanguard.com for information on Vanguard’s non-U.S. products.

Invalid addresses. If an income dividend distribution or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. In the rare event the NYSE experiences unanticipated disruptions and is unavailable at the close of the trading day, NAVs will be calculated as of the close of regular trading on the Nasdaq (or another alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s discretion), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Fund does not sell or redeem shares.

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security).

The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party as of the close of regular trading on the NYSE. The values of any mutual fund shares, including institutional money market fund shares, held by a fund are based on the NAVs of the shares. The values of any ETF shares or closed-end fund shares held by a fund are based on the market value of the shares.

20


 

A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day). Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

21


 

Financial Highlights

The following financial highlights table is intended to help you understand the Institutional Shares‘ financial performance for the periods shown, and certain information reflects financial results for a single Institutional Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Institutional Shares (assuming reinvestment of all distributions). This information has been obtained from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report—along with the Fund’s financial statements—is included in the Fund’s most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Inflation- Protected Securities Fund Institutional Shares          
      Year Ended December 31,  
For a Share Outstanding Throughout Each Period   2018   2017   2016   2015   2014  
Net Asset Value, Beginning of Period   $10.43   $10.38   $10.27   $10.54   $10.37  
Investment Operations            
Net Investment Income   .317 1   .263 1   .224   .093   .193  
Net Realized and Unrealized Gain (Loss)            
on Investments   (.462)   .043   .250   (.269)   .229  
Total from Investment Operations   (.145)   .306   .474   (.176)   .422  
Distributions            
Dividends from Net Investment Income   (.315)   (.256)   (.221)   (.093)   (.239)  
Distributions from Realized Capital Gains       (.014)   (.001)   (.013)  
Return of Capital       (.129)      
Total Distributions   (.315)   (.256)   (.364)   (.094)   (.252)  
Net Asset Value, End of Period   $9.97   $10.43   $10.38   $10.27   $10.54  
Total Return   –1.40%   2.97%   4.63%   –1.67%   4.07%  
Ratios/Supplemental Data            
Net Assets, End of Period (Millions)   $9,591   $9,508   $8,637   $7,471   $8,449  
Ratio of Total Expenses to            
Average Net Assets   0.07%   0.07%   0.07%   0.07%   0.07%  
Ratio of Net Investment Income to            
Average Net Assets   3.09%   2.51%   2.12%   0.85%   2.14%  
Portfolio Turnover Rate   27%   22%   27% 2   43% 2   39% 2  

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.

22


 

Investing With Vanguard

This section of the prospectus explains the basics of doing business with Vanguard. Vanguard fund shares can be held directly with Vanguard or indirectly through an intermediary, such as a bank, a broker, or an investment advisor. If you hold Vanguard fund shares directly with Vanguard, you should carefully read each topic within this section that pertains to your relationship with Vanguard. If you hold Vanguard fund shares indirectly through an intermediary (including shares held in a brokerage account through Vanguard Brokerage Services ® ), please see Investing With Vanguard Through Other Firms , and also refer to your account agreement with the intermediary for information about transacting in that account. If you hold Vanguard fund shares through an employer-sponsored retirement or savings plan, please see Employer-Sponsored Plans . Vanguard reserves the right to change the following policies without notice. Please call or check online for current information. See Contacting Vanguard.

For Vanguard fund shares held directly with Vanguard, each fund you hold in an account is a separate “fund account.” For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accounts—and this is true even if you hold the same fund in multiple accounts. Note that each reference to “you” in this prospectus applies to any one or more registered account owners or persons authorized to transact on your account.

Purchasing Shares

Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account or to add to an existing fund account.

Investment minimums may differ for certain categories of investors.

Account Minimums for Institutional Shares

To open and maintain an account. $5 million. If you request Institutional Shares when you open a new account but the investment amount does not meet the account minimum for Institutional Shares, your investment will be placed in another share class of the Fund, as appropriate.

Certain Vanguard institutional clients may meet the minimum investment amount by aggregating separate accounts within the same Fund. This aggregation policy does not apply to financial intermediaries.

Vanguard may charge additional recordkeeping fees for institutional clients whose accounts are recordkept by Vanguard. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your account.

To add to an existing account. Generally $1.

23


 

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also call Vanguard to request a purchase of shares in your account or to request an exchange. See

Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from a transaction confirmation or your account statement) or with a deposit slip (available online). For a list of Vanguard addresses, see Contacting Vanguard .

How to Pay for a Purchase

By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money from a bank account. To establish the electronic bank transfer service on an account, you must designate the bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or upon request. Your purchase request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.

By check. You may make initial or additional purchases to your fund account by sending a check with a deposit slip or by utilizing our mobile application if you are registered for online access. Also see How to Initiate a Purchase Request. Make your check payable to Vanguard and include the appropriate fund number (Vanguard—1190).

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail with an exchange form . See Exchanging Shares .

24


 

Trade Date

The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For purchases by check into all funds other than money market funds and for purchases by exchange , wire , or electronic bank transfer (not using an Automatic Investment Plan) into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the next business day.

For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date for the purchase will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date for the purchase will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date for the purchase will be one business day later than for other funds.

For purchases by electronic bank transfer using an Automatic Investment Plan : Your trade date generally will be the date you selected for withdrawal of funds from your designated bank account. Your bank account generally will be debited on the business day after your trade date. If the date you selected for withdrawal of funds from your bank account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your designated bank account falls on the last business day of the year, your trade date will be the first business day of the following year. Please note that if you select the first of the month for automated withdrawals from your designated bank account, trades designated for January 1 will receive the next business day’s trade date.

If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know—Good Order .

For further information about purchase transactions, consult our website at vanguard.com or see Contacting Vanguard .

25


 

Other Purchase Rules You Should Know

Check purchases. All purchase checks must be written in U.S. dollars, b e drawn on a U.S. bank , and be accompanied by good order instructions . Vanguard does not accept cash, traveler’s checks, starter checks, or money orders. In addition, Vanguard may refuse checks that are not made payable to Vanguard.

New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable. Certain types of accounts may require additional documentation.

Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because the investor has a history of frequent trading or because the purchase may negatively affect a fund’s operation or performance.

Large purchases. Call Vanguard before attempting to invest a large dollar amount.

No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.

Converting Shares

When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the “new” shares you receive equals the dollar value of the “old” shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the NAVs of the two share classes.

Vanguard will not accept your request to cancel any self-directed conversion request once processing has begun. Please be careful when placing a conversion request.

A conversion between share classes of the same fund is a nontaxable event.

26


 

Trade Date

The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.

Conversions to Institutional Shares

You are eligible for a self-directed conversion from another share class to Institutional Shares of the Fund, provided that your account meets all Institutional Shares’ eligibility requirements. You may request a conversion through our website (if you are registered for online access), or you may contact Vanguard by telephone or by mail to request this transaction. Accounts that qualify for Institutional Shares will not be automatically converted.

Mandatory Conversions to Another Share Class

If an account no longer meets the balance requirements for Institutional Shares, Vanguard may automatically convert the shares in the account to another share class, as appropriate. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.

Redeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Limitations , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares or request an exchange through our website or our mobile application if you are registered for online access.

By telephone. You may call Vanguard to request a redemption of shares or an exchange. See Contacting Vanguard .

By mail. You may send a form (available online) to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard .

27


 

How to Receive Redemption Proceeds

By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer service on an account, you must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form. After the service is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or upon request. Your redemption request can be initiated online (if you are registered for online access), by telephone, or by mail.

By wire. To receive your proceeds by wire, you may instruct Vanguard to wire your redemption proceeds ($100 minimum) to a previously designated bank account. To establish the wire redemption service, you generally must designate a bank account online, complete a form, or fill out the appropriate section of your account registration form.

Please note that Vanguard charges a $10 wire fee for outgoing wire redemptions. The fee is assessed in addition to, rather than being withheld from, redemption proceeds and is paid directly to the fund in which you invest . For example, if you redeem $100 via a wire, you will receive the full $100, and the $10 fee will be assessed to your fund account with an additional redemption of fund shares . If you redeem your entire fund account, your redemption proceeds will be reduced by the amount of the fee . The wire fee does not apply to accounts held by Flagship and Flagship Select clients; accounts held through intermediaries, including Vanguard Brokerage Services; or accounts held by institutional clients.

By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are registered for online access), by telephone, or by mail. See Exchanging Shares .

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, normally within two business days of your trade date, and generally to the address of record.

Trade Date

The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).

28


 

For redemptions by check , exchange , or wire : If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

• Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund; 12:30 p.m., Eastern time, for Vanguard Federal Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.

• Note on timing of wire redemptions from all other funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.

For redemptions by electronic bank transfer using an Automatic Withdrawal Plan : Your trade date generally will be the date you selected for withdrawal of funds (redemption of shares) from your Vanguard account. Proceeds of redeemed shares generally will be credited to your designated bank account two business days after your trade date. If the date you selected for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally will be the previous business day. For retirement accounts, if the date you selected for withdrawal of funds from your Vanguard account falls on the last day of the year and if that date is a holiday, your trade date will be the first business day of the following year. Please note that if you designate the first of the month for automated withdrawals, trades designated for January 1 will receive the next business day’s trade date.

For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.

29


 

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

If your redemption request is received in good order, we typically expect that redemption proceeds will be paid by the Fund within one business day of the trade date; however, in certain circumstances, investors may experience a longer settlement period at the time of the transaction. For further information, see “Potentially disruptive redemptions” and “Emergency circumstances.”

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Other Redemption Rules You Should Know

Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts.

Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind—that is, in the form of securities—if we reasonably believe that a cash redemption would negatively affect the fund’s operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limitations for information about Vanguard’s policies to limit frequent trading.

Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to seven calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.

30


 

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing (using a form available online) at any time. Confirmations of address changes are sent to both the old and new addresses.

Payment to a different person or address. At your request, we can make your redemption check payable, or wire your redemption proceeds, to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require additional documentation, such as a signature guarantee or a notarized signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange.

No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.

Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.

Exchanging Shares

An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are registered for online access), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Call Vanguard before attempting to exchange a large dollar amount. By calling us before you attempt to exchange a large dollar amount, you may avoid delayed or rejected transactions.

31


 

Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. See Frequent-Trading Limitations for additional restrictions on exchanges.

Frequent-Trading Limitations

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in the funds. Each Vanguard fund (other than money market funds and short-term bond funds, but including Vanguard Short-Term Inflation-Protected Securities Index Fund) limits an investor’s purchases or exchanges into a fund account for 30 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to these frequent-trading limits.

For Vanguard Retirement Investment Program pooled plans, the limitations apply to exchanges made online or by telephone.

These frequent-trading limitations do not apply to the following:

• Purchases of shares with reinvested dividend or capital gains distributions.

• Transactions through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online ® .

• Discretionary transactions through Vanguard Personal Advisor Services ® and Vanguard Institutional Advisory Services ® .

• Redemptions of shares to pay fund or account fees.

• Redemptions of shares to remove excess shareholder contributions to certain types of retirement accounts (including, but not limited to, IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans).

• Transfers and reregistrations of shares within the same fund.

• Purchases of shares by asset transfer or direct rollover.

• Conversions of shares from one share class to another in the same fund.

• Checkwriting redemptions.

• Section 529 college savings plans.

• Certain approved institutional portfolios and asset allocation programs, as well as trades made by funds or trusts managed by Vanguard or its affiliates that invest in other Vanguard funds. (Please note that shareholders of Vanguard’s funds of funds are subject to the limitations.)

32


 

For participants in employer-sponsored defined contribution plans,* the frequent-trading limitations do not apply to:

• Purchases of shares with participant payroll or employer contributions or loan repayments.

• Purchases of shares with reinvested dividend or capital gains distributions.

• Distributions, loans, and in-service withdrawals from a plan.

• Redemptions of shares as part of a plan termination or at the direction of the plan.

• Transactions executed through the Vanguard Managed Account Program.

• Redemptions of shares to pay fund or account fees.

• Share or asset transfers or rollovers.

• Reregistrations of shares.

• Conversions of shares from one share class to another in the same fund.

• Exchange requests submitted by written request to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are subject to the limitations.)

* The following Vanguard fund accounts are subject to the frequent-trading limitations: SEP-IRAs, SIMPLE IRAs, certain Individual 403(b)(7) Custodial Accounts, and Vanguard Individual 401(k) Plans.

Accounts Held by Institutions (Other Than Defined Contribution Plans)

Vanguard will systematically monitor for frequent trading in institutional clients’ accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client’s accounts the 30-day policy previously described, prohibiting a client’s purchases of fund shares, and/or revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

33


 

For those Vanguard funds that charge purchase and/or redemption fees, intermediaries will be asked to assess these fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading limitations may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading limitations. If you invest with Vanguard through an intermediary, please read that firm’s materials carefully to learn of any other rules or fees that may apply.

Other Rules You Should Know

Prospectus and Shareholder Report Mailings

When two or more shareholders have the same last name and address, just one summary prospectus (or prospectus) and/or shareholder report may be sent in an attempt to eliminate the unnecessary expense of duplicate mailings. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or online. See Contacting Vanguard .

Vanguard.com

Registration. If you are a registered user of vanguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions through our website. You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, prospectuses, certain tax forms, and shareholder reports electronically. If you are a registered user of vanguard.com , you can consent to the electronic delivery of these documents by logging on and changing your mailing preferences under “Account Maintenance.” You can revoke your electronic consent at any time through our website, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

Telephone Transactions

Automatic. When we set up your account, we will automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.

Tele-Account ® . To obtain fund and account information through Vanguard’s automated telephone service, you must first establish a Personal Identification Number (PIN) by calling Tele-Account at 800-662-6273.

34


 

Proof of a caller’s authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:

• Authorization to act on the account (as the account owner or by legal documentation or other means).

• Account registration and address.

• Fund name and account number, if applicable.

• Other information relating to the caller, the account owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

• Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

• Include the fund name and account number.

• Include the amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must generally be provided on a Vanguard form and include:

S ignature( s) and date from the authorized person(s).

• Signature guarantees or notarized signatures, if required for the type of transaction.

(Call Vanguard for specific requirements.)

• Any supporting documentation that may be required.

Good order requirements may vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

Future Trade-Date Requests

Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares , Converting Shares , Redeeming Shares, and Exchanging Shares . Vanguard reserves the right to return future-dated purchase checks.

Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally will accept instructions from any one owner or authorized person.

35


 

Responsibility for Fraud

Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. Vanguard may be required to transfer assets related to uncashed checks to a state under the state’s abandoned property law.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law, subject to potential federal or state withholding taxes .

Unusual Circumstances

If you experience difficulty contacting Vanguard online or by telephone, you can send us your transaction request on a Vanguard form by regular or express mail. See Contacting Vanguard for addresses.

Investing With Vanguard Through Other Firms

You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, a broker, or an investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply. Your financial intermediary can provide you with account information and any required tax forms. You may be required to pay a commission on purchases of mutual fund shares made through a financial intermediary.

Please see Frequent - Trading Limitations Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

36


 

Low-Balance Accounts

The Fund reserves the right to convert an investor’s Institutional Shares to another share class, as appropriate, if the fund account balance falls below the account minimum for any reason, including market fluctuation. Any such conversion will be preceded by written notice to the investor.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

Share Classes

Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.

Fund and Account Updates

Confirmation Statements

We will send (or provide through our website, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any

37


 

transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.

Portfolio Summaries

We will send (or provide through our website, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter (or month). Promptly review each summary that we provide to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.

Tax Information Statements

For most accounts, Vanguard (or your intermediary) is required to provide annual tax forms to assist you in preparing your income tax returns. These forms are generally available for each calendar year early in the following year. Registered users of vanguard.com can also view certain forms through our website. Vanguard (or your intermediary) may also provide you with additional tax-related documentation. For more information, consult our website at vanguard.com or see Contacting Vanguard .

Annual and Semiannual Reports

We will send (or provide through our website, whichever you prefer) reports about Vanguard Inflation-Protected Securities Fund twice a year, in February and August. These reports include overviews of the financial markets and provide the following specific Fund information:

• Performance assessments and comparisons with industry benchmarks.

• Reports from the advisor.

• Financial statements with listings of Fund holdings.

Portfolio Holdings

Please consult the Fund‘s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

38


 

Employer-Sponsored Plans

Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option.

• If you have any questions about the Fund or Vanguard, including those about the Fund’s investment objective, strategies, or risks, contact Vanguard Participant Services toll-free at 800-523-1188 or visit our website at vanguard.com.

• If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.

• Be sure to carefully read each topic that pertains to your transactions with Vanguard.

Vanguard reserves the right to change its policies without notice to shareholders.

Transactions

Processing times for your transaction requests may differ among recordkeepers or among transaction and funding types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing time frames for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

If Vanguard is serving as your plan recordkeeper and if your transaction involves one or more investments with an early cut-off time for processing or another trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

39


 

Contacting Vanguard    
 
 
Web    
Vanguard.com   For the most complete source of Vanguard news  
  For fund, account, and service information  
  For most account transactions  
  For literature requests  
  24 hours a day, 7 days a week  
 
Phone    
Vanguard Tele-Account ® 800-662-6273   For automated fund and account information  
  Toll-free, 24 hours a day, 7 days a week  
Investor Information 800-662-7447   For fund and service information  
(Text telephone for people with hearing   For literature requests  
impairment at 800-749-7273)    
Client Services 800-662-2739   For account information  
(Text telephone for people with hearing   For most account transactions  
impairment at 800-749-7273)    
Participant Services 800-523-1188   For information and services for participants in employer-  
(Text telephone for people with hearing   sponsored plans  
impairment at 800-749-7273)    
Institutional Division   For information and services for large institutional investors  
888-809-8102    
Financial Advisor and Intermediary   For information and services for financial intermediaries  
Sales Support 800-997-2798   including financial advisors, broker-dealers, trust institutions,  
  and insurance companies  
Financial Advisory and Intermediary   For account information and trading support for financial  
Trading Support 800-669-0498   intermediaries including financial advisors, broker-dealers,  
  trust institutions, and insurance companies  

 

40


 

Vanguard Addresses

Please be sure to use the correct address and the correct form . Use of an incorrect address or form could delay the processing of your transaction.

Regular Mail (Individuals)   The Vanguard Group      
  P.O. Box 1110      
  Valley Forge, PA 19482-1110    
Regular Mail (Institutions, Intermediaries, and The Vanguard Group      
Employer-Sponsored Plan Participants)   P.O. Box 2900      
  Valley Forge, PA 19482-2900    
Registered, Express, or Overnight Mail   The Vanguard Group      
  455 Devon Park Drive      
  Wayne, PA 19087-1815    
 
 
Additional Information          
 
 
    Newspaper   Vanguard   CUSIP  
  Inception Date   Abbreviation   Fund Number   Number  
Inflation-Protected Securities Fund          
Institutional Shares   12/12/2003   InPrSeln   1190   922031745  
(Investor Shares        
6/29/2000)

 

41


 

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index (the Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Inflation-Protected Securities Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Inflation-Protected Securities Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Inflation-Protected Securities Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect to the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Inflation-Protected Securities Fund or the owners of the Inflation-Protected Securities Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Inflation-Protected Securities Fund. Investors acquire the Inflation-Protected Securities Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Inflation-Protected Securities Fund. The Inflation-Protected Securities Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Inflation-Protected Securities Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Inflation-Protected Securities Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Inflation-Protected Securities Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Inflation-Protected Securities Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Inflation-Protected Securities Fund.

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Inflation-Protected Securities Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF A BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE INFLATION-PROTECTED SECURITIES FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

42


 

Glossary of Investment Terms

Average Maturity. The average length of time until bonds held by a fund reach maturity and are repaid. In general, the longer the average maturity, the more a fund’s share price fluctuates in response to changes in market interest rates. In calculating average maturity, a fund uses a bond’s maturity or, if applicable, an earlier date on which the advisor believes it is likely that a maturity-shortening device (such as a call, a put, a refunding, a prepayment, or a redemption provision or an adjustable coupon rate) will cause the bond to be repaid.

Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index. An index that includes the inflation-indexed securities within the Bloomberg Barclays Treasury Index, which represents U.S. Treasury obligations with maturities of more than one year.

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distributions. Payments to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Cash Equivalent Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker’s acceptances.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Dividend Distributions. Payments to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but it does not include the transaction costs of buying and selling portfolio securities.

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

43


 

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is generally measured from the inception date.

Inflation-Indexed Securities. Bonds issued by the U.S. government, government agencies, or corporations, whose principal and interest payments—unlike those of conventional bonds—are adjusted over time to reflect inflation.

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

Joint Committed Credit Facility. The Fund participates, along with other funds managed by Vanguard, in a committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each Vanguard fund is individually liable for its borrowings, if any, under the credit facility. The amount and terms of the committed credit facility are subject to approval by the Fund‘s board of trustees and renegotiation with the lender syndicate on an annual basis.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

New York Stock Exchange (NYSE). A stock exchange based in New York City that is open for regular trading on business days, Monday through Friday, from 9:30 a.m. to 4 p.m., Eastern time .

Principal. The face value of a debt instrument or the amount of money put into an investment.

Return of Capital. A return of all or part of your original investment in a fund. In general, return of capital reduces your cost basis in a fund’s shares and is not taxable to you until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other investments.

44


 

Total Return. A percentage change, over a specified time period, in a mutual fund’s net asset value, assuming the reinvestment of all distributions of dividends and capital gains.

Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund’s volatility, the wider the fluctuations in its returns.

Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment’s price.


 

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information

If you would like more information about Vanguard Inflation-Protected Securities Fund, the following documents are available free upon request:

Annual/Semiannual Reports to Shareholders

Additional information about the Fund’s investments is available in the Fund’s annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the Fund and is incorporated by reference into (and thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit vanguard.com or contact us as follows:

If you are an individual investor:

The Vanguard Group

Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900

Telephone: 800-662-7447; Text telephone for people with hearing impairment: 800-749-7273

If you are a client of Vanguard’s Institutional Division:

The Vanguard Group

Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102; Text telephone for people with hearing impairment: 800-749-7273

If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:

Client Services Department

Telephone: 800-662-2739; Text telephone for people with hearing impairment: 800-749-7273

Information Provided by the Securities and Exchange Commission (SEC)

R eports and other information about the Fund are available in the EDGAR database on the SEC’s website at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following email address: publicinfo@sec.gov.

Fund’s Investment Company Act file number: 811-04681

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 1190 042019


 

PART B
 
VANGUARD ® BOND INDEX FUNDS
 
STATEMENT OF ADDITIONAL INFORMATION
 
April 26, 2019
 
This Statement of Additional Information is not a prospectus but should be read in conjunction with a Fund’s current  
prospectus (dated April 26, 2019). To obtain, without charge, a prospectus or the most recent Annual Report to    
Shareholders, which contains the Fund’s financial statements as hereby incorporated by reference, please contact The  
Vanguard Group, Inc. (Vanguard).              
Phone: Investor Information Department at 800-662-7447
Online: vanguard.com
 
TABLE OF CONTENTS
Description of the Trust             B-1  
Fundamental Policies             B-3  
Investment Strategies, Risks, and Nonfundamental Policies         B-4  
Share Price             B-27  
Purchase and Redemption of Shares             B-28  
Management of the Funds             B-29  
Investment Advisory and Other Services           B-46  
Portfolio Transactions             B-48  
Vanguard‘s Proxy Voting Guidelines             B-50  
Information About the ETF Share Class           B-56  
Financial Statements             B-62  
Description of Bond Ratings             B-62  
 
DESCRIPTION OF THE TRUST
 
Vanguard Bond Index Funds (the Trust) currently offers the following funds and share classes (identified by ticker symbol):  
 
      Share Classes 1        
      Institutional Institutional    
Fund 2   Investor   Admiral   Institutional   Plus   Select   ETF  
Vanguard Total Bond Market Index Fund   VBMFX   VBTLX   VBTIX   VBMPX   VTBSX   BND  
Vanguard Total Bond Market II Index Fund   VTBIX     VTBNX        
Vanguard Short-Term Bond Index Fund   VBISX   VBIRX   VBITX   VBIPX     BSV  
Vanguard Intermediate-Term Bond Index Fund   VBIIX   VBILX   VBIMX   VBIUX     BIV  
Vanguard Long-Term Bond Index Fund 3   VBLTX   VBLAX   VBLLX   VBLIX     BLV  
Vanguard Inflation-Protected Securities Fund 4   VIPSX   VAIPX   VIPIX        
1 Individually, a class; collectively, the classes.              
2 Individually, a Fund; collectively, the Funds.              
3 The Fund’s Admiral Shares commenced operations on February 7, 2019.            
4 Prior to November 13, 2007, the Fund was a series of Vanguard Fixed Income Securities Funds.        

 

The Trust has the ability to offer additional funds or classes of shares. There is no limit on the number of full and fractional shares that may be issued for a single fund or class of shares.

Organization

The Trust was organized as a Maryland corporation in 1986 and was reorganized as a Delaware statutory trust in 1998.

Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard Bond Index Fund, Inc. The

B-1


 

Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.

Service Providers

Custodian. JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179, serves as the Funds‘ custodian. The custodian is responsible for maintaining the Funds‘ assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign subcustodians or foreign securities depositories.

Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Funds‘ independent registered public accounting firm. The independent registered public accounting firm audits the Funds‘ annual financial statements and provides other related services.

Transfer and Dividend-Paying Agent. The Funds‘ transfer agent and dividend-paying agent is Vanguard, P.O. Box 2600, Valley Forge, PA 19482.

Characteristics of the Funds‘ Shares

Restrictions on Holding or Disposing of Shares. There are no restrictions on the right of shareholders to retain or dispose of a Fund’s shares, other than those described in the Fund’s current prospectus and elsewhere in this Statement of Additional Information. Each Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Fund or class. Unless terminated by reorganization or liquidation, each Fund and share class will continue indefinitely.

Shareholder Liability. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. This means that a shareholder of a Fund generally will not be personally liable for payment of the Fund’s debts. Some state courts, however, may not apply Delaware law on this point. We believe that the possibility of such a situation arising is remote.

Dividend Rights. The shareholders of each class of a Fund are entitled to receive any dividends or other distributions declared by the Fund for each such class. No shares of a Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of a particular class according to the number of shares of the class held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the net asset values of the different classes and differences in the way that expenses are allocated between share classes pursuant to a multiple class plan approved by the Fund’s board of trustees.

Voting Rights. Shareholders are entitled to vote on a matter if (1) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of a Fund or any class; (2) the trustees determine that it is necessary or desirable to obtain a shareholder vote; (3) a merger or consolidation, share conversion, share exchange, or sale of assets is proposed and a shareholder vote is required by the 1940 Act to approve the transaction; or (4) a shareholder vote is required under the 1940 Act. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of a Fund’s net assets, to change any fundamental policy of a Fund (please see Fundamental Policies ), and to enter into certain merger transactions. Unless otherwise required by applicable law, shareholders of a Fund receive one vote for each dollar of net asset value owned on the record date and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the Fund or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders that relates solely to that class, and each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote by the shareholders.

Liquidation Rights. In the event that a Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Fund’s net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a

B-2


 

pro rata share of the Fund’s net assets that are allocated to that class. Shareholders may receive cash, securities, or a combination of the two.

Preemptive Rights. There are no preemptive rights associated with the Funds‘ shares.

Conversion Rights. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements as described in the Fund’s current prospectus. Shareholders may not convert into or out of a Fund’s ETF Shares.

Redemption Provisions. Each Fund’s redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information.

Sinking Fund Provisions. The Funds have no sinking fund provisions.

Calls or Assessment. Each Fund’s shares, when issued, are fully paid and non-assessable.

Tax Status of the Funds

Each Fund expects to qualify each year for treatment as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC). This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, each Fund must comply with certain requirements relating to the source of its income and the diversification of its assets. If a Fund fails to meet these requirements in any taxable year, the Fund will, in some cases, be able to cure such failure, including by paying a fund-level tax, paying interest, making additional distributions, or disposing of certain assets. If the Fund is ineligible to or otherwise does not cure such failure for any year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company.

Each Fund may declare a capital gain dividend consisting of the excess (if any) of net realized long-term capital gains over net realized short-term capital losses. Net capital gains for a fiscal year are computed by taking into account any capital loss carryforwards of the Fund. For Fund fiscal years beginning on or after December 22, 2010, capital losses may be carried forward indefinitely and retain their character as either short-term or long-term. Under prior law, net capital losses could be carried forward for eight tax years and were treated as short-term capital losses. A Fund is required to use capital losses arising in fiscal years beginning on or after December 22, 2010, before using capital losses arising in fiscal years beginning prior to December 22, 2010.

FUNDAMENTAL POLICIES

Each Fund is subject to the following fundamental investment policies, which cannot be changed in any material way without the approval of the holders of a majority of the Fund’s shares. For these purposes, a “majority” of shares means shares representing the lesser of (1) 67% or more of the Fund’s net assets voted, so long as shares representing more than 50% of the Fund’s net assets are present or represented by proxy or (2) more than 50% of the Fund’s net assets.

Borrowing . Each Fund may borrow money only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

Commodities . Each Fund may invest in commodities only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

Diversification . With respect to 75% of its total assets, each Fund may not (1) purchase more than 10% of the outstanding voting securities of any one issuer or (2) purchase securities of any issuer if, as a result, more than 5% of the Fund’s total assets would be invested in that issuer’s securities. This limitation does not apply to obligations of the U.S. government or its agencies or instrumentalities.

Industry Concentration . Each Fund (other than Vanguard Inflation-Protected Securities Fund) will not concentrate its investments in the securities of issuers whose principal business activities are in the same industry, except as may be necessary to approximate the composition of its target index.

B-3


 

Vanguard Inflation-Protected Securities Fund will not concentrate its investments in the securities of issuers whose principal business activities are in the same industry.

Investment Objective . The investment objectives of the Total Bond Market Index Fund, Total Bond Market II Index Fund, Short-Term Bond Index Fund, Intermediate-Term Bond Index Fund, and Long-Term Bond Index Fund may not be materially changed without a shareholder vote.

Loans . Each Fund may make loans to another person only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

Real Estate . Each Fund may not invest directly in real estate unless it is acquired as a result of ownership of securities or other instruments. This restriction shall not prevent the Fund from investing in securities or other instruments (1) issued by companies that invest, deal, or otherwise engage in transactions in real estate or (2) backed or secured by real estate or interests in real estate.

Senior Securities . Each Fund may not issue senior securities except as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

Underwriting . Each Fund may not act as an underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 (the 1933 Act), in connection with the purchase and sale of portfolio securities.

Compliance with the fundamental policies previously described is generally measured at the time the securities are purchased. Unless otherwise required by the 1940 Act (as is the case with borrowing), if a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. All fundamental policies must comply with applicable regulatory requirements. For more details, see Investment Strategies, Risks, and Nonfundamental Policies .

None of these policies prevents the Funds from having an ownership interest in Vanguard. As a part owner of Vanguard, each Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard’s costs or other financial requirements. See Management of the Funds for more information.

INVESTMENT STRATEGIES, RISKS, AND NONFUNDAMENTAL POLICIES

Some of the investment strategies and policies described on the following pages and in each Fund’s prospectus set forth percentage limitations on a Fund’s investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these strategies and policies will be determined immediately after the acquisition of such securities or assets by the Fund. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund’s investment strategies and policies.

The following investment strategies, risks, and policies supplement each Fund’s investment strategies, risks, and policies set forth in the prospectus. With respect to the different investments discussed as follows, a Fund may acquire such investments to the extent consistent with its investment strategies and policies.

Asset-Backed Securities . Asset-backed securities represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements, and other categories of receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements. The rate of principal payments on asset-backed securities is related to the rate of principal payments, including prepayments, on the underlying assets. The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit support, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement.

Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. Prepayments of principal by borrowers

B-4


 

or foreclosure or other enforcement action by creditors shortens the term of the underlying assets. The occurrence of prepayments is a function of several factors, such as the level of interest rates, the general economic conditions, the location and age of the underlying obligations, and other social and demographic conditions. A fund’s ability to maintain positions in asset-backed securities is affected by the reductions in the principal amount of the underlying assets because of prepayments. A fund’s ability to reinvest prepayments of principal (as well as interest and other distributions and sale proceeds) at a comparable yield is subject to generally prevailing interest rates at that time. The value of asset-backed securities varies with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of the underlying securities. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the average life of such assets. Because prepayments of principal generally occur when interest rates are declining, an investor, such as a fund, generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which the assets were previously invested. Therefore, asset-backed securities have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.

Because asset-backed securities generally do not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities. For example, revolving credit receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give debtors the right to set off certain amounts owed, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than by real property. Most issuers of automobile receivables permit loan servicers to retain possession of the underlying assets. If the servicer of a pool of underlying assets sells them to another party, there is the risk that the purchaser could acquire an interest superior to that of holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issue of asset-backed securities and technical requirements under state law, the trustee for the holders of the automobile receivables may not have a proper security interest in the automobiles. Therefore, there is the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. Asset-backed securities have been, and may continue to be, subject to greater liquidity risks when worldwide economic and liquidity conditions deteriorate . In addition, government actions and proposals that affect the terms of underlying home and consumer loans, thereby changing demand for products financed by those loans, as well as the inability of borrowers to refinance existing loans, have had and may continue to have a negative effect on the valuation and liquidity of asset-backed securities.

Borrowing . A fund’s ability to borrow money is limited by its investment policies and limitations; by the 1940 Act; and by applicable exemptions, no-action letters, interpretations, and other pronouncements issued from time to time by the SEC and its staff or any other regulatory authority with jurisdiction. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund’s total assets (at the time of borrowing) made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund’s total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.

Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund’s portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased with the proceeds of such borrowing. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.

The SEC takes the position that transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements; engaging in mortgage-dollar-roll transactions; selling securities short (other than short sales “against-the-box”); buying and selling certain derivatives (such as futures contracts); selling (or writing) put and call options; engaging in sale-buybacks; entering into firm-commitment and standby-commitment agreements; engaging in when-issued, delayed-delivery, or forward-commitment transactions; and participating in other similar trading practices. (Additional discussion about a number of these transactions can be

B-5


 

found on the following pages.) A borrowing transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund maintains an offsetting financial position; segregates liquid assets (with such liquidity determined by the advisor in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund’s potential economic exposure under the borrowing transaction; or otherwise “covers” the transaction in accordance with applicable SEC guidance (collectively, “covers” the transaction). A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction. In addition, segregated assets may not be available to satisfy redemptions or to fulfill other obligations.

Cybersecurity Risks . The increased use of technology to conduct business could subject a fund and its third-party service providers (including, but not limited to, investment advisors and custodians) to risks associated with cybersecurity. In general, a cybersecurity incident can occur as a result of a deliberate attack designed to gain unauthorized access to digital systems. If the attack is successful, an unauthorized person or persons could misappropriate assets or sensitive information, corrupt data, or cause operational disruption. A cybersecurity incident could also occur unintentionally if, for example, an authorized person inadvertently released proprietary or confidential information. Vanguard has developed robust technological safeguards and business continuity plans to prevent, or reduce the impact of, potential cybersecurity incidents. Additionally, Vanguard has a process for assessing the information security and/or cybersecurity programs implemented by a fund’s third-party service providers, which helps minimize the risk of potential incidents. Despite these measures, a cybersecurity incident still has the potential to disrupt business operations, which could negatively impact a fund and/or its shareholders. Some examples of negative impacts that could occur as a result of a cybersecurity incident include, but are not limited to, the following: a fund may be unable to calculate its net asset value (NAV), a fund’s shareholders may be unable to transact business, a fund may be unable to process transactions on behalf of its shareholders, or a fund may be unable to safeguard its data or the personal information of its shareholders.

Debt Securities . A debt security, sometimes called a fixed income security, consists of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time and to repay the debt on the specified maturity date. Some debt securities, such as zero-coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities, and asset-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call risk, prepayment risk, extension risk, inflation risk, credit risk, liquidity risk, and (in the case of foreign securities) country risk and currency risk. The reorganization of an issuer under the federal bankruptcy laws or an out-of-court restructuring of an issuer’s capital structure may result in the issuer’s debt securities being cancelled without repayment, repaid only in part, or repaid in part or in whole through an exchange thereof for any combination of cash, debt securities, convertible securities, equity securities, or other instruments or rights in respect to the same issuer or a related entity.

Debt Securities—Bank Obligations. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Certificates of deposit are negotiable short-term obligations of commercial banks. Variable rate certificates of deposit have an interest rate that is periodically adjusted prior to their stated maturity based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Frequently, dealers selling variable rate certificates of deposit to a fund will agree to repurchase such instruments, at the fund’s option, at par on or near the coupon dates. The dealers’ obligations to repurchase these instruments are subject to conditions imposed by various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. A fund is also able to sell variable rate certificates of deposit on the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed-rate certificates of deposit. A banker’s acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer, or storage of goods). The borrower is liable for payment, as is the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of 6 months or less and are traded in the secondary markets prior to maturity.

B-6


 

Debt Securities—Commercial Paper. Commercial paper refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. It is usually sold on a discount basis and has a maturity at the time of issuance not exceeding 9 months. High-quality commercial paper typically has the following characteristics: (1) liquidity ratios are adequate to meet cash requirements; (2) long-term senior debt is also high credit quality; (3) the issuer has access to at least two additional channels of borrowing; (4) basic earnings and cash flow have an upward trend with allowance made for unusual circumstances; (5) typically, the issuer’s industry is well established and the issuer has a strong position within the industry; and (6) the reliability and quality of management are unquestioned. In assessing the credit quality of commercial paper issuers, the following factors may be considered: (1) evaluation of the management of the issuer, (2) economic evaluation of the issuer’s industry or industries and the appraisal of speculative-type risks that may be inherent in certain areas, (3) evaluation of the issuer’s products in relation to competition and customer acceptance, (4) liquidity, (5) amount and quality of long-term debt, (6) trend of earnings over a period of ten years, (7) financial strength of a parent company and the relationships that exist with the issuer, and (8) recognition by the management of obligations that may be present or may arise as a result of public-interest questions and preparations to meet such obligations. The short-term nature of a commercial paper investment makes it less susceptible to interest rate risk than longer-term fixed income securities because interest rate risk typically increases as maturity lengths increase. Additionally, an issuer may expect to repay commercial paper obligations at maturity from the proceeds of the issuance of new commercial paper. As a result, investment in commercial paper is subject to the risk the issuer cannot issue enough new commercial paper to satisfy its outstanding commercial paper payment obligations, also known as rollover risk. Commercial paper may suffer from reduced liquidity due to certain circumstances, in particular, during stressed markets. In addition, as with all fixed income securities, an issuer may default on its commercial paper obligation.

Variable-amount master-demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to an arrangement between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable-amount master-demand notes are direct lending arrangements between a lender and a borrower, it is not generally contemplated that such instruments will be traded, and there is no secondary market for these notes, although they are redeemable (and thus immediately repayable by the borrower) at face value, plus accrued interest, at any time. In connection with a fund’s investment in variable-amount master-demand notes, Vanguard’s investment management staff will monitor, on an ongoing basis, the earning power, cash flow, and other liquidity ratios of the issuer, along with the borrower’s ability to pay principal and interest on demand.

Debt Securities—Inflation-Indexed Securities . Inflation-indexed securities are debt securities, the principal value of which is periodically adjusted to reflect the rate of inflation as indicated by the Consumer Price Index (CPI). Inflation-indexed securities may be issued by the U.S. government, by agencies and instrumentalities of the U.S. government, and by corporations. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the CPI accruals as part of a semiannual coupon payment.

The periodic adjustment of U.S. inflation-indexed securities is tied to the CPI, which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI is a measurement of changes in the cost of living, made up of components such as housing, food, transportation, and energy. Inflation-indexed securities issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will correlate to the rate of inflation in the United States.

Inflation—a general rise in prices of goods and services—erodes the purchasing power of an investor’s portfolio. For example, if an investment provides a “nominal” total return of 5% in a given year and inflation is 2% during that period, the inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI, has generally occurred during the past 50 years, so investors should be conscious of both the nominal and real returns of their investments. Investors in inflation-indexed securities funds who do not reinvest the portion of the income distribution that is attributable to inflation adjustments will not maintain the purchasing power of the investment over the long term. This is because interest earned depends on the amount of principal invested, and that principal will not grow with inflation if the investor fails to reinvest the principal adjustment paid out as part of a fund’s income distributions. Although inflation-indexed securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates

B-7


 

rise because of reasons other than inflation (e.g., changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.

If the periodic adjustment rate measuring inflation (i.e., the CPI) falls, the principal value of inflation-indexed securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed securities, even during a period of deflation. However, the current market value of the inflation-indexed securities is not guaranteed and will fluctuate. Other inflation-indexed securities include inflation-related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

The value of inflation-indexed securities should change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed securities. In contrast, if nominal interest rates were to increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed securities.

Coupon payments that a fund receives from inflation-indexed securities are included in the fund’s gross income for the period during which they accrue. Any increase in principal for an inflation-indexed security resulting from inflation adjustments is considered by Internal Revenue Service (IRS) regulations to be taxable income in the year it occurs. For direct holders of an inflation-indexed security, this means that taxes must be paid on principal adjustments, even though these amounts are not received until the bond matures. By contrast, a fund holding these securities distributes both interest income and the income attributable to principal adjustments each quarter in the form of cash or reinvested shares (which, like principal adjustments, are taxable to shareholders). It may be necessary for the fund to liquidate portfolio positions, including when it is not advantageous to do so, in order to make required distributions.

Debt Securities—Non-Investment-Grade Securities . Non-investment-grade securities, also referred to as “high-yield securities” or “junk bonds,” are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (e.g., lower than Baa3/P-2 by Moody’s Investors Service, Inc. (Moody’s) or below BBB–/A-2 by Standard & Poor’s Financial Services LLC (Standard & Poor’s)) or, if unrated, are determined to be of comparable quality by the fund’s advisor. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation, and they will generally involve more credit risk than securities in the investment-grade categories. Non-investment-grade securities generally provide greater income and opportunity for capital appreciation than higher quality securities, but they also typically entail greater price volatility and principal and income risk.

Analysis of the creditworthiness of issuers of high-yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high-yield securities than for investment-grade securities. The success of a fund’s advisor in managing high-yield securities is more dependent upon its own credit analysis than is the case with investment-grade securities.

Some high-yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring such as an acquisition, a merger, or a leveraged buyout. Companies that issue high-yield securities are often highly leveraged and may not have more traditional methods of financing available to them. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities. Some high-yield securities were once rated as investment-grade but have been downgraded to junk bond status because of financial difficulties experienced by their issuers.

The market values of high-yield securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general react to fluctuations in the general level of interest rates. High-yield securities also tend to be more sensitive to economic conditions than are investment-grade securities. An actual or anticipated economic downturn or sustained period of rising interest rates, for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery.

The secondary market on which high-yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund’s advisor to sell a

B-8


 

high-yield security or the price at which a fund’s advisor could sell a high-yield security, and it could also adversely affect the daily net asset value of fund shares. When secondary markets for high-yield securities are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation of the securities.

Except as otherwise provided in a fund’s prospectus, if a credit rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the advisor deems it in the best interests of shareholders.

Debt Securities—Structured and Indexed Securities . Structured securities (also called “structured notes”) and indexed securities are derivative debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities include structured notes as well as securities other than debt securities. The value of the principal of and/or interest on structured and indexed securities is determined by reference to changes in the value of a specific asset, reference rate, or index (the reference) or the relative change in two or more references. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased, depending upon changes in the applicable reference. The terms of the structured and indexed securities may provide that, in certain circumstances, no principal is due at maturity and, therefore, may result in a loss of invested capital. Structured and indexed securities may be positively or negatively indexed, so that appreciation of the reference may produce an increase or a decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rate or the value of the structured or indexed security at maturity may be calculated as a specified multiple of the change in the value of the reference; therefore, the value of such security may be very volatile. Structured and indexed securities may entail a greater degree of market risk than other types of debt securities because the investor bears the risk of the reference. Structured or indexed securities may also be more volatile, less liquid, and more difficult to accurately price than less complex securities or more traditional debt securities, which could lead to an overvaluation or an undervaluation of the securities.

Debt Securities—U.S. Government Securities . The term “U.S. government securities” refers to a variety of debt securities that are issued or guaranteed by the U.S. Treasury, by various agencies of the U.S. government, or by various instrumentalities that have been established or sponsored by the U.S. government. The term also refers to repurchase agreements collateralized by such securities.

U.S. Treasury securities are backed by the full faith and credit of the U.S. government, meaning that the U.S. government is required to repay the principal in the event of default. Other types of securities issued or guaranteed by federal agencies and U.S. government-sponsored instrumentalities may or may not be backed by the full faith and credit of the U.S. government. The U.S. government, however, does not guarantee the market price of any U.S. government securities. In the case of securities not backed by the full faith and credit of the U.S. government, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment.

Some of the U.S. government agencies that issue or guarantee securities include the Government National Mortgage Association, the Export-Import Bank of the United States, the Federal Housing Administration, the Maritime Administration, the Small Business Administration, and the Tennessee Valley Authority. An instrumentality of the U.S. government is a government agency organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, the Federal Deposit Insurance Corporation, the Federal Home Loan Banks, and the Federal National Mortgage Association.

Debt Securities—Variable and Floating Rate Securities . Variable and floating rate securities are debt securities that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that change whenever there is a change in a designated benchmark rate or the issuer’s credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction-rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). Variable or floating rate securities that include market-dependent liquidity features may have greater liquidity risk than other securities. The greater liquidity

B-9


 

risk may exist, for example, because of the failure of a market-dependent liquidity feature to operate as intended (as a result of the issuer’s declining creditworthiness, adverse market conditions, or other factors) or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value, and the holders of such securities may be required to retain them until the later of the repurchase date, the resale date, or the date of maturity. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security.

Debt Securities—Zero-Coupon and Pay-in-Kind Securities . Zero-coupon and pay-in-kind securities are debt securities that do not make regular cash interest payments. Zero-coupon securities generally do not pay interest. Zero-coupon Treasury bonds are U.S. Treasury notes and bonds that have been stripped of their unmatured interest coupons, or the coupons themselves, and also receipts or certificates representing an interest in such stripped debt obligations and coupons. The timely payment of coupon interest and principal on these instruments remains guaranteed by the full faith and credit of the U.S. government. Pay-in-kind securities pay interest through the issuance of additional securities. These securities are generally issued at a discount to their principal or maturity value. Because such securities do not pay current cash income, the price of these securities can be volatile when interest rates fluctuate. Although these securities do not pay current cash income, federal income tax law requires the holders of zero-coupon and pay-in-kind securities to include in income each year the portion of the original issue discount and other noncash income on such securities accrued during that year. Each fund that holds such securities intends to pass along such interest as a component of the fund’s distributions of net investment income. It may be necessary for the fund to liquidate portfolio positions, including when it is not advantageous to do so, in order to make required distributions.

Derivatives . A derivative is a financial instrument that has a value based on—or “derived from”—the values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts, certain forward-commitment transactions, options on securities, caps, floors, collars, swap agreements, and certain other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, may be privately negotiated and entered into in the over-the-counter market (OTC Derivatives) or may be cleared through a clearinghouse (Cleared Derivatives) and traded on an exchange or swap execution facility. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), certain swap agreements, such as certain standardized credit default and interest rate swap agreements, must be cleared through a clearinghouse and traded on an exchange or swap execution facility. This could result in an increase in the overall costs of such transactions. While the intent of derivatives regulatory reform is to mitigate risks associated with derivatives markets, the new regulations could, among other things, increase liquidity and decrease pricing for more standardized products while decreasing liquidity and increasing pricing for less standardized products. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities or assets on which the derivatives are based.

Derivatives may be used for a variety of purposes, including—but not limited to—hedging, managing risk, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, and seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments. Some investors may use derivatives primarily for speculative purposes while other uses of derivatives may not constitute speculation. There is no assurance that any derivatives strategy used by a fund’s advisor will succeed. The other parties to a fund’s OTC Derivatives contracts (usually referred to as “counterparties”) will not be considered the issuers thereof for purposes of certain provisions of the 1940 Act and the IRC, although such OTC Derivatives may qualify as securities or investments under such laws. A fund’s advisors, however, will monitor and adjust, as appropriate, the fund’s credit risk exposure to OTC Derivative counterparties.

Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions.

When a fund enters into a Cleared Derivative, an initial margin deposit with a Futures Commission Merchant (FCM) is required. Initial margin deposits are typically calculated as an amount equal to the volatility in market value of a Cleared

B-10


 

Derivative over a fixed period. If the value of the fund’s Cleared Derivatives declines, the fund will be required to make additional “variation margin” payments to the FCM to settle the change in value. If the value of the fund’s Cleared Derivatives increases, the FCM will be required to make additional “variation margin” payments to the fund to settle the change in value. This process is known as “marking-to-market” and is calculated on a daily basis.

For OTC Derivatives, a fund is subject to the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a fund’s advisor does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based.

Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with certain OTC Derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price.

Derivatives may be subject to pricing or “basis” risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity.

Because certain derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “ Borrowing .”

Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund’s interest. A fund bears the risk that its advisor will incorrectly forecast future market trends or the values of assets, reference rates, indexes, or other financial or economic factors in establishing derivative positions for the fund. If the advisor attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives (in particular, OTC Derivatives) are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.

Exchange-Traded Funds . A fund may purchase shares of exchange-traded funds (ETFs). Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage.

An investment in an ETF generally presents the same principal risks as an investment in a conventional fund (i.e., one that is not exchange-traded) that has the same investment objective, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of an ETF’s shares may trade at a discount or a premium to their net asset value; (2) an active trading market for an ETF’s shares may not develop or be maintained; and (3) trading of an ETF’s shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of an ETF’s shares may also be halted if the shares are delisted from the exchange without first being listed on another exchange or if the listing exchange’s officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

Most ETFs are investment companies. Therefore, a fund’s purchases of ETF shares generally are subject to the limitations on, and the risks of, a fund’s investments in other investment companies, which are described under the heading “ Other Investment Companies .”

B-11


 

Vanguard ETF ® * Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard funds. A fund’s investments in Vanguard ETF Shares are also generally subject to the descriptions, limitations, and risks described under the heading “ Other Investment Companies ,” except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions.

* U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

Foreign Securities. Typically, foreign securities are considered to be equity or debt securities issued by entities organized, domiciled, or with a principal executive office outside the United States, such as foreign corporations and governments. Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities if the company’s principal operations are conducted from the United States or when the company’s equity securities trade principally on a U.S. stock exchange. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments (depositary receipts) for foreign securities. Direct investments in foreign securities may be made either on foreign securities exchanges or in the over-the-counter (OTC) markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments.

Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there are multiple risks that could result in a loss to the fund, including, but not limited to, the risk that a fund’s trade details could be incorrectly or fraudulently entered at the time of a transaction. Securities of foreign issuers are generally more volatile and less liquid than securities of comparable U.S. issuers, and foreign investments may be effected through structures that may be complex or confusing. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the United States. The risk that securities traded on foreign exchanges may be suspended, either by the issuers themselves, by an exchange, or by government authorities, is also heightened. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments that could affect U.S. investments in those countries. Additionally, economic or other sanctions imposed on the United States by a foreign country, or imposed on a foreign country or issuer by the United States, could impair a fund’s ability to buy, sell, hold, receive, deliver, or otherwise transact in certain investment securities. Sanctions could also affect the value and/or liquidity of a foreign security.

Although an advisor will endeavor to achieve the most favorable execution costs for a fund’s portfolio transactions in foreign securities under the circumstances, commissions and other transaction costs are generally higher than those on U.S. securities. In addition, it is expected that the custodian arrangement expenses for a fund that invests primarily in foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Additionally, bankruptcy laws vary by jurisdiction and cash deposits may be subject to a custodian’s creditors. Certain foreign governments levy withholding or other taxes against dividend and interest income from, capital gains on the sale of, or transactions in foreign securities. Although in some countries a portion of these taxes is recoverable by the fund, the nonrecovered portion of foreign withholding taxes will reduce the income received from such securities.

The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated, and it tends to increase when the value of the U.S. dollar falls against such currency (as discussed under the heading “ Foreign Securities—Foreign Currency Transactions ,” a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred from converting between various currencies in order to purchase and sell foreign securities, as well as by currency restrictions, exchange control regulations, currency devaluations, and political and economic developments.

Foreign Securities—Foreign Currency Transactions. The value in U.S. dollars of a fund’s non-dollar-denominated foreign securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in

B-12


 

connection with its investments in foreign securities. A fund will enter into foreign currency transactions only to attempt to “hedge” the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase.

Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives.

Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “ Borrowing .”

By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against part or all of the possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as “transaction hedging.” In addition, when the advisor reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as “portfolio hedging.” Similarly, when the advisor reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount.

A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options, and “cross-hedge” transactions. In cross-hedge transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the advisor reasonably believes generally tracks the currency being hedged with regard to price movements). The advisor may select the tracking (or substitute) currency rather than the currency in which the security is denominated for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or to take advantage of a more liquid or more efficient market for the tracking currency. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies.

A fund may hold a portion of its assets in bank deposits denominated in foreign currencies so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these assets are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations.

The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward currency contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its advisor’s predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks and may leave a fund in a less advantageous position than if such a hedge had not been established. Because forward currency contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll over a forward currency contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder.

Futures Contracts and Options on Futures Contracts. Futures contracts and options on futures contracts are derivatives. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based

B-13


 

securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be “long” the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be “short” the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies, and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash-settled futures contracts, the cash settlement amount is equal to the difference between the final settlement or market price for the relevant commodity on the last trading day of the contract and the price for the relevant commodity agreed upon at the outset of the contract. Most futures contracts, however, are not held until maturity but instead are “offset” before the settlement date through the establishment of an opposite and equal futures position.

The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit “initial margin” with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as an amount equal to the volatility in market value of a contract over a fixed period. If the value of the fund’s position declines, the fund will be required to make additional “variation margin” payments to the FCM to settle the change in value. If the value of the fund’s position increases, the FCM will be required to make additional “variation margin” payments to the fund to settle the change in value. This process is known as “marking-to-market” and is calculated on a daily basis. A futures transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “ Borrowing .”

An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the “exercise” or “strike” price) any time before the option expires. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is “in-the-money” at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer.

A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as previously described in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “ Borrowing .”

Each Fund intends to comply with Rule 4.5 under the Commodity Exchange Act (CEA), under which a mutual fund may be excluded from the definition of the term Commodity Pool Operator (CPO) if the fund meets certain conditions such as limiting its investments in certain CEA-regulated instruments (e.g., futures, options, or swaps) and complying with certain marketing restrictions. Accordingly, Vanguard is not subject to registration or regulation as a CPO with respect to each Fund under the CEA. A Fund will only enter into futures contracts and futures options that are traded on a U.S. or foreign exchange, board of trade, or similar entity or that are quoted on an automated quotation system.

Futures Contracts and Options on Futures Contracts—Risks. The risk of loss in trading futures contracts and in writing futures options can be substantial because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a

B-14


 

relatively small price movement in a futures position may result in immediate and substantial loss (or gain) for the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds.

A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange that provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day, and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. U.S. Treasury futures are generally not subject to such daily limits.

A fund bears the risk that its advisor will incorrectly predict future market trends. If the advisor attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments.

A fund could lose margin payments it has deposited with its FCM if, for example, the FCM breaches its agreement with the fund or becomes insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM’s other customers, potentially resulting in losses to the fund.

Hybrid Instruments . A hybrid instrument, or hybrid, is an interest in an issuer that combines the characteristics of an equity security, a debt security, a commodity, and/or a derivative. A hybrid may have characteristics that, on the whole, more strongly suggest the existence of a bond, stock, or other traditional investment, but a hybrid may also have prominent features that are normally associated with a different type of investment. Moreover, hybrid instruments may be treated as a particular type of investment for one regulatory purpose (such as taxation) and may be simultaneously treated as a different type of investment for a different regulatory purpose (such as securities or commodity regulation). Hybrids can be used as an efficient means of pursuing a variety of investment goals, including increased total return, duration management, and currency hedging. Because hybrids combine features of two or more traditional investments and may involve the use of innovative structures, hybrids present risks that may be similar to, different from, or greater than those associated with traditional investments with similar characteristics.

Examples of hybrid instruments include convertible securities, which combine the investment characteristics of bonds and common stocks; perpetual bonds, which are structured like fixed income securities, have no maturity date, and may be characterized as debt or equity for certain regulatory purposes; contingent convertible securities, which are fixed income securities that, under certain circumstances, either convert into common stock of the issuer or undergo a principal write-down by a predetermined percentage if the issuer’s capital ratio falls below a predetermined trigger level; and trust-preferred securities, which are preferred stocks of a special-purpose trust that holds subordinated debt of the corporate parent. Another example of a hybrid is a commodity-linked bond, such as a bond issued by an oil company that

B-15


 

pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid would be a combination of a bond and a call option on oil.

In the case of hybrids that are structured like fixed income securities (such as structured notes), the principal amount or the interest rate is generally tied (positively or negatively) to the price of some commodity, currency, securities index, interest rate, or other economic factor (each, a benchmark). For some hybrids, the principal amount payable at maturity or the interest rate may be increased or decreased, depending on changes in the value of the benchmark. Other hybrids do not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark, thus magnifying movements within the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond with a fixed principal amount that pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a fund to the credit risk of the issuer of the hybrids. Depending on the level of a fund’s investment in hybrids, these risks may cause significant fluctuations in the fund’s net asset value. Hybrid instruments may also carry liquidity risk since the instruments are often “customized” to meet the needs of an issuer or, sometimes, the portfolio needs of a particular investor, and therefore the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt securities.

Certain issuers of hybrid instruments known as structured products may be deemed to be investment companies as defined in the 1940 Act. As a result, a fund’s investments in these products may be subject to the limitations described under the heading “ Other Investment Companies .”

Interfund Borrowing and Lending. The SEC has granted an exemption permitting registered open-end Vanguard funds to participate in Vanguard’s interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including, among other things, the requirements that (1) no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction, (2) no fund may lend money if the loan would cause its aggregate outstanding loans through the program to exceed 15% of its net assets at the time of the loan, and (3) a fund’s interfund loans to any one fund shall not exceed 5% of the lending fund’s net assets. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund’s investment objective and investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs.

Investing for Control. Each Vanguard fund invests in securities and other instruments for the sole purpose of achieving a specific investment objective. As such, a Vanguard fund does not seek to acquire, individually or collectively with any other Vanguard fund, enough of a company’s outstanding voting stock to have control over management decisions. A Vanguard fund does not invest for the purpose of controlling a company’s management.

Loan Interests and Direct Debt Instruments. Loan interests and direct debt instruments are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates (in the case of loans and loan participations); to suppliers of goods or services (in the case of trade claims or other receivables); or to other parties. These investments involve a risk of loss in case of the default, the insolvency, or the bankruptcy of the borrower and may offer less legal protection to the purchaser in the event of fraud or misrepresentation, or there may be a requirement that a purchaser supply additional cash to a borrower on demand.

Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. Direct debt instruments may not be rated by a rating agency. If scheduled interest or principal payments are not made, or are not made in a timely manner, the value of the instrument may be adversely affected. Loans that are fully secured provide more protections than unsecured loans in the event of failure to make scheduled interest or principal payments. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the borrower’s obligation or that the collateral could be liquidated. Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks and may be highly speculative. Borrowers that are in bankruptcy or restructuring may never pay off their indebtedness, or they may pay only a small fraction of the

B-16


 

amount owed. Direct indebtedness of developing countries also involves a risk that the governmental entities responsible for the repayment of the debt may be unable, or unwilling, to pay interest and repay principal when due.

Corporate loans and other forms of direct corporate indebtedness in which a fund may invest generally are made to finance internal growth, mergers, acquisitions, stock repurchases, refinancing of existing debt, leveraged buyouts, and other corporate activities. A significant portion of the corporate indebtedness purchased by a fund may represent interests in loans or debt made to finance highly leveraged corporate acquisitions (known as “leveraged buyout” transactions), leveraged recapitalization loans, and other types of acquisition financing. Another portion may also represent loans incurred in restructuring or “work-out” scenarios, including super-priority debtor-in-possession facilities in bankruptcy and acquisition of assets out of bankruptcy. Loans in restructuring or work-out scenarios may be especially vulnerable to the inherent uncertainties in restructuring processes. In addition, the highly leveraged capital structure of the borrowers in any such transactions, whether in acquisition financing or restructuring, may make such loans especially vulnerable to adverse or unusual economic or market conditions.

Loans and other forms of direct indebtedness generally are subject to restrictions on transfer, and only limited opportunities may exist to sell them in secondary markets. As a result, a fund may be unable to sell loans and other forms of direct indebtedness at a time when it may otherwise be desirable to do so or may be able to sell them only at a price that is less than their fair value.

Investments in loans through direct assignment of a financial institution’s interests with respect to a loan may involve additional risks. For example, if a loan is foreclosed, the purchaser could become part owner of any collateral and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is at least conceivable that, under emerging legal theories of lender liability, a purchaser could be held liable as a co-lender. Direct debt instruments may also involve a risk of insolvency of the lending bank or other intermediary.

A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless the purchaser has direct recourse against the borrower, the purchaser may have to rely on the agent to apply appropriate credit remedies against a borrower under the terms of the loan or other indebtedness. If assets held by the agent for the benefit of a purchaser were determined to be subject to the claims of the agent’s general creditors, the purchaser might incur certain costs and delays in realizing payment on the loan or loan participation and could suffer a loss of principal and/or interest.

Direct indebtedness may include letters of credit, revolving credit facilities, or other standby financing commitments that obligate purchasers to make additional cash payments on demand. These commitments may have the effect of requiring a purchaser to increase its investment in a borrower when it would not otherwise have done so, even if the borrower’s condition makes it unlikely that the amount will ever be repaid.

A fund’s investment policies will govern the amount of total assets that it may invest in any one issuer or in issuers within the same industry. For purposes of these limitations, a fund generally will treat the borrower as the “issuer” of indebtedness held by the fund. In the case of loan participations in which a bank or other lending institution serves as financial intermediary between a fund and the borrower, if the participation does not shift to the fund the direct debtor-creditor relationship with the borrower, SEC interpretations require the fund, in some circumstances, to treat both the lending bank or other lending institution and the borrower as “issuers” for purposes of the fund’s investment policies. Treating a financial intermediary as an issuer of indebtedness may restrict a fund’s ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.

Mortgage-Backed Securities. Mortgage-backed securities represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans and may be based on different types of mortgages, including those on residential properties or commercial real estate. Mortgage-backed securities include various types of securities, such as government stripped mortgage-backed securities, adjustable rate mortgage-backed securities, and collateralized mortgage obligations.

Generally, mortgage-backed securities represent partial interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA); by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC); and by private issuers, such as commercial banks, savings and loan institutions, and mortgage bankers. The average maturity of pass-through pools of mortgage-backed securities in which a fund may invest varies with the maturities of the underlying mortgage instruments. In addition, a pool’s average maturity may be

B-17


 

shortened by unscheduled payments on the underlying mortgages. Factors affecting mortgage prepayments include the level of interest rates, the general economic and social conditions, the location of the mortgaged property, and the age of the mortgage. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool cannot be predicted accurately.

Mortgage-backed securities may be classified as private, government, or government-related, depending on the issuer or guarantor. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential or commercial mortgage loans created by nongovernment issuers, such as commercial banks, savings and loan associations, and private mortgage insurance companies. Private mortgage-backed securities may not be readily marketable. In addition, mortgage-backed securities have been subject to greater liquidity risk when worldwide economic and liquidity conditions deteriorate . U.S. government mortgage-backed securities are backed by the full faith and credit of the U.S. government. GNMA, the principal U.S. guarantor of these securities, is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the U.S. government. Issuers include FNMA and FHLMC, which are congressionally chartered corporations. In September 2008, the U.S. Treasury placed FNMA and FHLMC under conservatorship and appointed the Federal Housing Finance Agency (FHFA) to manage their daily operations. In addition, the U.S. Treasury entered into purchase agreements with FNMA and FHLMC to provide them with capital in exchange for senior preferred stock. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. Participation certificates representing interests in mortgages from FHLMC’s national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments (i.e., mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary).

Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. A fund’s ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. A fund’s ability to reinvest prepayments of principal at comparable yield is subject to generally prevailing interest rates at that time. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor, such as a fund, generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.

Mortgage-Backed Securities—Adjustable Rate Mortgage-Backed Securities. Adjustable rate mortgage-backed securities (ARMBSs) have interest rates that reset at periodic intervals. Acquiring ARMBSs permits a fund to participate in increases in prevailing current interest rates through periodic adjustments in the coupons of mortgages underlying the pool on which ARMBSs are based. Such ARMBSs generally have higher current yield and lower price fluctuations than is the case with more traditional fixed income debt securities of comparable rating and maturity. However, because the interest rates on ARMBSs are reset only periodically, changes in market interest rates or in the issuer’s creditworthiness may affect their value. In addition, when prepayments of principal are made on the underlying mortgages during periods of rising interest rates, a fund can reinvest the proceeds of such prepayments at rates higher than those at which they were previously invested. Mortgages underlying most ARMBSs, however, have limits on the allowable annual or lifetime increases that can be made in the interest rate that the mortgagor pays. Therefore, if current interest rates rise above such limits over the period of the limitation, a fund holding an ARMBS does not benefit from further increases in interest rates. Moreover, when interest rates are in excess of coupon rates (i.e., the rates being paid by mortgagors) of the mortgages, ARMBSs behave more like fixed income securities and less like adjustable rate securities and are thus subject to the risks associated with fixed income securities. In addition, during periods of rising interest rates, increases in the coupon rate of adjustable rate mortgages generally lag current market interest rates slightly, thereby creating the potential for capital depreciation on such securities.

B-18


 

Mortgage-Backed Securities—Collateralized Mortgage Obligations. Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a “tranche.” Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The “fastest-pay” tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche (or tranches) in the sequence, as specified in the prospectus, receives all of the principal payments until that tranche is retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long-maturity, monthly pay collateral to formulate securities with short, intermediate, and long final maturities and expected average lives and risk characteristics.

In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, planned amortization classes, accrual bonds, and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.

CMOs may include real estate mortgage investment conduits (REMICs). REMICs, which were authorized under the Tax Reform Act of 1986, are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. A REMIC is a CMO that qualifies for special tax treatment under the IRC and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as “regular” interests, or “residual” interests. Guaranteed REMIC pass-through certificates (REMIC Certificates) issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC, or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest and also guarantees the payment of principal, as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA.

The primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (i.e., the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, the average life, and the price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.

Mortgage-Backed Securities—Hybrid ARMs. A hybrid adjustable rate mortgage (hybrid ARM) is a type of mortgage in which the interest rate is fixed for a specified period and then resets periodically, or floats, for the remaining mortgage term. Hybrid ARMs are usually referred to by their fixed and floating periods. For example, a 5/1 ARM refers to a mortgage with a 5-year fixed interest rate period, followed by a 1-year interest rate adjustment period. During the initial interest period (i.e., the initial five years for a 5/1 hybrid ARM), hybrid ARMs behave more like fixed income securities and are thus subject to the risks associated with fixed income securities. All hybrid ARMs have reset dates. A reset date is the date when a hybrid ARM changes from a fixed interest rate to a floating interest rate. At the reset date, a hybrid ARM can adjust by a maximum specified amount based on a margin over an identified index. Like ARMBSs, hybrid ARMs have periodic and lifetime limitations on the increases that can be made to the interest rates that mortgagors pay. Therefore, if during a floating rate period interest rates rise above the interest rate limits of the hybrid ARM, a fund holding the hybrid ARM does not benefit from further increases in interest rates.

Mortgage-Backed Securities—Mortgage Dollar Rolls. A mortgage dollar roll is a transaction in which a fund sells a mortgage-backed security to a dealer and simultaneously agrees to purchase a similar security (but not the same security) in the future at a predetermined price. A mortgage-dollar-roll program may be structured to simulate an investment in mortgage-backed securities at a potentially lower cost, or with potentially reduced administrative burdens, than directly holding mortgage-backed securities. For accounting purposes, each transaction in a mortgage dollar roll is viewed as a

B-19


 

separate purchase and sale of a mortgage-backed security. These transactions may increase a fund’s portfolio turnover rate. The fund receives cash for a mortgage-backed security in the initial transaction and enters into an agreement that requires the fund to purchase a similar mortgage-backed security in the future.

The counterparty with which a fund enters into a mortgage-dollar-roll transaction is obligated to provide the fund with similar securities to purchase as those originally sold by the fund. These securities generally must (1) be issued by the same agency and be part of the same program; (2) have similar original stated maturities; (3) have identical net coupon rates; and (4) satisfy “good delivery” requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within a certain percentage of the initial amount delivered. Mortgage dollar rolls will be used only if consistent with a fund’s investment objective and strategies and will not be used to change a fund’s risk profile.

Mortgage-Backed Securities—Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities (SMBSs) are derivative multiclass mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks, and special purpose entities formed or sponsored by any of the foregoing.

SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The price and yield to maturity on an IO class are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed, and accordingly, these securities may be deemed “illiquid” and thus subject to a fund’s limitations on investment in illiquid securities.

Mortgage-Backed Securities—To Be Announced (TBA) Securities . A TBA securities transaction, which is a type of forward-commitment transaction, represents an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics for a fixed unit price, with settlement on a scheduled future date, typically within 30 calendar days of the trade date. With TBA transactions, the particular securities (i.e., specified mortgage pools) to be delivered or received are not identified at the trade date; however, securities delivered to a purchaser must meet specified criteria, including face value, coupon rate, and maturity, and be within industry-accepted “good delivery” standards. A fund may sell TBA securities to hedge its portfolio positions or to dispose of mortgage-backed securities it owns under delayed-delivery arrangements. Proceeds of TBA securities sold are not received until the contractual settlement date. For TBA purchases, a fund will maintain sufficient liquid assets (e.g., cash or marketable securities) until settlement date in an amount sufficient to meet the purchase price. Unsettled TBA securities are valued by an independent pricing service based on the characteristics of the securities to be delivered or received. A risk associated with TBA transactions is that at settlement, either the buyer fails to pay the agreed price for the securities or the seller fails to deliver the agreed securities. As the value of such unsettled TBA securities is assessed on a daily basis, parties mitigate such risk by, among other things, exchanging collateral as security for performance, performing a credit analysis of the counterparty, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty.

Options. An option is a derivative. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a “premium,” the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price (in the case of a call option) or to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options,

B-20


 

which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of over-the-counter (OTC) options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. Although this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve credit risk to the counterparty, whereas for exchange-traded, centrally cleared options, credit risk is mutualized through the involvement of the applicable clearing house.

The buyer (or holder) of an option is said to be “long” the option, while the seller (or writer) of an option is said to be “short” the option. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price, which is the predetermined price at which the option may be exercised. A put option grants to the holder the right to sell (and obligates the writer to buy) the underlying security at the strike price. The purchase price of an option is called the “premium.” The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is “in-the-money” at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “ Borrowing .”

If a trading market, in particular options, were to become unavailable, investors in those options (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying instrument moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying instruments and related instruments. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options.

A fund bears the risk that its advisor will not accurately predict future market trends. If the advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment, which could cause substantial losses for the fund. Although hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.

OTC Swap Agreements. An over-the-counter (OTC) swap agreement, which is a type of derivative, is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index.

Examples of OTC swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, excess return swaps, and total return swaps. Most OTC swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund’s current obligations (or rights) under an OTC swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. OTC swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index.

B-21


 

An OTC option on an OTC swap agreement, also called a “swaption,” is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based “premium.” A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.

The use of OTC swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. OTC swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of an OTC swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions.

OTC swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If an OTC swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, OTC swap transactions may be subject to a fund’s limitation on investments in illiquid securities.

OTC swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive or inexpensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the OTC swap agreement.

Because certain OTC swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain OTC swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged OTC swap transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “Borrowing.”

Like most other investments, OTC swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund’s interest. A fund bears the risk that its advisor will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing OTC swap positions for the fund. If the advisor attempts to use an OTC swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the OTC swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving OTC swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many OTC swaps are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.

The use of an OTC swap agreement also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund’s advisor does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based.

The market for OTC swaps and swaptions is a relatively new market. It is possible that developments in the market could adversely affect a fund, including its ability to terminate existing OTC swap agreements or to realize amounts to be received under such agreements. As previously noted under the heading “Derivatives,” under the Dodd-Frank Act, certain swaps that may be used by a fund may be cleared through a clearinghouse and traded on an exchange or swap execution facility.

Other Investment Companies . A fund may invest in other investment companies to the extent permitted by applicable law or SEC exemption. Under Section 12(d)(1) of the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as no investment represents more than 3% of the voting stock of an acquired investment company. In addition, no funds for which Vanguard acts as an advisor may, in the aggregate, own more than 10% of the voting stock of a closed-end investment

B-22


 

company. The 1940 Act and related rules provide certain exemptions from these restrictions, for example, for funds that invest in other funds within the same group of investment companies. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the fund’s expenses (including operating expenses and the fees of the advisor), but they also may indirectly bear similar expenses of the underlying investment companies. Certain investment companies, such as business development companies (BDCs), are more akin to operating companies and, as such, their expenses are not direct expenses paid by fund shareholders and are not used to calculate the fund’s net asset value. SEC rules nevertheless require that any expenses incurred by a BDC be included in a fund’s expense ratio as “Acquired Fund Fees and Expenses.” The expense ratio of a fund that holds a BDC will thus overstate what the fund actually spends on portfolio management, administrative services, and other shareholder services by an amount equal to these Acquired Fund Fees and Expenses. The Acquired Fund Fees and Expenses are not included in a fund’s financial statements, which provide a clearer picture of a fund’s actual operating expenses. Shareholders would also be exposed to the risks associated not only with the investments of the fund but also with the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded on the secondary market.

Repurchase Agreements. A repurchase agreement is an agreement under which a fund acquires a debt security (generally a security issued by the U.S. government or an agency thereof, a banker’s acceptance, or a certificate of deposit) from a bank, a broker, or a dealer and simultaneously agrees to resell such security to the seller at an agreed-upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed-upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a fund’s repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The aggregate amount of any such agreements is not limited, except to the extent required by law.

The use of repurchase agreements involves certain risks. One risk is the seller’s ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control, and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement.

Restricted and Illiquid Securities. Illiquid securities are investments that a fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment . The SEC generally limits aggregate holdings of illiquid securities by a mutual fund to 15% of its net assets (5% for money market funds). A fund may experience difficulty valuing and selling illiquid securities and, in some cases, may be unable to value or sell certain illiquid securities for an indefinite period of time. Illiquid securities may include a wide variety of investments, such as (1) repurchase agreements maturing in more than seven days (unless the agreements have demand/redemption features), (2) OTC options contracts and certain other derivatives (including certain swap agreements), (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), (4) certain loan interests and other direct debt instruments, (5) certain municipal lease obligations, (6) private equity investments, (7) commercial paper issued pursuant to Section 4(a)(2) of the 1933 Act, and (8) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security held by a fund, it may be treated as a liquid security in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered, that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act, or that are exempt from registration under the 1933 Act, such as

B-23


 

commercial paper. Although a fund’s advisor monitors the liquidity of restricted securities, the board of trustees oversees and retains ultimate responsibility for the advisor’s liquidity determinations. Several factors that the trustees consider in monitoring these decisions include the valuation of a security; the availability of qualified institutional buyers, brokers, and dealers that trade in the security; and the availability of information about the security’s issuer.

Reverse Repurchase Agreements. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund that it is obligated to repurchase. In addition to the risk of such a loss, fees charged to the fund may exceed the return the fund earns from investing the proceeds received from the reverse repurchase agreement transaction. A reverse repurchase agreement may be considered a borrowing transaction for purposes of the 1940 Act. A reverse repurchase agreement transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading “Borrowing.” A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor. If the buyer in a reverse repurchase agreement becomes insolvent or files for bankruptcy, a fund’s use of proceeds from the sale may be restricted while the other party or its trustee or receiver determines if it will honor the fund’s right to repurchase the securities. If the fund is unable to recover the securities it sold in a reverse repurchase agreement, it would realize a loss equal to the difference between the value of the securities and the payment it received for them.

Securities Lending. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who may need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the securities lent. Any gain or loss in the market price of the securities lent that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the securities lent, the fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation. Currently, Vanguard funds that lend securities invest the cash collateral received in Vanguard Market Liquidity Fund and/or Vanguard Municipal Cash Management Fund , which are low-cost money market funds.

The terms and the structure of the loan arrangements, as well as the aggregate amount of securities loans, must be consistent with the 1940 Act and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33 1/3% of the fund’s total assets and require that (1) the borrower pledge and maintain with the fund collateral consisting of cash, an irrevocable letter of credit, or securities issued or guaranteed by the U.S. government having at all times not less than 100% of the value of the securities lent; (2) the borrower add to such collateral whenever the price of the securities lent rises (i.e., the borrower “marks to market” on a daily basis); (3) the loan be made subject to termination by the fund at any time; and (4) the fund receives reasonable interest on the loan (which may include the fund investing any cash collateral in interest-bearing short-term investments), any distribution on the lent securities, and any increase in their market value. Loan arrangements made by a fund will comply with all other applicable regulatory requirements, including the requirement to redeliver the securities within the standard settlement time applicable to the relevant trading market. The advisor will consider the creditworthiness of the borrower, among other things, in making decisions with respect to the lending of securities, subject to oversight by the board of trustees. At the present time, the SEC does not object if an investment company pays reasonable negotiated fees in connection with lent securities, so long as such fees are set forth in a written contract and approved by the investment company’s trustees. In addition, voting rights pass with the lent securities, but if a fund has knowledge that a material event will occur affecting securities on loan, and in respect to which the holder of the securities will be entitled to vote or consent,

B-24


 

the lender must be entitled to call the loaned securities in time to vote or consent. A fund bears the risk that there may be a delay in the return of the securities, which may impair the fund’s ability to vote on such a matter.

Pursuant to Vanguard’s securities lending policy, Vanguard’s fixed income and money market funds are not permitted to, and do not, lend their investment securities.

Tax Matters—Federal Tax Discussion. Discussion herein of U.S. federal income tax matters summarizes some of the important, generally applicable U.S. federal tax considerations relevant to investment in a fund based on the IRC, U.S. Treasury regulations, and other applicable authorities. These authorities are subject to change by legislative, administrative, or judicial action, possibly with retroactive effect. Each Fund has not requested and will not request an advance ruling from the Internal Revenue Service (IRS) as to the U.S. federal income tax matters discussed in this Statement of Additional Information. In some cases, a fund’s tax position may be uncertain under current tax law and an adverse determination or future guidance by the IRS with respect to such a position could adversely affect the fund and its shareholders, including the fund’s ability to continue to qualify as a regulated investment company or to continue to pursue its current investment strategy. A shareholder should consult his or her tax professional for information regarding the particular situation and the possible application of U.S. federal, state, local, foreign, and other taxes.

Tax Matters—Federal Tax Treatment of Derivatives, Hedging, and Related Transactions. A fund’s transactions in derivative instruments (including, but not limited to, options, futures, forward contracts, and swap agreements), as well as any of the fund’s hedging, short sale, securities loan, or similar transactions, may be subject to one or more special tax rules that accelerate income to the fund, defer losses to the fund, cause adjustments in the holding periods of the fund’s securities, convert long-term capital gains into short-term capital gains, or convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing, and character of distributions to shareholders.

Because these and other tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether a fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid a fund-level tax.

Tax Matters—Federal Tax Treatment of Futures Contracts. For federal income tax purposes, a fund generally must recognize, as of the end of each taxable year, any net unrealized gains and losses on certain futures contracts, as well as any gains and losses actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term, depending on the holding period of the contract. Sales of futures contracts that are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund.

A fund will distribute to shareholders annually any net capital gains that have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the fund’s other investments, and shareholders will be advised on the nature of the distributions.

Tax Matters—Federal Tax Treatment of Non-U.S. Currency Transactions. Special rules generally govern the federal income tax treatment of a fund’s transactions in the following: non-U.S. currencies; non-U.S. currency-denominated debt obligations; and certain non-U.S. currency options, futures contracts, forward contracts, and similar instruments. Accordingly, if a fund engages in these types of transactions it may have ordinary income or loss to the extent that such income or loss results from fluctuations in the value of the non-U.S. currency concerned. Such ordinary income could accelerate fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. Any ordinary loss so created will generally reduce ordinary income distributions and, in some cases, could require the recharacterization of prior ordinary income distributions. Net ordinary losses cannot be carried forward by the fund to offset income or gains realized in subsequent taxable years.

Any gain or loss attributable to the non-U.S. currency component of a transaction engaged in by a fund that is not subject to these special currency rules (such as foreign equity investments other than certain preferred stocks) will generally be treated as a capital gain or loss and will not be segregated from the gain or loss on the underlying transaction.

B-25


 

To the extent a fund engages in non-U.S. currency hedging, the fund may elect or be required to apply other rules that could affect the character, timing, or amount of the fund’s gains and losses. For more information, see “Tax Matters—Federal Tax Treatment of Derivatives, Hedging, and Related Transactions.”

Tax Matters—Foreign Tax Credit. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund’s total assets are invested in securities of foreign issuers, the fund may elect to pass through to shareholders the ability to deduct or, if they meet certain holding period requirements, take a credit for foreign taxes paid by the fund. Similarly, if at the close of each quarter of a fund’s taxable year, at least 50% of its total assets consist of interests in other regulated investment companies, the fund is permitted to elect to pass through to its shareholders the foreign income taxes paid by the fund in connection with foreign securities held directly by the fund or held by a regulated investment company in which the fund invests that has elected to pass through such taxes to shareholders.

Tax Matters—Market Discount or Premium. The price of a bond purchased after its original issuance may reflect market discount or premium. Depending on the particular circumstances, market discount may affect the tax character and amount of income required to be recognized by a fund holding the bond. In determining whether a bond is purchased with market discount, certain de minimis rules apply. Premium is generally amortizable over the remaining term of the bond. Depending on the type of bond, premium may affect the amount of income required to be recognized by a fund holding the bond and the fund’s basis in the bond.

Tax Matters—Real Estate Mortgage Investment Conduits. If a fund invests directly or indirectly, including through a REIT or other pass-through entity, in residual interests in real estate mortgage investment conduits (REMICs) or equity interests in taxable mortgage pools (TMPs), a portion of the fund’s income that is attributable to a residual interest in a REMIC or an equity interest in a TMP (such portion referred to in the IRC as an “excess inclusion”) will be subject to U.S. federal income tax in all events including potentially at the fund level under a notice issued by the IRS in October 2006 and U.S. Treasury regulations that have yet to be issued but may apply retroactively. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a registered investment company will be allocated to shareholders of the registered investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related interest directly. In general, excess inclusion income allocated to shareholders (1) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions); (2) will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan, or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity, which otherwise might not be required, to file a tax return and pay tax on such income; and (3) in the case of a non-U.S. investor, will not qualify for any reduction in U.S. federal withholding tax. A shareholder will be subject to U.S. federal income tax on such inclusions notwithstanding any exemption from such income tax otherwise available under the IRC. As a result, a fund investing in such interests may not be suitable for charitable remainder trusts. See “Tax Matters—Tax-Exempt Investors.”

Tax Matters—Tax Considerations for Non-U.S. Investors . U.S. withholding and estate taxes and certain U.S. tax reporting requirements may apply to any investments made by non-U.S. investors in Vanguard funds. Certain properly reported distributions of qualifying interest income or short-term capital gain made by a fund to its non-U.S. investors are exempt from U.S. withholding taxes, provided the investors furnish valid tax documentation (i.e., IRS Form W-8) certifying as to their non-U.S. status.

A fund is permitted, but is not required, to report any of its distributions as eligible for such relief, and some distributions (e.g., distributions of interest a fund receives from non-U.S. issuers) are not eligible for this relief. For some funds, Vanguard has chosen to report qualifying distributions and apply the withholding exemption to those distributions when made to non-U.S. shareholders who invest directly with Vanguard. For other funds, Vanguard may choose not to apply the withholding exemption to qualifying fund distributions made to direct shareholders, but may provide the reporting to such shareholders. In these cases, a shareholder may be able to reclaim such withholding tax directly from the IRS.

If shareholders hold fund shares (including ETF shares) through a broker or intermediary, their broker or intermediary may apply this relief to properly reported qualifying distributions made to shareholders with respect to those shares. If a shareholder’s broker or intermediary instead collects withholding tax where the fund has provided the proper reporting, the shareholder may be able to reclaim such withholding tax from the IRS. Please consult your broker or intermediary regarding the application of these rules.

B-26


 

This relief does not apply to any withholding required under the Foreign Account Tax Compliance Act (FATCA), which generally requires a fund to obtain information sufficient to identify the status of each of its shareholders. If a shareholder fails to provide this information or otherwise fails to comply with FATCA, a fund may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on fund distribution s . Please consult your tax advisor for more information about these rules.

Tax Matters—Tax-Exempt Investors. Income of a fund that would be UBTI if earned directly by a tax-exempt entity will not generally be attributed as UBTI to a tax-exempt shareholder of the fund. Notwithstanding this “blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in a fund if shares in the fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of IRC Section 514(b).

A tax-exempt shareholder may also recognize UBTI if a fund recognizes “excess inclusion income” derived from direct or indirect investments in residual interests in REMICs or equity interests in TMPs. See “Tax Matters—Real Estate Mortgage Investment Conduits.”

In addition, special tax consequences apply to charitable remainder trusts that invest in a fund that invests directly or indirectly in residual interests in REMICs or equity interests in TMPs. Charitable remainder trusts and other tax-exempt investors are urged to consult their tax advisors concerning the consequences of investing in a fund.

Time Deposits. Time deposits are subject to the same risks that pertain to domestic issuers of money market instruments, most notably credit risk (and, to a lesser extent, income risk, market risk, and liquidity risk). Additionally, time deposits of foreign branches of U.S. banks and foreign branches of foreign banks may be subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders. Other risks include adverse political and economic developments, the extent and quality of government regulation of financial markets and institutions, the imposition of foreign withholding taxes, and expropriation or nationalization of foreign issuers. However, time deposits of such issuers will undergo the same type of credit analysis as domestic issuers in which a Vanguard fund invests and will have at least the same financial strength as the domestic issuers approved for the fund.

When-Issued, Delayed-Delivery, and Forward-Commitment Transactions. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward-commitment transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed-delivery, and forward-commitment transactions will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund, if the fund covers the transaction in accordance with the requirements described under the heading “Borrowing.”

SHARE PRICE

Multiple-class funds do not have a single share price. Rather, each class has a share price, called its net asset value, or NAV, that is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the Exchange is closed, the NAV is not calculated, and the Funds do not sell or redeem shares. However, on those days the value of a Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

The Exchange typically observes the following holidays: New Year’s Day; Martin Luther King, Jr., Day; Presidents’ Day (Washington’s Birthday); Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas

B-27


 

Day. Although each Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time.

PURCHASE AND REDEMPTION OF SHARES

Purchase of Shares (Other than ETF Shares)

The purchase price of shares of each Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Fund’s prospectus.

Each Fund (other than Vanguard Inflation-Protected Securities Fund and Vanguard Total Bond Market II Index Fund) reserves the right to impose a transaction fee on any purchase of shares that, in the opinion of the advisor, would disrupt efficient management of the Fund. The advisor believes that it may be necessary to impose the transaction fees specified in the following table and may impose these transaction fees if an investor’s aggregate purchases into a Fund over a 12-month period exceed, or are expected to exceed, the indicated amounts. The fee will be assessed only if the client elects to proceed with the purchase.

Vanguard Fund   Transaction Fee   Aggregate Purchases  
Total Bond Market Index Fund   0.25%   Over $500 million  
Short-Term Bond Index Fund   0.15   Over $200 million  
Intermediate-Term Bond Index Fund   0.25   Over $100 million  
Long-Term Bond Index Fund   0.50   Over $100 million  

 

When applicable, transaction fees may be imposed on the aggregate amount of an investor’s purchases. Fees are based on the advisor’s estimate of the transaction costs incurred by each Fund in accepting new investments, which depends on the types of securities in which each Fund invests. Fees may be waived or reduced, however, if an investor’s purchases can be offset by other shareholders’ redemptions from the same Fund. Prospective investors may determine whether the fee will be imposed on their investments by calling Vanguard.

Exchange of Securities for Shares of a Fund. Shares of a Fund may be purchased “in kind” (i.e., in exchange for securities, rather than for cash) at the discretion of the Fund’s portfolio manager. Such securities must not be restricted as to transfer and must have a value that is readily ascertainable. Securities accepted by the Fund will be valued, as set forth in the Fund’s prospectus, as of the time of the next determination of NAV after such acceptance. All dividend, subscription, or other rights that are reflected in the market price of accepted securities at the time of valuation become the property of the Fund and must be delivered to the Fund by the investor upon receipt from the issuer. A gain or loss for federal income tax purposes, depending upon the cost of the securities tendered, would be realized by the investor upon the exchange. Investors interested in purchasing fund shares in kind should contact Vanguard.

Redemption of Shares (Other than ETF Shares)

The redemption price of shares of each Fund is the NAV per share next determined after the redemption request is received in good order, as defined in the Fund’s prospectus.

Each Fund can postpone payment of redemption proceeds for up to seven calendar days. In addition, each Fund can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the SEC; (2) during any period when an emergency exists, as defined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets; or (3) for such other periods as the SEC may permit.

The Trust has filed a notice of election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the beginning of such period.

If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC and in

B-28


 

accordance with procedures adopted by the Fund’s board of trustees. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions.

The Funds do not charge redemption fees. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Funds.

Vanguard processes purchase and redemption requests through a pooled account. Pending investment direction or distribution of redemption proceeds, the assets in the pooled account are invested and any earnings (the “float”) are allocated proportionately among the Vanguard funds in order to offset fund expenses. Other than the float, Vanguard treats assets held in the pooled account as the assets of each shareholder making such purchase or redemption request.

Right to Change Policies

Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if Vanguard reasonably believes a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any purchase fee, redemption fee, account service fee, or other fees charged to a shareholder or a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believes they are in the best interest of a fund.

Investing With Vanguard Through Other Firms

Each Fund has authorized certain agents to accept on its behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund’s behalf (collectively, Authorized Agents). The Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Fund’s instructions. In most instances, a customer order that is properly transmitted to an Authorized Agent will be priced at the NAV per share next determined after the order is received by the Authorized Agent.

MANAGEMENT OF THE FUNDS

Vanguard

Each Fund is part of the Vanguard group of investment companies, which consists of over 200 funds. Each fund is a series of a Delaware statutory trus t. T he funds obtain v irtually all of their corporate management, administrative, and distribution services through the trusts’ jointly owned subsidiary, Vanguard . Vanguard also provides investment advisory services to certain Vanguard funds. All of these services are provided at Vanguard’s total cost of operations pursuant to the Fifth Amended and Restated Funds’ Service Agreement (the Agreement) .

Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund (other than a fund of funds) pays its share of Vanguard’s total expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing, and custodial fees.

The funds’ officers are also employees of Vanguard.

Vanguard, Vanguard Marketing Corporation (VMC), the funds, and the funds’ advisors have adopted codes of ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The codes of ethics permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions

B-29


 

on the trading activities of access persons. For example, the codes of ethics require that access persons receive advance approval for most securities trades to ensure that there is no conflict with the trading activities of the funds.

Vanguard was established and operates under the Agreement. Th e A greement provides that each Vanguard fund may be called upon to invest up to 0.40% of its net assets in Vanguard. The amounts that each fund has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund’s relative net assets and its contribution to Vanguard’s capital.

As of December 31, 2018 , each Fund had contributed capital to Vanguard as follows:

  Capital   Percentage of   Percent of  
  Contribution   Fund’s Average   Vanguard’s  
Vanguard Fund   to Vanguard   Net Assets   Capitalization  
Total Bond Market Index Fund   $10,502,000   0.01%   4.20%  
Total Bond Market II Index Fund   8,293,000   0.01   3.32  
Short-Term Bond Index Fund   2,653,000   Less than 0.01   1.06  
Intermediate-Term Bond Index Fund   1,615,000   0.01   0.65  
Long-Term Bond Index Fund 1   541,000   Less than 0.01   0.22  
Inflation-Protected Securities Fund   1,443,000   0.01   0.58  
1 The Fund’s Admiral Shares commenced operations on February 7, 2019.        

 

Management . Corporate management and administrative services include (1) executive staff, (2) accounting and financial, (3) legal and regulatory, (4) shareholder account maintenance, (5) monitoring and control of custodian relationships, (6) shareholder reporting, and (7) review and evaluation of advisory and other services provided to the funds by third parties.

Distribution . Vanguard Marketing Corporation, 100 Vanguard Boulevard, Malvern, PA 19355, a wholly owned subsidiary of Vanguard, is the principal underwriter for the funds and in that capacity performs and finances marketing, promotional, and distribution activities (collectively, marketing and distribution activities) that are primarily intended to result in the sale of the funds’ shares. VMC offers shares of each fund for sale on a continuous basis and will use all reasonable efforts in connection with the distribution of shares of the funds. VMC performs marketing and distribution activities i n accordance with the conditions of a 1981 SEC exemptive order that permits the Vanguard funds to internalize and jointly finance the marketing, promotion, and distribution of their shares. The funds’ trustees review and approve the marketing and distribution expenses incurred by the funds, including the nature and cost of the activities and the desirability of each fund’s continued participation in the joint arrangement.

To ensure that each fund’s participation in the joint arrangement falls within a reasonable range of fairness, each fund contributes to VMC’s marketing and distribution expenses in accordance with an SEC-approved formula. Under that formula, one half of the marketing and distribution expenses are allocated among the funds based upon their relative net assets. The remaining half of those expenses are allocated among the funds based upon each fund’s sales for the preceding 24 months relative to the total sales of the funds as a group, provided, however, that no fund’s aggregate quarterly rate of contribution for marketing and distribution expenses shall exceed 125% of the average marketing and distribution expense rate for Vanguard and that no fund shall incur annual marketing and distribution expenses in excess of 0.20% of its average month-end net assets. Each fund’s contribution to these marketing and distribution expenses helps to maintain and enhance the attractiveness and viability of the Vanguard complex as a whole, which benefits all of the funds and their shareholders.

VMC’s principal marketing and distribution expenses are for advertising, promotional materials, and marketing personnel. Other marketing and distribution activities of an administrative nature that VMC undertakes on behalf of the funds may include, but are not limited to:

  • Conducting or publishing Vanguard-generated research and analysis concerning the funds, other investments, the financial markets, or the economy.
  • Providing views, opinions, advice, or commentary concerning the funds, other investments, the financial markets, or the economy.

B-30


 

  • Providing analytical, statistical, performance, or other information concerning the funds, other investments, the financial markets, or the economy.
  • Providing administrative services in connection with investments in the funds or other investments, including, but not limited to, shareholder services, recordkeeping services, and educational services.
  • Providing products or services that assist investors or financial service providers (as defined below) in the investment decision-making process.
  • Providing promotional discounts, commission-free trading, fee waivers, and other benefits to clients of Vanguard Brokerage Services ® who maintain qualifying investments in the funds.
  • Sponsoring, jointly sponsoring, financially supporting, or participating in conferences, programs, seminars, presentations, meetings, or other events involving fund shareholders, financial service providers, or others concerning the funds, other investments, the financial markets, or the economy, such as industry conferences, prospecting trips, due diligence visits, training or education meetings, and sales presentations.

VMC performs most marketing and distribution activities itself. Some activities may be conducted by third parties pursuant to shared marketing arrangements under which VMC agrees to share the costs and performance of marketing and distribution activities in concert with a financial service provider. Financial service providers include, but are not limited to, investment advisors, broker-dealers, financial planners, financial consultants, banks, and insurance companies. Under these cost- and performance-sharing arrangements, VMC may pay or reimburse a financial service provider (or a third party it retains) for marketing and distribution activities that VMC would otherwise perform. VMC’s cost- and performance-sharing arrangements may be established in connection with Vanguard investment products or services offered or provided to or through the financial service providers. VMC’s arrangements for shared marketing and distribution activities may vary among financial service providers, and its payments or reimbursements to financial service providers in connection with shared marketing and distribution activities may be significant. VMC participates in an offshore arrangement established with a third party to provide marketing, promotional, and other services to qualifying Vanguard funds that are distributed in certain foreign countries on a private-placement basis to government-sponsored and other institutional investors. In exchange for such services, the third party receives an annual base (fixed) fee and may also receive discretionary fees or performance adjustments.

In connection with its marketing and distribution activities, VMC may give financial service providers (or their representatives) (1) promotional items of nominal value that display Vanguard’s logo, such as golf balls, shirts, towels, pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and are not preconditioned on achievement of a sales target; (3) an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target; and (4) reasonable travel and lodging accommodations to facilitate participation in marketing and distribution activities.

VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or account-based fees to financial service providers in connection with its marketing and distribution activities for the Vanguard funds. VMC policy also prohibits marketing and distribution activities that are intended, designed, or likely to compromise suitability determinations by, or the fulfillment of any fiduciary duties or other obligations that apply to, financial service providers. Nonetheless, VMC’s marketing and distribution activities are primarily intended to result in the sale of the funds’ shares, and as such, its activities, including shared marketing and distribution activities, may influence participating financial service providers (or their representatives) to recommend, promote, include, or invest in a Vanguard fund or share class. In addition, Vanguard or any of its subsidiaries may retain a financial service provider to provide consulting or other services, and that financial service provider also may provide services to investors. Investors should consider the possibility that any of these activities or relationships may influence a financial service provider’s (or its representatives’) decision to recommend, promote, include, or invest in a Vanguard fund or share class. Each financial service provider should consider its suitability determinations, fiduciary duties, and other legal obligations (or those of its representatives) in connection with any decision to consider, recommend, promote, include, or invest in a Vanguard fund or share class.

The following table describes the expenses of Vanguard and VMC that are incurred by the Funds . Amounts captioned “Management and Administrative Expenses” include a Fund‘s allocated share of expenses associated with the management, administrative, and transfer agency services Vanguard provides to the Vanguard funds. Amounts captioned “Marketing and Distribution Expenses” include a Fund‘s allocated share of expenses associated with the marketing and distribution activities that VMC conducts on behalf of the Vanguard funds.

B-31


 

As is the case with all mutual funds, transaction costs incurred by the Funds for buying and selling securities are not reflected in the table. Annual Shared Fund Operating Expenses are based on expenses incurred in the fiscal years ended December 31, 2016, 2017, and 2018, and are presented as a percentage of each Fund‘s average month-end net assets.

Annual Shared Fund Operating Expenses
(Shared Expenses Deducted From Fund Assets)
Vanguard Fund   2016   2017   2018  
Total Bond Market Index Fund        
Management and Administrative Expenses   0.04%   0.04%   0.04%  
Marketing and Distribution Expenses   0.01   0.01   Less than 0.01  
Total Bond Market II Index Fund        
Management and Administrative Expenses   0.05%   0.05%   0.05%  
Marketing and Distribution Expenses   0.01   0.01   0.01  
Short-Term Bond Index Fund        
Management and Administrative Expenses   0.06%   0.06%   0.06%  
Marketing and Distribution Expenses   0.01   0.01   0.01  
Intermediate-Term Bond Index Fund        
Management and Administrative Expenses   0.06%   0.06%   0.06%  
Marketing and Distribution Expenses   0.01   0.01   0.01  
Long-Term Bond Index Fund 1        
Management and Administrative Expenses   0.07%   0.06%   0.07%  
Marketing and Distribution Expenses   0.01   0.01   0.01  
Inflation-Protected Securities Fund        
Management and Administrative Expenses   0.09%   0.09%   0.09%  
Marketing and Distribution Expenses   0.01   0.01   0.01  
1 The Fund’s Admiral Shares commenced operations on February 7, 2019.      

 

Officers and Trustees

Each Vanguard fund is governed by the board of trustees of its trust and a single set of officers. Consistent with the board’s corporate governance principles, the trustees believe that their primary responsibility is oversight of the management of each fund for the benefit of its shareholders, not day-to-day management. The trustees set broad policies for the funds; select investment advisors; monitor fund operations, regulatory compliance, performance, and costs; nominate and select new trustees; and elect fund officers. Vanguard manages the day-to-day operations of the funds under the direction of the board of trustees.

The trustees play an active role, as a full board and at the committee level, in overseeing risk management for the funds. The trustees delegate the day-to-day risk management of the funds to various groups, including portfolio review, investment management, risk management, compliance, legal, fund accounting, and fund financial services. These groups provide the trustees with regular reports regarding investment, valuation, liquidity, and compliance, as well as the risks associated with each. The trustees also oversee risk management for the funds through regular interactions with the funds’ internal and external auditors.

The full board participates in the funds’ risk oversight, in part, through the Vanguard funds’ compliance program, which covers the following broad areas of compliance: investment and other operations; recordkeeping; valuation and pricing; communications and disclosure; reporting and accounting; oversight of service providers; fund governance; and codes of ethics, insider trading controls, and protection of nonpublic information. The program seeks to identify and assess risk through various methods, including through regular interdisciplinary communications between compliance professionals and business personnel who participate on a daily basis in risk management on behalf of the funds. The funds’ chief compliance officer regularly provides reports to the board in writing and in person.

The audit committee of the board, which is composed of F . Joseph Loughrey, Mark Loughridge, Sarah Bloom Raskin, and Peter F. Volanakis, each of whom is an independent trustee, oversees management of financial risks and controls. The audit committee serves as the channel of communication between the independent auditors of the funds and the board with respect to financial statements and financial reporting processes, systems of internal control, and the audit process. Vanguard’s head of internal audit reports directly to the audit committee and provides reports to the committee in writing

B-32


 

and in person on a regular basis. Although the audit committee is responsible for overseeing the management of financial risks, the entire board is regularly informed of these risks through committee reports.

All of the trustees bring to each fund’s board a wealth of executive leadership experience derived from their service as executives (in many cases chief executive officers), board members, and leaders of diverse public operating companies, academic institutions, and other organizations. In determining whether an individual is qualified to serve as a trustee of the funds, the board considers a wide variety of information about the trustee, and multiple factors contribute to the board’s decision. Each trustee is determined to have the experience, skills, and attributes necessary to serve the funds and their shareholders because each trustee demonstrates an exceptional ability to consider complex business and financial matters, evaluate the relative importance and priority of issues, make decisions, and contribute effectively to the deliberations of the board. The board also considers the individual experience of each trustee and determines that the trustee’s professional experience, education, and background contribute to the diversity of perspectives on the board. The business acumen, experience, and objective thinking of the trustees are considered invaluable assets for Vanguard management and, ultimately, the Vanguard funds’ shareholders. The specific roles and experience of each board member that factor into this determination are presented on the following pages. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

      Principal Occupation(s)   Number of  
    Vanguard   During the Past Five Years,   Vanguard Funds  
  Position(s)   Funds’ Trustee/   Outside Directorships,   Overseen by  
Name, Year of Birth   Held With Funds   Officer Since   and Other Experience   Trustee/Officer  
Interested Trustee 1          
Mortimer J. Buckley   Chairman of the   January 2018   Chairman of the board (January 2019–present) of   210  
(1969)   Board, Chief     Vanguard and of each of the investment companies    
  Executive Officer,     served by Vanguard; chief executive officer (2018–    
  and President     present) of Vanguard; chief executive officer,    
      president, and trustee (2018 –present) of each of the    
      investment companies served by Vanguard; president    
      and director (2017–present) of Vanguard; and president    
      (2018 –present) of Vanguard Marketing Corporation.    
      Chief investment officer (2013–2017), managing    
      director (2002–2017), head of the Retail Investor Group    
      (2006–2012), and chief information officer (2001–2006)    
      of Vanguard. Chairman of the board (2011–2017) and    
      trustee (2009–2017) of the Children’s Hospital of    
      Philadelphia; trustee (2018–present) of The Shipley    
School.
 
1 Mr. Buckley is considered an “interested person” as defined in the 1940 Act because he is an officer of the Trust.    
Independent Trustees          
Emerson U. Fullwood   Trustee   January 2008   E xecutive chief staff and marketing officer for North   210  
(1948)       America and corporate vice president (retired 2008) of    
      Xerox Corporation (document management products    
      and services). Former president of the Worldwide    
      Channels Group, Latin America, and Worldwide    
      Customer Service and executive chief staff officer of    
      Developing Markets of Xerox. Executive in residence    
      and 2009–2010 Distinguished Minett Professor at the    
      Rochester Institute of Technology. D irector of SPX    
      FLOW, Inc. (multi-industry manufacturing). Director of    
      the University of Rochester Medical Center, the    
      Monroe Community College Foundation, the United    
      Way of Rochester, North Carolina A&T University, and    
      Roberts Wesleyan College. Trustee of the University of    
      Rochester.    

 

B-33


 

      Principal Occupation(s)   Number of  
    Vanguard   During the Past Five Years,   Vanguard Funds  
  Position(s)   Funds’ Trustee/   Outside Directorships,   Overseen by  
Name, Year of Birth   Held With Funds   Officer Since   and Other Experience   Trustee/Officer  
Amy Gutmann   Trustee   June 2006   P resident (2004–present) of the University of   210  
(1949)       Pennsylvania. Christopher H. Browne Distinguished    
      Professor of Political Science, School of Arts and    
      Sciences, and professor of communication,    
      Annenberg School for Communication, with secondary    
      faculty appointments in the Department of Philosophy,    
      School of Arts and Sciences, and at the Graduate    
      School of Education, University of Pennsylvania.    
      Trustee of the National Constitution Center.    
 
F. Joseph Loughrey   Trustee   October 2009   P resident and chief operating officer (retired 2009) and   210  
(1949)       vice chairman of the board (2008–2009) of Cummins    
      Inc. (industrial machinery). Chairman of the board of    
      Hillenbrand, Inc. (specialized consumer services) and    
      the Lumina Foundation . Director of the V Foundation    
      and Oxfam America . Member of the advisory council    
      for the College of Arts and Letters and chair of the    
      advisory board to the Kellogg Institute for International    
      Studies, both at the University of Notre Dame.    
 
Mark Loughridge   Lead Independent   March 2012   S enior vice president and chief financial officer (retired   210  
(1953)   Trustee     2013) of IBM (information technology services).    
      Fiduciary member of IBM’s Retirement Plan    
      Committee (2004–2013), senior vice president and    
      general manager (2002–2004) of IBM Global    
      Financing, vice president and controller (1998–2002) of    
      IBM, and a variety of other prior management roles at    
      IBM. Member of the Council on Chicago Booth.    
 
Scott C. Malpass   Trustee   March 2012   C hief investment officer (1989–present) and vice   210  
(1962)       president (1996–present) of the University of Notre    
      Dame. Assistant professor of finance at the Mendoza    
      College of Business, University of Notre Dame, and    
      member of the Notre Dame 403(b) Investment    
      Committee. Chairman of the board of TIFF Advisory    
      Services, Inc. Member of the board of Catholic    
      Investment Services, Inc. (investment advisors), the    
      board of advisors for Spruceview Capital Partners, and    
      the board of superintendence of the Institute for the    
      Works of Religion.    
 
Deanna Mulligan   Trustee   January 2018   P resident (2010–present) and chief executive officer   210  
(1963)       (2011–present) of The Guardian Life Insurance    
      Company of America . Chief operating officer (2010–    
      2011) and executive vice president (2008–2010) of    
      Individual Life and Disability of The Guardian Life    
      Insurance Company of America. Member of the board    
      of The Guardian Life Insurance Company of America,    
      the American Council of Life Insurers, the Partnership    
      for New York City (business leadership), and the    
      Committee Encouraging Corporate Philanthropy.    
      Trustee of the Economic Club of New York and the    
      Bruce Museum (arts and science). Member of the    
      Advisory Council for the Stanford Graduate School of    
      Business.    

 

B-34


 

      Principal Occupation(s)   Number of  
    Vanguard   During the Past Five Years,   Vanguard Funds  
  Position(s)   Funds’ Trustee/   Outside Directorships,   Overseen by  
Name, Year of Birth   Held With Funds   Officer Since   and Other Experience   Trustee/Officer  
André F. Perold   Trustee   December 2004   G eorge Gund Professor of Finance and Banking,   210  
(1952)       Emeritus at the Harvard Business School (retired    
      2011). Chief investment officer and co-managing    
      partner of HighVista Strategies LLC (private    
      investment firm). Board of Advisors and investment    
      committee member of the Museum of Fine Arts    
      Boston. Board member (2018–present) of RIT Capital    
      Partners (investment firm); investment committee    
      member of Partners Health Care System.    
 
Sarah Bloom Raskin   T rustee   January 2018   Deputy secretary (2014–2017) of the United States   210  
(1961)       Department of the Treasury. Governor (2010–2014) of    
      the Federal Reserve Board. Commissioner (2007–    
      2010) of financial regulation for the State of Maryland.    
      Member of the board of directors (2012–2014) of    
      Neighborhood Reinvestment Corporation. Director    
      (2017–present) of i(x) Investments, LLC; director    
      (2017–present) of Reserve Trust. Rubinstein Fellow    
      (2017–present) of Duke University; trustee (2017–    
      present) of Amherst College.    
 
Peter F. Volanakis   Trustee   July 2009   P resident and chief operating officer (retired 2010) of   210  
(1955)       Corning Incorporated (communications equipment)    
      and director of Corning Incorporated (2000–2010) and    
      Dow Corning (2001–2010). Director (2012) of SPX    
      Corporation (multi-industry manufacturing). Overseer    
      of the Amos Tuck School of Business Administration,    
      Dartmouth College (2001–2013). Chairman of the    
      board of trustees of Colby-Sawyer College. Member of    
      the Board of Hypertherm Inc. (industrial cutting    
      systems, software, and consumables).    
 
Executive Officers          
Glenn Booraem   Investment   February 2001   P rincipal of Vanguard. Investment stewardship officer   210  
(1967)   Stewardship     (2017–present), treasurer (2015–2017), controller    
  Officer     (2010–2015), and assistant controller (2001–2010) of    
      each of the investment companies served by    
      Vanguard.    
 
Christine M. Buchanan   Treasurer   November 2017   Principal of Vanguard and global head of Fund   210  
(1970)       Administration at Vanguard. Treasurer (2017–present)    
      of each of the investment companies served by    
      Vanguard. Partner (2005–2017) at KPMG LLP (audit,    
      tax, and advisory services).    
 
Thomas J. Higgins   Chief Financial   July 1998   P rincipal of Vanguard. Chief financial officer (2008–   210  
(1957)   Officer     present) and treasurer (1998–2008) of each of the    
      investment companies served by Vanguard.    
 
Peter Mahoney   Controller   May 2015   P rincipal of Vanguard. Controller (2015–present) of   210  
(1974)       each of the investment companies served by    
      Vanguard. Head of International Fund Services (2008–    
      2014) at Vanguard.    

 

B-35


 

      Principal Occupation(s)   Number of  
    Vanguard   During the Past Five Years,   Vanguard Funds  
  Position(s)   Funds’ Trustee/   Outside Directorships,   Overseen by  
Name, Year of Birth   Held With Funds   Officer Since   and Other Experience   Trustee/Officer  
Anne E. Robinson   Secretary   September 2016   General counsel (2016–present) of Vanguard.   210  
(1970)       Secretary (2016–present) of Vanguard and of each of    
      the investment companies served by Vanguard.    
      Managing director (2016–present) of Vanguard.    
      Director and senior vice president (2016–2018) of    
      Vanguard Marketing Corporation. Managing director    
      and general counsel of Global Cards and Consumer    
      Services (2014–2016) at Citigroup. Counsel (2003–    
      2014) at American Express.    
 
Michael Rollings   Finance Director   February 2017   F inance director (2017–present) and treasurer (2017) of   210  
(1963)       each of the investment companies served by    
      Vanguard. Managing director (2016–present) of    
      Vanguard. Chief financial officer (2016–present) of    
      Vanguard. Director (2016–present) of Vanguard    
      Marketing Corporation. Executive vice president and    
      chief financial officer (2006–2016) of MassMutual    
      Financial Group.    
 
John E. Schadl   Chief Compliance   March 2019   Principal of Vanguard. Chief compliance officer (2019–   210  
(1972)   Officer     present) of Vanguard and of each of the investment    
      companies served by Vanguard. Director, general    
      counsel, and audit committee member of Vanguard    
      Marketing Corporation and Vanguard National Trust    
      Company (2018–present).    

 

All but one of the trustees are independent. The independent trustees designate a lead independent truste e. The lead independent trustee is a spokesperson and principal point of contact for the independent trustees and is responsible for coordinating the activities of the independent trustees, including calling regular executive sessions of the independent trustees; developing the agenda of each meeting together with the chairman; and chairing the meetings of the independent trustees. The lead independent trustee also chairs the meetings of the audit, compensation, and nominating committees. The board also has two investment committees, which consist of independent trustees and the sole in terested trustee.

The independent trustees appoint the chairman of the board. The roles of chairman of the board and chief executive officer currently are held by the same person; as a result, the chairman of the board is an “interested” trustee. The independent trustees generally believe that the Vanguard funds’ chief executive officer is best qualified to serve as chairman and that fund shareholders benefit from this leadership structure through accountability and strong day-to-day leadership.

B oard Committees: The Trust‘s board has the following committees:

  • Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each fund. The following independent trustees serve as members of the committee : M r. Loughrey, Mr. Loughridge, Ms. Raskin , and Mr. Volanakis. The committee held six meetings during the Trust’s fiscal year ended December 31, 2018.
  • Compensation Committee: This committee oversees the compensation programs established by each fund for the benefit of its trustees. All independent trustees serve as members of the committee. The committee held one meeting during the Trust’s fiscal year ended December 31, 2018.
  • Investment Committees: These committees assist the board in its oversight of investment advisors to the funds and in the review and evaluation of materials relating to the board’s consideration of investment advisory agreements with the funds. Each trustee serves on one of two investment committees. Each investment committee held four meetings during the Trust’s fiscal year ended December 31, 2018.

B-36


 

  • Nominating Committee: This committee nominates candidates for election to the board of trustees of each fund. The committee also has the authority to recommend the removal of any trustee. All independent trustees serve as members of the committee. The committee held three meetings during the Trust’s fiscal year ended December 31, 2018.

The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Loughridge, chairman of the committee.

Trustee Compensation

The same individuals serve as trustees of all Vanguard funds and each fund pays a proportionate share of the trustees’ compensation. Vanguard funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds.

Independent Trustees. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways:

  • The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings.
  • The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings.
  • Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee’s separate account was generally equal to the net present value of the benefits he or she had accrued under the trustees’ former retirement plan. Each eligible trustee’s separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan.

“Interested” Trustee . Mr. Buckley serves as trustee, but is not paid in this capacity. He is, however, paid in his role as an officer of Vanguard.

Compensation Table. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Funds for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement and the total amount of compensation paid to each trustee by all Vanguard funds.

B-37


 

VANGUARD BOND INDEX FUNDS
TRUSTEES’ COMPENSATION TABLE
 
    Pension or Retirement   Accrued Annual   Total Compensation  
  Aggregate   Benefits Accrued   Retirement   From All Vanguard  
  Compensation   as Part of the   Benefit at   Funds Paid  
Trustee   From the Funds 1   Funds’ Expenses 1   January 1, 2019 2   to Trustees 3  
F. William McNabb III 4          
Mortimer J. Buckley 5          
Emerson U. Fullwood   $23,395       $287,500  
Amy Gutmann   23,395       287,500  
JoAnn Heffernan Heisen 4   25,023   $496   $8,678   307,500  
F. Joseph Loughrey   25,023       307,500  
Mark Loughridge   29,093       357,500  
Scott C. Malpass   23,395       280,530  
Deanna Mulligan 5   23,395       287,500  
André F. Perold   23,395       287,500  
Sarah Bloom Raskin 5   25,023       307,500  
Peter F. Volanakis   25,023       307,500  

 

1       The amounts shown in this column are based on the Trust‘s fiscal year ended December 31, 2018. Each Fund within the Trust is responsible for a proportionate share of these amounts.
2       Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month following the trustee’s retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan.
3       The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 212 Vanguard funds for the 2018 calendar year.
4       Mr. McNabb and Ms. Heisen retired from service effective December 31, 2018.
5       Mr. Buckley, Ms. Mulligan, and Ms. Raskin began service effective January 1, 2018 .

Ownership of Fund Shares

All current trustees all ocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee’s ownership of shares of each Fund and of all Vanguard funds served by the trustee as of December 31, 2018 .

    Dollar Range   Aggregate Dollar Range of  
    of Fund Shares   Vanguard Fund Shares  
Vanguard Fund   Trustee   Owned by Trustee   Owned by Trustee  
Total Bond Market Index Fund   Mortimer J. Buckley     Over $100,000  
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann   Over $100,000   Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge   Over $100,000   Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin     Over $100,000  
  Peter F. Volanakis     Over $100,000  

 

B-38


 

    Dollar Range   Aggregate Dollar Range of  
    of Fund Shares   Vanguard Fund Shares  
Vanguard Fund   Trustee   Owned by Trustee   Owned by Trustee  
Total Bond Market II Index Fund   Mortimer J. Buckley     Over $100,000  
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann     Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge     Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin     Over $100,000  
  Peter F. Volanakis     Over $100,000  
 
Short-Term Bond Index Fund   Mortimer J. Buckley     Over $100,000  
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann     Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge     Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin   $10,001–$50,000   Over $100,000  
  Peter F. Volanakis     Over $100,000  
 
Intermediate-Term Bond Index Fund   Mortimer J. Buckley      
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann   Over $100,000   Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge     Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin   $50,001–-$100,000   Over $100,000  
  Peter F. Volanakis     Over $100,000  
 
Long-Term Bond Index Fund   Mortimer J. Buckley     Over $100,000  
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann     Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge     Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin     Over $100,000  
  Peter F. Volanakis     Over $100,000  

 

B-39


 

    Dollar Range   Aggregate Dollar Range of  
    of Fund Shares   Vanguard Fund Shares  
Vanguard Fund   Trustee   Owned by Trustee   Owned by Trustee  
Inflation-Protected Securities Fund   Mortimer J. Buckley     Over $100,000  
  Emerson U. Fullwood     Over $100,000  
  Amy Gutmann     Over $100,000  
  F. Joseph Loughrey     Over $100,000  
  Mark Loughridge     Over $100,000  
  Scott C. Malpass     Over $100,000  
  Deanna Mulligan     Over $100,000  
  André F. Perold     Over $100,000  
  Sarah Bloom Raskin     Over $100,000  
  Peter F. Volanakis     Over $100,000  

 

As of March 31, 2019, the trustees and officers of the funds owned, in the aggregate, less than 1% of each class of each fund’s outstanding shares.

As of March 31, 2019, the following owned of record 5% or more of the outstanding shares of each class (other than ETF Shares):

Vanguard Total Bond Market Index Fund—Investor Shares: Charles Schwab & Co., Inc., San Francisco, CA (12.48%), National Financial Services LLC, Jersey City, NJ (10.90%); Vanguard Total Bond Market Index Fund—Admiral Shares: Charles Schwab & Co., Inc., San Francisco, CA (5.35%); Vanguard Total Bond Market Index Fund—Institutional Shares: Fidelity Investments Institutional Operations Co., Inc., Covington, KY (13.16%), Charles Schwab & Co., Inc., San Francisco, CA (6.78%), National Financial Services LLC, Jersey City, NJ (5.38%); Vanguard Total Bond Market Index Fund—Institutional Plus Shares: Fidelity Investments Institutional Operations Co., Inc., Covington, KY (12.06%), Charles Schwab & Co., Inc., San Francisco, CA (6.84%), State of Utah Educational Savings Plan, Salt Lake City, UT (6.83%); Vanguard Total Bond Market Index Fund—Institutional Select Shares: Vanguard Institutional Total Bond Market Index Trust, Valley Forge, PA (99.91%); Vanguard Total Bond Market II Index Fund—Investor Shares: Vanguard Target Retirement 2025 Fund, Valley Forge, PA (10.98%), Vanguard Target Retirement 2020 Fund, Valley Forge, PA (9.18%), Vanguard Institutional Target Retirement 2025 Fund, Valley Forge, PA (8.08%), Vanguard Target Retirement 2030 Fund, Valley Forge, PA (7.73%), Vanguard Institutional Target Retirement 2020 Fund, Valley Forge, PA (6.66%), Vanguard Institutional Target Retirement 2030 Fund, Valley Forge, PA (6.13%), Vanguard Target Retirement Income Fund, Valley Forge, PA (5.98%), Vanguard Target Retirement 2035 Fund, Valley Forge, PA (5.59%), Vanguard Target Retirement 2015 Fund, Valley Forge, PA (5.17%); Vanguard Total Bond Market II Index Fund—Institutional Shares: Vanguard Target Retirement Trust 2025, Valley Forge, PA (18.11%), Vanguard Target Retirement Trust 2030, Valley Forge, PA (13.78%), Vanguard Target Retirement Trust 2020, Valley Forge, PA (13.24%), Vanguard Target Retirement Trust 2035, Valley Forge, PA (9.71%), Vanguard Target Retirement Trust 2015, Valley Forge, PA (5.47%), Vanguard Target Retirement Trust 2040, Valley Forge, PA (5.46%), Vanguard Target Retirement Trust Income, Valley Forge, PA (5.23%); Vanguard Short-Term Bond Index Fund—Investor Shares: Charles Schwab & Co., Inc., San Francisco, CA (25.97%), National Financial Services LLC, Jersey City, NJ (18.81%); Vanguard Short-Term Bond Index Fund—Admiral Shares: Charles Schwab & Co., Inc., San Francisco, CA (16.73%), National Financial Services LLC, Jersey City, NJ (9.80%); Vanguard Short-Term Bond Index Fund—Institutional Shares: National Financial Services LLC, Jersey City, NJ (11.05%), Fidelity Investments Institutional Operations Co., Inc., Covington, KY (6.68%); Vanguard Short-Term Bond Index Fund—Institutional Plus Shares: Fidelity Investments Institutional Operations Co., Inc., Covington, KY (15.62%), T. Rowe Price Retirement Plan Services Inc., FBO Eastman Kodak Employees Savings and Investment Plan, Owings Mills, MD (12.75%), MetLife, FBO Kaiser Permanente, New York, NY (5.41%), Ubatco & Co., FBO Bright Start, Lincoln, NE (5.27%); Vanguard Intermediate-Term Bond Index Fund—Investor Shares: National Financial Services LLC, Jersey City, NJ (16.69%), Charles Schwab & Co., Inc., San Francisco, CA (16.58%); Vanguard Intermediate-Term Bond Index Fund—Admiral Shares: Charles Schwab & Co., Inc., San Francisco, CA (6.95%), National Financial Services LLC, Jersey City, NJ (5.46%); Vanguard Intermediate-Term Bond Index Fund—Institutional Shares: National Financial Services LLC, Jersey City, NJ (10.91%), State Street Bank, TR Transamerica Retirement Solutions Corporation, Harrison, NY (8.37%), Charles Schwab & Co., Inc., San Francisco, CA (7.75%), Fidelity Investments Institutional Operations Co., Inc., Covington, KY (6.99%), Minnesota Mutual Life Insurance, Saint Paul, MN (6.04%); Vanguard Intermediate-Term Bond Index Fund—Institutional Plus Shares: Brown

B-40


 

Brothers Harriman & Company, A/C 5491816, New York, NY (40.10%), Brown Brothers Harriman & Company, A/C 6661110, New York, NY (21.84%), Fidelity Investments Institutional Operations Co., Inc., Covington, KY (9.03%), Great West Trust Co., FBO DTE Energy Company Savings and Stock Ownership Plan, Overlook Park, KS (7.83%), Lincoln Retirement Services Company, FBO MaineHealth 403B Retirement Plan, Fort Wayne, IN (7.06%), Mitra & Company Exp., Green Bay, WI (6.24%), Brown Brothers Harriman & Company, A/C 6661052, New York, NY (5.78%); Vanguard Long-Term Bond Index Fund—Institutional Shares: HOCO, FBO NON FID ERISA, Kansas City, MO (14.70%), National Financial Services LLC, Jersey City, NJ (8.91%), Capinco, Milwaukee, WI (8.04%), State Street Bank, TR Transamerica Retirement Solutions Corporation, Harrison, NY (5.35%); Vanguard Long-Term Bond Index Fund—Institutional Plus Shares: National Financial Services LLC, Jersey City, NJ (23.09%), Vanguard Fiduciary Trust Co., FBO Munich Reinsurance America Inc. Pension Plan, Wayne, PA (13.64%), Mac & Co., A/C 747087, Pittsburgh, PA (12.61%), Fidelity Investments Institutional Operations Co., Inc., Covington, KY (11.01%), M&T Bank, FBO Moog Inc. Employees Retirement Plan, Oaks, PA (7.00%), Northern Trust Company, FBO Andeavor Pension Plan Trust, Chicago, IL (6.33%), St. Luke’s Hospital of Bethlehem, Defined Benefit Pension Plan, Bethlehem, PA (6.03%), Suntrust Bank, FBO Deloitte & Touche Partners, A/C 7914069, Oaks, PA (5.83%), Stanford University Staff Retirement Annuity Plan, Wayne, PA (5.21%), Northern Trust Company, FBO The McClatchy Company, Chicago, IL (5.07%); Vanguard Inflation-Protected Securities Fund—Investor Shares: Charles Schwab & Co., Inc., San Francisco, CA (15.99%), National Financial Services LLC, Jersey City, NJ (14.58%); Vanguard Inflation-Protected Securities Fund—Admiral Shares: Charles Schwab & Co., Inc., San Francisco, CA (14.40%), National Financial Services LLC, Jersey City, NJ (11.56%); Vanguard Inflation-Protected Securities Fund—Institutional Shares: Fidelity Investments Institutional Operations Co., Inc., Covington, KY (10.41%), National Financial Services LLC, Jersey City, NJ (5.37%), TIAA, FSB, Saint Louis, MO (5.21%).

Although the Funds do not have information concerning the beneficial ownership of shares held in the names of Depository Trust Company (DTC) participants, as of March 31, 2019, the name and percentage ownership of each DTC participant that owned of record 5% or more of the outstanding ETF Shares of a Fund were as follows:

Vanguard Total Bond Market Index Fund—ETF Shares: State Street Bank and Trust Company (15.01%), Edward D. Jones & Co. (11.46%), Charles Schwab & Co., Inc. (9.48%), Pershing LLC (8.39%), National Financial Services LLC (8.06%), TD Ameritrade Clearing, Inc. (5.84%), Morgan Stanley DW Inc. (5.41%), Vanguard Marketing Corporation (5.29%); Vanguard Short-Term Bond Index Fund—ETF Shares: Pershing LLC (14.47%), Morgan Stanley DW Inc. (10.61%), National Financial Services LLC (10.40%), Merrill Lynch, Pierce, Fenner & Smith Inc. (9.23%), Charles Schwab & Co., Inc. (9.10%), TD Ameritrade Clearing, Inc. (7.65%); Vanguard Intermediate-Term Bond Index Fund—ETF Shares: Merrill Lynch, Pierce, Fenner & Smith Inc. (28.27%), Edward D. Jones & Co. (12.00%), National Financial Services LLC (7.91%), Wells Fargo Bank, NA (7.61%), TD Ameritrade Clearing, Inc. (6.74%), Charles Schwab & Co., Inc. (5.55%); Vanguard Long-Term Bond Index Fund—ETF Shares: National Financial Services LLC (20.08%), TD Ameritrade Clearing, Inc. (16.31%), Pershing LLC (8.89%), Charles Schwab & Co., Inc. (8.34%), Vanguard Marketing Corporation (7.67%), Morgan Stanley DW Inc. (7.01%).

Portfolio Holdings Disclosure Policies and Procedures

Introduction

Vanguard and the boards of trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures) to govern the disclosure of the portfolio holdings of each Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund shareholders, on the one hand, and those of the fund’s investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately addresses the potential for material conflicts of interest.

B-41


 

The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the chief compliance officer of Vanguard and the Vanguard funds; (2) considering reports and recommendations by the chief compliance officer concerning any material compliance matters (as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies; and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice at their sole discretion. For purposes of the Policies and Procedures, the term “portfolio holdings” means the equity and debt securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean the cash investments, derivatives, and other investment positions (collectively, other investment positions) held by the fund.

Online Disclosure of Ten Largest Stock Holdings

Each actively managed Vanguard fund generally will seek to disclose the fund’s ten largest stock portfolio holdings and the percentage of the fund’s total assets that each of these holdings represents as of the end of the most recent calendar quarter (quarter-end ten largest stock holdings with weightings) online at vanguard.com, in the “Portfolio” section of the fund’s Portfolio & Management page, 15 calendar days after the end of the calendar quarter. Each Vanguard index fund generally will seek to disclose the fund’s ten largest stock portfolio holdings and the percentage of the fund’s total assets that each of these holdings represents as of the end of the most recent month (month-end ten largest stock holdings with weightings) online at vanguard.com , in the “Portfolio” section of the fund’s Portfolio & Management page, 15 calendar days after the end of the month. In addition, Vanguard funds generally will seek to disclose the fund’s ten largest stock portfolio holdings and the aggregate percentage of the fund’s total assets (and, for balanced funds, the aggregate percentage of the fund’s equity securities) that these holdings represent as of the end of the most recent month (month-end ten largest stock holdings) online at vanguard.com, in the “Portfolio” section of the fund’s Portfolio & Management page, 10 business days after the end of the month. Together, the quarter-end and month-end ten largest stock holdings are referred to as the ten largest stock holdings. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons.

Online Disclosure of Complete Portfolio Holdings

Each actively managed Vanguard fund, unless otherwise stated, generally will seek to disclose the fund’s complete portfolio holdings as of the end of the most recent calendar quarter online at vanguard.com, in the “Portfolio” section of the fund’s Portfolio & Management page, 30 calendar days after the end of the calendar quarter. Each Vanguard fund relying on exemptive relief from the Securities and Exchange Commission (SEC) permitting the operation of actively-managed ETFs generally will seek to disclose complete portfolio holdings, including other investment positions, at the beginning of each business day. These portfolio holdings, including other investment positions, will be disclosed online at vanguard.com in the “Portfolio” section of the fund’s Portfolio & Management page. In accordance with Rule 2a-7 under the 1940 Act, each of the Vanguard money market funds will disclose the fund’s complete portfolio holdings as of the last business day of the prior month online at vanguard.com, in the “Portfolio” section of the fund’s Portfolio & Management page, no later than the fifth business day of the current month. The complete portfolio holdings information for money market funds will remain available online for at least six months after the initial posting. Vanguard Market Neutral Fund and Vanguard Alternative Strategies Fund generally will seek to disclose the Fund’s complete portfolio holdings as of the end of the most recent calendar quarter online at vanguard.com, in the “Portfolio” section of the Fund’s Portfolio & Management page, 60 calendar days after the end of the calendar quarter. Each Vanguard index fund generally will seek to disclose the fund’s complete portfolio holdings as of the end of the most recent month online at vanguard.com , in the “Portfolio” section of the fund’s Portfolio & Management page, 15 calendar days after the end of the month. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. Vanguard will review complete portfolio holdings before disclosure is made and, except with respect to the complete portfolio holdings of the Vanguard money market funds, may withhold any portion of the fund’s complete portfolio holdings from disclosure when deemed to be in the best interests of the fund after consultation with a Vanguard fund’s investment advisor.

B-42


 

Disclosure of Complete Portfolio Holdings to Service Providers Subject to Confidentiality and Trading Restrictions

Vanguard, for legitimate business purposes, may disclose Vanguard fund complete portfolio holdings at times it deems necessary and appropriate to rating and ranking organizations; financial printers; proxy voting service providers; pricing information vendors; issuers of guaranteed investment contracts for stable value portfolios; third parties that deliver analytical, statistical, or consulting services; and other third parties that provide services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information.

The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to a Service Provider varies and may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguard’s Portfolio Review Department or Legal and Compliance Division. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives.

Currently, Vanguard discloses Vanguard fund complete portfolio holdings t o the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Abel/Noser Corporation; Advisor Software, Inc.; Alcom Printing Group Inc.; Apple Press, L.C.; Bloomberg L.P.; Brilliant Graphics, Inc.; Broadridge Financial Solutions, Inc.; Brown Brothers Harriman & Co.; Canon Business Process Services; FactSet Research Systems Inc.; Innovation Printing & Communications; Institutional Shareholder Services, Inc.; Intelligencer Printing Company; Investment Technology Group, Inc.; Lipper, Inc.; Markit WSO Corporation; McMunn Associates Inc.; Reuters America Inc.; R.R. Donnelley, Inc.; State Street Bank and Trust Company; Trade Informatics LLC; Triune Color Corporation; and Tursack Printing Inc.

Disclosure of Complete Portfolio Holdings to Vanguard Affiliates and Certain Fiduciaries Subject to Confidentiality and Trading Restrictions

Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, Affiliates and Fiduciaries) for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons’ continuing legal duty of confidentiality and legal duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement, or under applicable laws, rules, and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent, or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm, or outside legal counsel retained by Vanguard, a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the advisor is in merger or acquisition talks with a Vanguard fund’s current advisor; and (5) a newly hired investment advisor or sub-advisor to whom complete portfolio holdings are disclosed prior to the time it commences its duties.

The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure between and among Affiliates and Fiduciaries varies and may be as frequent as daily, with no lag. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives. Disclosure of Vanguard fund complete portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be authorized by a Vanguard fund officer or a Principal of Vanguard.

B-43


 

Currently, Vanguard discloses Vanguard fund complete portfolio holdings t o the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard and each investment advisor, custodian, and independent registered public accounting firm identified in each fund’s Statement of Additional Information.

Disclosure of Portfolio Holdings to Broker-Dealers in the Normal Course of Managing a Fund’s Assets

An investment advisor, administrator, or custodian for a Vanguard fund may, for legitimate business purposes within the scope of its official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up the fund to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities and derivatives transactions with or through such broker-dealers subject to the broker-dealer’s legal obligation not to use or disclose material nonpublic information concerning the fund’s portfolio holdings, other investment positions, securities transactions, or derivatives transactions without the consent of the fund or its agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio holdings or other investment positions by Vanguard to broker-dealers must be authorized by a Vanguard fund officer or a Principal of Vanguard.

Disclosure of Nonmaterial Information

The Policies and Procedures permit Vanguard fund officers, Vanguard fund portfolio managers, and other Vanguard representatives (collectively, Approved Vanguard Representatives) to disclose any views, opinions, judgments, advice, or commentary, or any analytical, statistical, performance, or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the end of the most recent calendar quarter (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. Disclosure of commentary and analysis or recent portfolio changes by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund officer or a Principal of Vanguard.

An Approved Vanguard Representative must make a good faith determination whether the information constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases recent portfolio changes that involve a few or even several securities in a diversified portfolio or commentary and analysis would be immaterial and would not convey any advantage to a recipient in making an investment decision concerning a Vanguard fund. Nonexclusive examples of commentary and analysis about a Vanguard fund include (1) the allocation of the fund’s portfolio holdings and other investment positions among various asset classes, sectors, industries, and countries; (2) the characteristics of the stock and bond components of the fund’s portfolio holdings and other investment positions; (3) the attribution of fund returns by asset class, sector, industry, and country; and (4) the volatility characteristics of the fund. Approved Vanguard Representatives may, at their sole discretion, deny any request for information made by any person, and may do so for any reason or for no reason. Approved Vanguard Representatives include, for purposes of the Policies and Procedures, persons employed by or associated with Vanguard or a subsidiary of Vanguard who have been authorized by Vanguard’s Portfolio Review Department to disclose recent portfolio changes and/or commentary and analysis in accordance with the Policies and Procedures.

Disclosure of Portfolio Holdings, Including Other Investment Positions, in Accordance with SEC Exemptive Orders

Vanguard’s Fund Financial Services unit may disclose to the National Securities Clearing Corporation (NSCC), Authorized Participants, and other market makers the daily portfolio composition files (PCFs) that identify a basket of specified securities that may overlap with the actual or expected portfolio holdings of the Vanguard funds that offer a class of shares known as Vanguard ETF Shares (ETF Funds). Each Vanguard fund relying on exemptive relief from the SEC permitting the operation of actively-managed ETFs generally will seek to disclose complete portfolio holdings, including other investment positions, at the beginning of each business day. These portfolio holdings, including other investment positions, will be

B-44


 

disclosed online at vanguard.com in the “Portfolio” section of the fund’s Portfolio & Management page. The disclosure of PCFs and portfolio holdings, including other investment positions, will be in accordance with the terms and conditions of related exemptive orders (Vanguard ETF Exemptive Orders) issued by the SEC, as described in this section.

Unlike the conventional classes of shares issued by ETF Funds, the ETF Shares are listed for trading on a national securities exchange. Each ETF Fund issues and redeems ETF Shares in large blocks, known as “Creation Units.” To purchase or redeem a Creation Unit, an investor must be an “Authorized Participant” or the investor must purchase or redeem through a broker-dealer that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) that has executed a “Participant Agreement” with Vanguard Marketing Corporation. Each ETF Fund issues Creation Units in exchange for a “portfolio deposit” consisting of a basket of specified securities (Deposit Securities) and a cash payment (Balancing Amount). Each ETF Fund also redeems Creation Units in kind; an investor who tenders a Creation Unit will receive, as redemption proceeds, a basket of specified securities together with a Balancing Amount.

In connection with the creation and redemption process, and in accordance with the terms and conditions of the Vanguard ETF Exemptive Orders, Vanguard makes available to the NSCC (a clearing agency registered with the SEC and affiliated with the DTC), for dissemination to NSCC participants on each business day prior to the opening of trading on the listing exchange, a PCF containing a list of the names and the required number of shares of each Deposit Security for each ETF Fund. In addition, the listing exchange disseminates (1) continuously throughout the trading day, through the facilities of the Consolidated Tape Association, the market value of an ETF Share; and (2) every 15 seconds throughout the trading day, a calculation of the estimated NAV of an ETF Share (expected to be accurate to within a few basis points). Comparing these two figures allows an investor to determine whether, and to what extent, ETF Shares are selling at a premium or at a discount to NAV. ETF Shares are listed on the exchange and traded on the secondary market in the same manner as other equity securities. The price of ETF Shares trading on the secondary market is based on a current bid/offer market.

In addition to making PCFs available to the NSCC, as previously described, Vanguard’s Fund Financial Services unit may disclose the PCF for any ETF Fund to any person, or online at vanguard.com to all categories of persons, if (1) such disclosure serves a legitimate business purpose and (2) such disclosure does not constitute material nonpublic information. Vanguard’s Fund Financial Services unit must make a good faith determination whether the PCF for any ETF Fund constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases the PCF for any ETF Fund would be immaterial and would not convey any advantage to the recipient in making an investment decision concerning the ETF Fund, if sufficient time has passed between the date of the PCF and the date on which the PCF is disclosed. Vanguard’s Fund Financial Services unit may, at its sole discretion, determine whether to deny any request for the PCF for any ETF Fund made by any person, and may do so for any reason or for no reason. Disclosure of a PCF must be authorized by a Vanguard fund officer or a Principal in Vanguard’s Fund Financial Services unit.

Disclosure of Portfolio Holdings Related Information to the Issuer of a Security for Legitimate Business Purposes

Vanguard, at its sole discretion, may disclose portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security if the issuer presents, to the satisfaction of Vanguard’s Fund Financial Services unit, convincing evidence that the issuer has a legitimate business purpose for such information. Disclosure of this information to an issuer is conditioned on the issuer being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which portfolio holdings information concerning a security may be disclosed to the issuer of such security, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the issuer, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to an issuer cannot be determined in advance of a specific request and will vary based upon the particular facts and circumstances and the legitimate business purposes, but in unusual situations could be as frequent as daily, with no lag. Disclosure of portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security must be authorized by a Vanguard fund officer or a Principal in Vanguard’s Portfolio Review Department or Legal and Compliance Division.

B-45


 

Disclosure of Portfolio Holdings as Required by Applicable Law

Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up a fund shall be disclosed to any person as required by applicable laws, rules, and regulations. Examples of such required disclosure include, but are not limited to, disclosure of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with seeking recovery on defaulted bonds in a federal bankruptcy case, (3) in connection with a lawsuit, or (4) as required by court order. Disclosure of portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as required by applicable laws, rules, and regulations must be authorized by a Vanguard fund officer or a Principal of Vanguard.

Prohibitions on Disclosure of Portfolio Holdings

No person is authorized to disclose Vanguard fund portfolio holdings or other investment positions (whether online at vanguard.com , in writing, by fax, by e-mail, orally, or by other means) except in accordance with the Policies and Procedures. In addition, no person is authorized to make disclosure pursuant to the Policies and Procedures if such disclosure is otherwise unlawful under the antifraud provisions of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act). Furthermore, Vanguard’s management, at its sole discretion, may determine not to disclose portfolio holdings or other investment positions that make up a Vanguard fund to any person who would otherwise be eligible to receive such information under the Policies and Procedures, or may determine to make such disclosures publicly as provided by the Policies and Procedures.

Prohibitions on Receipt of Compensation or Other Consideration

The Policies and Procedures prohibit a Vanguard fund, its investment advisor, and any other person or entity from paying or receiving any compensation or other consideration of any type for the purpose of obtaining disclosure of Vanguard fund portfolio holdings or other investment positions. “Consideration” includes any agreement to maintain assets in the fund or in other investment companies or accounts managed by the investment advisor or by any affiliated person of the investment advisor.

INVESTMENT ADVISORY AND OTHER SERVICES

The Funds receive all investment advisory services from Vanguard, through its Fixed Income Group. These services are provided by an experienced investment advisory staff employed directly by Vanguard. The compensation and other expenses of the advisory staff are allocated among the funds utilizing these services.

During the fiscal years ended December 31, 2016, 2017, and 2018, the Funds incurred the following approximate advisory expenses:

Vanguard Fund   2016   2017   2018  
Total Bond Market Index Fund   $4,365,000   $5,822,000   $6,089,000  
Total Bond Market II Index Fund   2,690,000   4,175,000   4,825,000  
Short-Term Bond Index Fund   1,183,000   1,564,000   1,553,000  
Intermediate-Term Bond Index Fund   711,000   1,027,000   996,000  
Long-Term Bond Index Fund 1   255,000   326,000   324,000  
Inflation-Protected Securities Fund   2,562,000   3,413,000   3,425,000  
1 The Fund’s Admiral Shares commenced operations on February 7, 2019.        

 

1. Other Accounts Managed

Joshua C. Barrickman manages Vanguard Intermediate-Term Bond Index Fund, Vanguard Total Bond Market Index Fund, Vanguard Total Bond Market II Index Fund, Vanguard Long-Term Bond Index Fund, and Vanguard Short-Term Bond Index Fund; as of December 31, 2018, the Funds collectively held assets of $ 454 billion. As of December 31, 2018, Mr. Barrickman also managed 6 other registered investment companies with total assets of $ 17 billion and co-managed all or a portion of 10 other registered investment companies with total assets of $ 236 billion (none of which had advisory fees based on account performance).

B-46


 

Gemma Wright-Casparius manages Vanguard Inflation-Protected Securities Fund; as of December 31, 2018, the Fund held assets of $26.8 billion. As of December 31, 2018, Ms. Wright-Casparius also managed 3 other registered investment companies with total assets of $ 16.7 billion and co-managed 2 other registered investment companies with total assets of $ 17.8 billion (none of which had advisory fees based on account performance).

2. Material Conflicts of Interest

At Vanguard, individual portfolio managers may manage multiple accounts for multiple clients. In addition to mutual funds, these accounts may include separate accounts, collective trusts, and offshore funds. Managing multiple funds or accounts may give rise to potential conflicts of interest, including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Vanguard manages potential conflicts between funds or accounts through allocation policies and procedures, internal review processes, and oversight by trustees and independent third parties. Vanguard has developed trade allocation procedures and controls to ensure that no one client, regardless of type, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities.

3. Description of Compensation

All Vanguard portfolio managers are Vanguard employees. This section describes the compensation of the Vanguard employees who manage Vanguard mutual funds. As of December 31, 2018, a Vanguard portfolio manager’s compensation generally consists of base salary, bonus, and payments under Vanguard’s long-term incentive compensation program. In addition, portfolio managers are eligible for the standard retirement benefits and health and welfare benefits available to all Vanguard employees. Also, certain portfolio managers may be eligible for additional retirement benefits under several supplemental retirement plans that Vanguard adopted in the 1980s to restore dollar-for-dollar the benefits of management employees that had been cut back solely as a result of tax law changes. These plans are structured to provide the same retirement benefits as the standard retirement plans.

In the case of portfolio managers responsible for managing multiple Vanguard funds or accounts, the method used to determine their compensation is the same for all funds and investment accounts. A portfolio manager’s base salary is determined by the manager’s experience and performance in the role, taking into account the ongoing compensation benchmark analyses performed by Vanguard’s Human Resources Department. A portfolio manager’s base salary is generally a fixed amount that may change as a result of an annual review, upon assumption of new duties, or in response to a market adjustment of the position.

A portfolio manager’s bonus is determined by a number of factors. One factor is gross, pre-tax performance of the fund relative to expectations for how the fund should have performed, given the fund’s investment objective, policies, strategies, l imitations, and the market environment during the measurement period. This performance factor is not based on the amount of assets held in the fund’s portfolio. For the Inflation-Protected Securities Fund, the performance factor depends on how successfully the portfolio manager outperforms these expectations and maintains the risk parameters of the Fund generally over a three-year period. For the Total Bond Market Index, Total Bond Market II Index, Short-Term Bond Index, Intermediate-Term Bond Index, and Long-Term Bond Index Funds, the performance factor depends on how closely the portfolio manager tracks the Fund’s benchmark index over a one-year period. Additional factors include the portfolio manager’s contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group. The target bonus is expressed as a percentage of base salary. The actual bonus paid may be more or less than the target bonus, based on how well the manager satisfies the objectives previously described. The bonus is paid on an annual basis.

Under the long-term incentive compensation program, all full-time employees receive a payment from Vanguard’s long-term incentive compensation plan based on their years of service, job level, and if applicable, management responsibilities. Each year, Vanguard’s independent directors determine the amount of the long-term incentive compensation award for that year based on the investment performance of the Vanguard funds relative to competitors and Vanguard’s operating efficiencies in providing services to the Vanguard funds.

B-47


 

4. Ownership of Securities

Vanguard employees, including portfolio managers, allocate their investments among the various Vanguard funds or collective investment trusts that may invest in Vanguard funds based on their own individual investment needs and goals. Vanguard employees, as a group, invest a sizable portion of their personal assets in Vanguard funds. As of December 31, 2018, Vanguard employees collectively invested more than $6.2 billion in Vanguard funds or collective investment trusts that may invest in Vanguard fund s.

As of December 31, 2018, Mr. Barrickman owned shares of Vanguard Intermediate-Term Bond Index Fund in the $100,001–$500,000 range and shares of Vanguard Total Bond Market Index Fund in the $1–$10,000 range.

Ms. Wright-Casparius did not own any shares of Vanguard Inflation-Protected Securities Index Fund .

Duration and Termination of Investment Advisory Agreement

Vanguard provides investment advisory services to the Funds pursuant to the terms of the Fifth Amended and Restated Funds’ Service Agreement. This agreement will continue in full force and effect until terminated or amended by mutual agreement of the Vanguard funds and Vanguard.

PORTFOLIO TRANSACTIONS

The advisor decides which securities to buy and sell on behalf of a Fund and then selects the brokers or dealers that will execute the trades on an agency basis or the dealers with whom the trades will be effected on a principal basis. For each trade, the advisor must select a broker-dealer that it believes will provide “best execution.” Best execution does not necessarily mean paying the lowest spread or commission rate available. In seeking best execution, the SEC has said that an advisor should consider the full range of a broker-dealer’s services. The factors considered by the advisor in seeking best execution include, but are not limited to, the broker-dealer’s execution capability, clearance and settlement services, commission rate, trading expertise, willingness and ability to commit capital, ability to provide anonymity, financial responsibility, reputation and integrity, responsiveness, access to underwritten offerings and secondary markets, and access to company management, as well as the value of any research provided by the broker-dealer. In assessing which broker-dealer can provide best execution for a particular trade, the advisor also may consider the timing and size of the order and available liquidity and current market conditions. Subject to applicable legal requirements, the advisor may select a broker based partly on brokerage or research services provided to the advisor and its clients, including the Funds. The advisor may cause a Fund to pay a higher commission than other brokers would charge if the advisor determines in good faith that the amount of the commission is reasonable in relation to the value of services provided. The advisor also may receive brokerage or research services from broker-dealers that are provided at no charge in recognition of the volume of trades directed to the broker. To the extent research services or products may be a factor in selecting brokers, services and products may include written research reports analyzing performance or securities, discussions with research analysts, meetings with corporate executives to obtain oral reports on company performance, market data, and other products and services that will assist the advisor in its investment decision-making process. The research services provided by brokers through which a Fund effects securities transactions may be used by the advisor in servicing all of its accounts, and some of the services may not be used by the advisor in connection with the Fund.

The types of securities in which the Funds invest are generally purchased and sold in principal transactions, meaning that the Funds normally purchase securities directly from the issuer or a primary market-maker acting as principal for the securities on a net basis. Explicit brokerage commissions are not paid on these transactions, although purchases of new issues from underwriters of securities typically include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market-makers typically include a dealer’s mark up (i.e., a spread between the bid and the asked prices). Brokerage commissions will also be paid in connection with opening and closing out futures positions.

As previously explained, the types of securities that each Fund purchases do not normally involve the payment of explicit brokerage commissions. If any such brokerage commissions are paid, however, the advisor will evaluate their reasonableness by considering (1) historical commission rates; (2) rates that other institutional investors are paying, based upon publicly available information; (3) rates quoted by brokers and dealers; (4) the size of a particular transaction, in terms of the number of shares, the dollar amount, and the number of clients involved; (5) the complexity of a particular transaction in terms of both execution and settlement; (6) the level and type of business done with a particular firm over a period of time; and (7) the extent to which the broker or dealer has capital at risk in the transaction.

B-48


 

During the fiscal years ended December 31, 2016, 2017, and 2018, the Funds paid the following approximate amounts in brokerage commissions:

Vanguard Fund   2016   2017   2018  
Total Bond Market Index Fund   $2,000   Less than $1,000    
Total Bond Market II Index Fund   $6,000      
Short-Term Bond Index Fund   $1,000   $1,000    
Intermediate-Term Bond Index Fund        
Long-Term Bond Index Fund     Less than $1,000   $1,000  
Inflation-Protected Securities Fund   $1,083,000   $1,285,000   $1,239,000  

 

Some securities that are considered for investment by a Fund may also be appropriate for other Vanguard funds or for other clients served by the advisor. If such securities are compatible with the investment policies of a Fund and one or more of the advisor’s other clients and are considered for purchase or sale at or about the same time, then transactions in such securities may be aggregated by the advisor, and the purchased securities or sale proceeds may be allocated among the participating Vanguard funds and the other participating clients of the advisor in a manner deemed equitable by the advisor. Although there may be no specified formula for allocating such transactions, the allocation methods used, and the results of such allocations, will be subject to periodic review by the Funds‘ board of trustees.

The ability of Vanguard and external advisors to purchase or dispose of investments in regulated industries, certain derivatives markets, certain international markets, and certain issuers that limit ownership by a single shareholder or group of related shareholders, or to exercise rights on behalf of a Fund, may be restricted or impaired because of limitations on the aggregate level of investment unless regulatory or corporate consents or ownership waivers are obtained. As a result, Vanguard and external advisors on behalf of a Fund may be required to limit purchases, sell existing investments, or otherwise restrict or limit the exercise of shareholder rights by the Fund, including voting rights. If a Fund is required to limit its investment in a particular issuer, the Fund may seek to obtain economic exposure to that issuer through alternative means, such as through a derivative, which may be more costly than owning securities of the issuer directly.

As of December 31, 2018, each Fund held securities of its “regular brokers or dealers,” as that term is defined in Rule 10b-1 of the 1940 Act, as follows:

Vanguard Fund   Regular Broker or Dealer (or Parent)   Aggregate Holdings  
Total Bond Market Index Fund   Barclays Capital Inc.   $ 213,928,000  
  BNP Paribas Securities Corp.   72,790,000  
  Citigroup Global Markets Inc.   995,794,000  
  Credit Suisse Securities (USA) LLC   250,896,000  
  Goldman, Sachs & Co.   10,046,767,000  
  J.P. Morgan Securities Inc.   1,653,653,000  
  Merrill Lynch, Pierce, Fenner & Smith Inc.   1,186,893,000  
  Morgan Stanley   1,129,218,000  
  RBC Capital Markets   201,864,000  
  Wells Fargo Securities, LLC   1,172,075,000  
 
Total Bond Market II Index Fund   Barclays Capital Inc.   156,587,000  
  BNP Paribas Securities Corp.   47,547,000  
  Citigroup Global Markets Inc   742,295,000  
  Credit Suisse Securities (USA) LLC   896,599,000  
  Goldman, Sachs & Co.   796,653,000  
  J.P. Morgan Securities Inc.   1,217,754,000  
  Merrill Lynch, Pierce, Fenner & Smith Inc.   856,899,000  
  Morgan Stanley   847,560,000  
  RBC Capital Markets   144,538,000  
  Wells Fargo Securities, LLC   927,000,000  

 

B-49


 

Vanguard Fund   Regular Broker or Dealer (or Parent)   Aggregate Holdings  
Short-Term Bond Index Fund   Barclays Capital Inc.   $75,835,000  
  BNP Paribas Securities Corp.   33,797,000  
  Citigroup Global Markets Inc.   200,929,000  
  Deutsche Bank Securities Inc.   86,181,000  
  Goldman, Sachs & Co.   292,815,000  
  HSBC Securities (USA) Inc.   200,567,000  
  J.P. Morgan Securities Inc.   398,790,000  
  Merrill Lynch, Pierce, Fenner & Smith Inc.   316,310,000  
  Morgan Stanley   270,184,000  
  Wells Fargo Securities, LLC   286,492,000  
 
Intermediate-Term Bond Index Fund   Barclays Capital Inc.   53,558,000  
  BNP Paribas Securities Corp.   7,167,000  
  Citigroup Global Markets Inc.   267,115,000  
  Credit Suisse Securities (USA) LLC   60,853,000  
  Goldman, Sachs & Co.   263,588,000  
  HSBC Securities (USA) Inc.   157,299,000  
  J.P. Morgan Securities Inc.   326,368,000  
  Merrill Lynch, Pierce, Fenner & Smith Inc.   387,200,000  
  Morgan Stanley   262,754,000  
  Wells Fargo Securities, LLC   183,257,000  
 
Long-Term Bond Index Fund   Barclays Capital Inc.   7,026,000  
  Citigroup Global Markets Inc.   55,584,000  
  Credit Suisse Securities (USA) LLC   9,552,000  
  Deutsche Bank Securities Inc.    
  Goldman, Sachs & Co.   73,127,000  
  HSBC Securities (USA) Inc.   45,795,000  
  J.P. Morgan Securities Inc.   74,742,000  
  Merrill Lynch, Pierce, Fenner & Smith Inc.   56,279,000  
  Morgan Stanley   43,375,000  
  Wells Fargo Securities, LLC   65,240,000  
 
Inflation-Protected Securities Fund      

 

VANGUARD‘S PROXY VOTING GUIDELINES

The Board of Trustees (the Board) of each Vanguard fund has adopted proxy voting procedures and guidelines to govern proxy voting by the fund. The Board has delegated oversight of proxy voting to the Investment Stewardship Oversight Committee (the Committee), made up of senior officers of Vanguard and subject to the procedures and guidelines described below. The Committee reports directly to the Board. Vanguard is subject to these procedures and guidelines to the extent that they call for Vanguard to administer the voting process and implement the resulting voting decisions, and for these purposes the guidelines have also been approved by the Board of Directors of Vanguard.

The overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a fund’s investments—and those of fund shareholders—over the long term. Although the goal is simple, the proposals the funds receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented.

B-50


 

For ease of reference, the procedures and guidelines often refer to all funds. However, our processes and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In some cases, however, a fund may vote differently, depending upon the nature and objective of the fund, the composition of its portfolio, and other factors.

The guidelines do not permit the Board to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting some or all of its shares or vote in a particular way if doing so would be in the fund’s and its shareholders’ best interests. These circumstances may arise, for example, if the expected cost of voting exceeds the expected benefits of voting, if exercising the vote would result in the imposition of trading or other restrictions, or if a fund (or all Vanguard funds in the aggregate) were to own more than the permissible maximum percentage of a company’s stock (as determined by the company’s governing documents or by applicable law, regulation, or regulatory agreement).

In evaluating proxy proposals, we consider information from many sources, including, but not limited to, the investment advisor for the fund, the management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company’s board, absent guidelines or other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Committee, who are accountable to the fund’s Board.

While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund’s vote in a manner that, in the Committee’s view, will maximize the value of the fund’s investment, subject to the individual circumstances of the fund.

I. The Board of Directors

A. Election of directors

Good governance starts with a majority-independent board, whose key committees are made up entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement.

While the funds will generally support the board’s nominees, we will consider a company’s specific circumstances in the context of relevant exchange rules and local governance codes, where applicable, in determining the fund’s vote. T he following factors will be taken into account in determining each fund’s vote:

Factors f or a pproval   Factors a gainst a pproval  
Nominated slate results in board made up of a majority of   Nominated slate results in board made up of a majority of  
independent directors.   non-independent directors.  
All members of Audit, Nominating, and Compensation   Audit, Nominating, and/or Compensation committees include  
committees are independent of management.   non-independent members.  
  Incumbent board member failed to attend at least 75% of meetings  
  in the previous year.  
  Actions of committee(s) on which nominee serves are inconsistent with  
  other guidelines (e.g., excessive equity grants, substantial non-audit fees,  
  lack of board independence).  
  Actions of committee(s) on which nominee serves demonstrate serious  
  failures of governance (e.g., unilaterally acting to significantly reduce  
  shareholder rights, failure to respond to previous vote results for directors  
  and shareholder proposals).  

 

B. Contested director elections

In the case of contested board elections, we will evaluate the nominees’ qualifications, the performance of the incumbent board, and the rationale behind the dissidents’ campaign, to determine the outcome that we believe will maximize shareholder value.

B-51


 

C. Classified boards

The funds will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures in which only part of the board is elected each year.

D. Proxy access

We believe that long-term investors may benefit from having proxy access, or the opportunity to place director nominees on a company’s proxy ballot. In our view, this improves shareholders’ ability to participate in director elections while potentially enhancing boards’ accountability and responsiveness to shareholders.

That said, we also believe that proxy access provisions should be appropriately limited to avoid abuse by investors who lack a meaningful long-term interest in the company. As such, we generally believe that a shareholder or group of shareholders representing 3% of a company’s outstanding shares held for at least three years should be able to nominate directors for up to 20% of the seats on the board.

We will review proposals regarding proxy access case by case. The funds will be most likely to support access provisions with the terms described above, but they may support different thresholds based on a company’s other governance provisions, as well as other relevant factors.

II. Approval of Independent Auditors

The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. The funds will generally support management’s recommendation for the ratification of the auditor, except in instances in which audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether independence has been compromised.

III. Compensation Issues

A. Stock-based compensation plans

Appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders with the interests of management, employees, and directors. The funds oppose plans that substantially dilute their ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features.

An independent compensation committee should have significant latitude to deliver varied compensation to motivate the company’s employees. However, we will evaluate compensation proposals in the context of several factors (a company’s industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company’s other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account.

The following factors will be among those considered in evaluating these proposals:

Factors f or a pproval   Factors a gainst a pproval  
Company requires senior executives to hold a minimum amount   Total potential dilution (including all stock-based plans) exceeds 15% of  
of company stock (frequently expressed as a multiple of salary).   shares outstanding.  
Company requires stock acquired through equity awards to be   Annual equity grants have exceeded 2% of shares outstanding.  
held for a certain period of time.    
Compensation program includes performance-vesting awards,   Plan permits repricing or replacement of options without  
indexed options, or other performance-linked grants.   shareholder approval.  
Concentration of equity grants to senior executives is limited   Plan provides for the issuance of reload options.  
(indicating that the plan is very broad-based).    
Stock-based compensation is clearly used as a substitute for   Plan contains automatic share replenishment (evergreen) feature.  
cash in delivering market-competitive total pay.    

 

B-52


 

B. Bonus plans

Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the Internal Revenue Code, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported.

C. Employee stock purchase plans

The funds will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan amount to less than 5% of the outstanding shares.

D. Advisory votes on executive compensation (Say on Pay)

In addition to proposals on specific equity or bonus plans, the funds are required to cast advisory votes approving many companies’ overall executive compensation plans (so-called Say on Pay votes). In evaluating these proposals, we consider a number of factors, including the amount of compensation that is at risk, the amount of equity-based compensation that is linked to the company’s performance, and the level of compensation as compared to industry peers. The funds will generally support pay programs that demonstrate effective linkage between pay and performance over time and that provide compensation opportunities that are competitive relative to industry peers. On the other hand, pay programs in which significant compensation is guaranteed or insufficiently linked to performance will be less likely to earn our support.

E. Executive severance agreements ( golden parachutes )

Although executives’ incentives for continued employment should be more significant than severance benefits, there are instances—particularly in the event of a change in control—in which severance arrangements may be appropriate. Severance benefits payable upon a change of control AND an executive’s termination (so-called “double trigger” plans) are generally acceptable to the extent that benefits paid do not exceed three times salary and bonus. Arrangements in which the benefits exceed three times salary and bonus should be justified and submitted for shareholder approval. We do not generally support guaranteed severance absent a change in control or arrangements that do not require the termination of the executive (so-called “single trigger” plans).

IV. Corporate Structure and Shareholder Rights

The exercise of shareholder rights, in proportion to economic ownership, is a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders’ ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. In general, the market for corporate control should be allowed to function without undue interference from these artificial barriers.

The funds’ positions on a number of the most commonly presented issues in this area are as follows:

A. Shareholder rights plans ( poison pills )

A company’s adoption of a so-called poison pill effectively limits a potential acquirer’s ability to buy a controlling interest without the approval of the target’s board of directors. Such a plan, in conjunction with other takeover defenses, may serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium.

B-53


 

In general, shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors:

Factors f or a pproval   Factors a gainst a pproval  
Plan is relatively short term (3-5 years).   Plan is long term (>5 years).  
Plan requires shareholder approval for renewal.   Renewal of plan is automatic or does not require shareholder approval.  
Plan incorporates review by a committee of independent   Board with limited independence.  
directors at least every three years (so-called TIDE provisions).    
Ownership trigger is reasonable (15-20%).   Ownership trigger is less than 15%.  
Highly independent, non-classified board.   Classified board.  
Plan includes permitted-bid/qualified-offer feature (chewable    
pill) that mandates a shareholder vote in certain situations.    

 

B. Increase in authorized shares

The funds are supportive of companies seeking to increase authorized share amounts that do not potentially expose shareholders to excessive dilution. We will generally approve increases of up to 50% of the current share authorization, but will also consider a company’s specific circumstances and market practices.

C. Cumulative voting

The funds are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation.

D. Supermajority vote requirements

The funds support shareholders’ ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, the funds will support proposals to remove supermajority requirements and oppose proposals to impose them.

E. Right to call meetings and act by written consent

The funds support shareholders’ right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. The funds will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them.

F. Confidential voting

The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the funds support proposals to provide confidential voting.

G. Dual classes of stock

We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes.

V. Environmental and Social Proposals

Proposals in this category, initiated primarily by shareholders, typically request that a company enhance its disclosure or amend certain business practices. The funds will evaluate these proposals in the context of our view that a company’s board has ultimate responsibility for providing effective ongoing oversight of relevant sector- and company-specific risks, including those related to environmental and social matters. The funds will evaluate each proposal on its merits and support those where we believe there is a logically demonstrable linkage between the specific proposal and long-term shareholder value of the company . Some of the factors considered when evaluating these proposals include the

B-54


 

materiality of the issue, the quality of the current disclosures/ business practices, and any progress by the company toward the adoption of best practices and/or industry norms.

VI. Voting in Markets Outside the United States

Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. Each fund’s votes will be used, where applicable, to advocate for improvements in governance and disclosure by each fund’s portfolio companies. We will evaluate issues presented to shareholders for each fund’s foreign holdings in the context with the guidelines described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with these guidelines, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below.

Many other markets require that securities be “blocked” or reregistered to vote at a company’s meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements.

The costs of voting (e.g., custodian fees, vote agency fees) in other markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances in which the issues presented are unlikely to have a material impact on shareholder value.

VII. Voting Shares of a Company T hat H as an Ownership Limitation

Certain companies have provisions in their governing documents that restrict stock ownership in excess of a specified limit. Typically, these ownership restrictions are included in the governing documents of real estate investment trusts, but may be included in other companies’ governing documents.

A company’s governing documents normally allow the company to grant a waiver of these ownership limits, which would allow a fund (or all Vanguard-advised funds) to exceed the stated ownership limit. Sometimes a company will grant a waiver without restriction. From time to time, a company may grant a waiver only if a fund (or funds) agrees to not vote the company’s shares in excess of the normal specified limit. In such a circumstance, a fund may refrain from voting shares if owning the shares beyond the company’s specified limit is in the best interests of the fund and its shareholders.

In addition, applicable law may require prior regulatory approval to permit ownership of certain regulated issuer’s voting securities above certain limits or may impose other restrictions on owners of more than a certain percentage of a regulated issuer’s voting shares. The Board has authorized the funds to vote shares above these limits in the same proportion as votes cast by the issuer’s entire shareholder base (i.e., mirror vote) or to refrain from voting excess shares if mirror voting is not practicable .

VIII. Voting on a Fund’s Holdings of Other Vanguard Funds

Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund.

IX. Investment Stewardship Team

The Board has delegated the day-to-day operation of the funds’ proxy voting process to the Investment Stewardship T eam , which the Committee oversees. Although most votes will be determined, subject to the individual circumstances of each fund, by reference to the guidelines as separately adopted by each of the funds, there may be circumstances when the Investment Stewardship Team will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, at the Board’s or the Committee’s discretion, such action is warranted.

The Investment Stewardship Team performs the following functions: (1) managing and conducting due diligence of proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and

B-55


 

(5) voting proxies. The Investment Stewardship Team also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines.

X. I nvestment Stewardship Oversight Committee

The Board, including a majority of the independent trustees, appoints the members of the Committee who are senior officers of Vanguard.

The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision.

The Committee works with the Investment Stewardship Team to provide reports and other guidance to the Board regarding proxy voting by the funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness, and Vanguard’s Code of Ethics. The Committee shall authorize proxy votes that the Committee determines, at its sole discretion, to be in the best interests of each fund’s shareholders. In determining how to apply the guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments.

The Board may review these procedures and guidelines and modify them from time to time .

To obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 , lo g on to vanguard.com or visit the SEC’s website at www.sec.gov.

INFORMATION ABOUT THE ETF SHARE CLASS

Vanguard Total Bond Market Index Fund, Vanguard Short-Term Bond Index Fund, Vanguard Intermediate-Term Bond Index Fund, and Vanguard Long-Term Bond Index Fund (collectively, the ETF Funds) offer and issue an exchange-traded class of shares called ETF Shares. Each ETF Fund issues and redeems ETF Shares in large blocks, known as “Creation Units.” For the Funds, the number of ETF Shares in a Creation Unit is 100,000.

To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must transact through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) that has executed a Participant Agreement with Vanguard Marketing Corporation, the Funds’ Distributor (the Distributor). For a current list of Authorized Participants, contact the Distributor.

Investors that are not Authorized Participants must hold ETF Shares in a brokerage account. As with any stock traded on an exchange through a broker, purchases and sales of ETF Shares will be subject to usual and customary brokerage commissions.

Each ETF Fund issues Creation Units in kind in exchange for a basket of securities that are part of—or soon to be part of—its target index (Deposit Securities). Each ETF Fund also redeems Creation Units in kind; an investor who tenders a Creation Unit will receive, as redemption proceeds, a basket of securities that are part of the Fund’s portfolio holdings (Redemption Securities). As part of any creation or redemption transaction, the investor will either pay or receive some cash in addition to the securities, as described more fully on the following pages. Each ETF Fund reserves the right to issue Creation Units for cash, rather than in kind.

Exchange Listing and Trading

The ETF Shares have been approved for listing on a national securities exchange and will trade on the exchange at market prices that may differ from net asset value (NAV). There can be no assurance that, in the future, ETF Shares will continue to meet all of the exchange’s listing requirements. The exchange will institute procedures to delist a Fund’s ETF Shares if the Fund’s ETF Shares do not continuously comply with the exchange’s listing rules . The exchange will also delist a Fund’s ETF Shares upon termination of the ETF share class.

B-56


 

The exchange disseminates, through the facilities of the Consolidated Tape Association, an updated “indicative optimized portfolio value” (IOPV) for each ETF Fund as calculated by an information provider. The ETF Funds are not involved with or responsible for the calculation or dissemination of the IOPVs, and they make no warranty as to the accuracy of the IOPVs. An IOPV for a Fund’s ETF Shares is disseminated every 15 seconds during regular exchange trading hours. An IOPV has a securities value component and a cash component. The securities values included in an IOPV are based on the real-time market prices of the Deposit Securities for a Fund’s ETF Shares. The IOPV is designed as an estimate of an ETF Fund’s NAV at a particular point in time, but it is only an estimate and should not be viewed as the actual NAV, which is calculated once each day.

Book Entry Only System

ETF Shares issued by the Funds are registered in the name of the DTC or its nominee, Cede & Co., and are deposited with, or on behalf of, the DTC. The DTC is a limited-purpose trust company that was created to hold securities of its participants (DTC Participants) and to facilitate the clearance and settlement of transactions among them through electronic book-entry changes in their accounts, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. The DTC is a subsidiary of the Depository Trust and Clearing Corporation (DTCC), which is owned by certain participants of the DTCC’s subsidiaries, including the DTC. Access to the DTC system is also available to others such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (Indirect Participants).

Beneficial ownership of ETF Shares is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in ETF Shares (owners of such beneficial interests are referred to herein as Beneficial Owners) is shown on, and the transfer of ownership is effected only through, records maintained by the DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from, or through, the DTC Participant a written confirmation relating to their purchase of ETF Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities. Such laws may impair the ability of certain investors to acquire beneficial interests in ETF Shares.

Each ETF Fund recognizes the DTC or its nominee as the record owner of all ETF Shares for all purposes. Beneficial Owners of ETF Shares are not entitled to have ETF Shares registered in their names and will not receive or be entitled to physical delivery of share certificates. Each Beneficial Owner must rely on the procedures of the DTC and any DTC Participant and/or Indirect Participant through which such Beneficial Owner holds its interests to exercise any rights of a holder of ETF Shares.

Conveyance of all notices, statements, and other communications to Beneficial Owners is effected as follows. The DTC will make available to each ETF Fund, upon request and for a fee, a listing of the ETF Shares of the Fund held by each DTC Participant. The ETF Fund shall obtain from each DTC Participant the number of Beneficial Owners holding ETF Shares, directly or indirectly, through the DTC Participant. The ETF Fund shall provide each DTC Participant with copies of such notice, statement, or other communication, in form, in number, and at such place as the DTC Participant may reasonably request, in order that these communications may be transmitted by the DTC Participant, directly or indirectly, to the Beneficial Owners. In addition, the ETF Fund shall pay to each DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, subject to applicable statutory and regulatory requirements.

Share distributions shall be made to the DTC or its nominee as the registered holder of all ETF Shares. The DTC or its nominee, upon receipt of any such distributions, shall immediately credit the DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in ETF Shares of the appropriate Fund as shown on the records of the DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of ETF Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants.

The ETF Funds have no responsibility or liability for any aspects of the records relating to or notices to Beneficial Owners; for payments made on account of beneficial ownership interests in such ETF Shares; for maintenance, supervision, or review of any records relating to such beneficial ownership interests; or for any other aspect of the

B-57


 

relationship between the DTC and DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.

The DTC may determine to discontinue providing its service with respect to ETF Shares at any time by giving reasonable notice to the ETF Funds and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the ETF Funds shall take action either to find a replacement for the DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver printed certificates representing ownership of ETF Shares, unless the ETF Funds make other arrangements with respect thereto satisfactory to the exchange.

Purchase and Issuance of ETF Shares in Creation Units

The ETF Funds issue and sell ETF Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt of an order in proper form on any business day. The ETF Funds do not issue fractional Creation Units.

A business day is any day on which the NYSE is open for business. As of the date of this Statement of Additional Information, the NYSE observes the following U.S. holidays: New Year’s Day; Martin Luther King, Jr., Day; Presidents’ Day (Washington’s Birthday); Good Friday; Memorial Day (observed); Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.

Fund Deposit. The consideration for purchase of a Creation Unit from an ETF Fund generally consists of the in-kind deposit of a designated portfolio of securities (Deposit Securities) and an amount of cash (Cash Component) consisting of a purchase balancing amount and a transaction fee (both described in the following paragraphs). Together, the Deposit Securities and the Cash Component constitute the fund deposit.

The purchase balancing amount is an amount equal to the difference between the NAV of a Creation Unit and the market value of the Deposit Securities (Deposit Amount). It ensures that the NAV of a fund deposit (not including the transaction fee) is identical to the NAV of the Creation Unit it is used to purchase. If the purchase balancing amount is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities), then that amount will be paid by the purchaser to an ETF Fund in cash. If the purchase balancing amount is a negative number (i.e., the NAV per Creation Unit is less than the market value of the Deposit Securities), then that amount will be paid by an ETF Fund to the purchaser in cash (except as offset by the transaction fee).

Vanguard, through the National Securities Clearing Corporation (NSCC), makes available after the close of each business day a list of the names and the number of shares of each Deposit Security to be included in the next business day’s fund deposit for each ETF Fund (subject to possible amendment or correction). Each ETF Fund reserves the right to accept a nonconforming fund deposit.

The identity and number of shares of the Deposit Securities required for a fund deposit may change from one day to another to reflect rebalancing adjustments, corporate actions, and interest payments on underlying bonds or to respond to adjustments to the weighting or composition of the component securities of the relevant target index.

Vanguard Total Bond Market ETF intends to require an investor purchasing a Creation Unit to include in the fund deposit, in place of all Deposit Securities that are TBA transactions, an amount of cash, to be added to the Cash Component, equal in value to the TBAs. Vanguard Total Bond Market ETF reserves the right to require an investor purchasing a Creation Unit late in the day to include in the fund deposit, in place of all Deposit Securities that are TBA transactions, U.S. Treasury securities of equivalent value and duration rather than cash.

In addition, each ETF Fund reserves the right to permit or require the substitution of an amount of cash—referred to as “cash in lieu”—to be added to the Cash Component to replace any Deposit Security. This might occur, for example, if a Deposit Security is not available in sufficient quantity for delivery, is not eligible for transfer through the applicable clearance and settlement system, or is not eligible for trading by an Authorized Participant or the investor for which an Authorized Participant is acting. Trading costs incurred by the ETF Fund in connection with the purchase of Deposit Securities with cash-in-lieu amounts will be an expense of the ETF Fund. However, Vanguard may adjust the transaction fee to protect existing shareholders from this expense.

All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the appropriate ETF Fund, and the ETF Fund’s determination shall be final and binding.

B-58


 

Procedures for Purchasing Creation Units. To initiate a purchase order for a Creation Unit, an Authorized Participant must submit an order in proper form to the Distributor and such order must be received by the Distributor prior to the closing time of regular trading of the NYSE (Closing Time) (ordinarily 4 p.m., Eastern time) to receive that day’s NAV. Authorized Participants must transmit orders using a transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement.

Neither the Trust, the ETF Funds, the Distributor, nor any affiliated party will be liable to an investor who is unable to submit a purchase order by Closing Time, even if the problem is the responsibility of one of those parties (e.g., the Distributor‘s phone or email systems were not operating properly).

If you are not an Authorized Participant, you must place your purchase order in an acceptable form with an Authorized Participant. The Authorized Participant may request that you make certain representations or enter into agreements with respect to the order (e.g., to provide for payments of cash when required).

Placement of Purchase Orders. An Authorized Participant must deliver the cash and government securities portion of a fund deposit through the Federal Reserve’s Fedwire System and the corporate securities portion of a fund deposit through the DTC. If a fund deposit is incomplete on the second business day after the trade date (the trade date is the date on which the trade actually takes place, or “T”; two business days after the trade date is known as “ T+2 ”) because of the failed delivery of one or more of the Deposit Securities, the ETF Fund shall be entitled to cancel the purchase order.

The ETF Funds may issue Creation Units in reliance on the Authorized Participant’s undertaking to deliver the missing Deposit Securities at a later date. Such undertaking shall be secured by the delivery and maintenance of cash collateral in an amount determined by the ETF Fund in accordance with the terms of the Participant Agreement.

Rejection of Purchase Orders. Each ETF Fund reserves the absolute right to reject a purchase order. By way of example, and not limitation, an ETF Fund will reject a purchase order if:

  • The order is not in proper form.
  • The Deposit Securities delivered are not the same (in name or amount) as the published basket.
  • Acceptance of the Deposit Securities would have certain adverse tax consequences to the ETF Fund.
  • Acceptance of the fund deposit would, in the opinion of counsel, be unlawful.
  • Acceptance of the fund deposit would otherwise, at the discretion of the ETF Fund or Vanguard, have an adverse effect on the Fund or any of its shareholders.
  • Circumstances outside the control of the ETF Fund, the Trust, the transfer agent, the custodian, the Distributor, and Vanguard make it for all practical purposes impossible to process the order. Examples include, but are not limited to, natural disasters, public service disruptions, or utility problems such as fires, floods, extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the aforementioned parties as well as the DTC, the NSCC, the Federal Reserve, or any other participant in the purchase process; and similar extraordinary events.

If a purchase order is rejected, the Distributor shall notify the Authorized Participant that submitted the order. The ETF Funds, the Trust, the transfer agent, the custodian, the Distributor, and Vanguard are under no duty, however, to give notification of any defects or irregularities in the delivery of a fund deposit, nor shall any of them incur any liability for the failure to give any such notification.

Transaction Fee on Purchases of Creation Units. Each ETF Fund may impose a transaction fee (payable to the Fund) to compensate the ETF Fund for costs associated with the issuance of Creation Units. The amount of the fee, which may be changed by Vanguard from time to time at its sole discretion, is made available daily to Authorized Participants, market makers, and other interested parties through Vanguard’s proprietary portal system. For Creation Units of Vanguard Total Bond Market ETF purchased with a fund deposit that includes cash in lieu of mortgage-TBA securities, the transaction fee includes a variable charge in an amount approximately equal to the transaction costs the Fund expects to incur buying the mortgage TBAs that are part of the fund deposit. For Creation Units of Vanguard Total Bond Market ETF purchased with a fund deposit that includes U.S. Treasury securities in lieu of mortgage-TBA securities, the transaction fee will not include a variable charge. When an ETF Fund (except Vanguard Total Bond Market ETF) permits (or requires) a purchaser to substitute cash in lieu of depositing one or more Deposit Securities, the purchaser may be assessed an additional charge on the cash-in-lieu portion of the investment. The amount of this charge will be disclosed to investors before they place their orders. The amount will be determined by the ETF Fund at its sole discretion but will

B-59


 

not be more than the ETF Fund’s good faith estimate of the costs it will incur investing the cash in lieu, which may include, if applicable, market-impact costs. The maximum transaction fee on purchases of Creation Units, including any additional charges as described, shall be 2% of the value of the Creation Units.

Redemption of ETF Shares in Creation Units

To be eligible to place a redemption order, you must be an Authorized Participant. Investors that are not Authorized Participants must make appropriate arrangements with an Authorized Participant in order to redeem a Creation Unit.

ETF Shares may be redeemed only in Creation Units. Investors should expect to incur transaction costs in connection with assembling a sufficient number of ETF Shares to constitute a redeemable Creation Unit. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Redemption requests received on a business day in good order will receive the NAV next determined after the request is made.

Unless cash redemptions are available or specified for an ETF Fund, an investor tendering a Creation Unit generally will receive redemption proceeds consisting of (1) a basket of Redemption Securities; plus (2) a redemption balancing amount in cash equal to the difference between (x) the NAV of the Creation Unit being redeemed, as next determined after receipt of a request in proper form, and (y) the value of the Redemption Securities; less (3) a transaction fee. If the Redemption Securities have a value greater than the NAV of a Creation Unit, the redeeming investor will pay the redemption balancing amount in cash to the ETF Fund rather than receive such amount from the Fund.

Vanguard, through the NSCC, makes available after the close of each business day a list of the names and the number of shares of each Redemption Security to be included in the next business day’s redemption basket for each ETF Fund (subject to possible amendment or correction). The basket of Redemption Securities provided to an investor redeeming a Creation Unit may not be identical to the basket of Deposit Securities required of an investor purchasing a Creation Unit. If an ETF Fund and a redeeming investor mutually agree, the Fund may provide the investor with a basket of Redemption Securities that differs from the composition of the redemption basket published through the NSCC.

Each ETF Fund reserves the right to deliver cash in lieu of any Redemption Security for the same reason it might accept cash in lieu of a Deposit Security, as previously discussed, or if the ETF Fund could not lawfully deliver the security or could not do so without first registering such security under federal or state law.

When satisfying redemption requests, Vanguard Total Bond Market ETF intends to deliver, in lieu of each mortgage-TBA transaction that is a Redemption Security, cash in an amount equal to the value of the mortgage TBA. Vanguard Total Bond Market ETF reserves the right to deliver to a shareholder redeeming a Creation Unit late in the day, in place of all Redemption Securities that are mortgage-TBA transactions, U.S. Treasury securities of equivalent value and duration, rather than cash.

Neither the Trust, the ETF Funds, the Distributor, nor any affiliated party will be liable to an investor who is unable to submit a redemption order by Closing Time, even if the problem is the responsibility of one of those parties (e.g., the Distributor’s phone or email systems were not operating properly).

Transaction Fee on Redemptions of Creation Units. Each ETF Fund may impose a transaction fee (payable to the Fund) to compensate the ETF Fund for costs associated with the redemption of Creation Units. The amount of the fee, which may be changed by Vanguard from time to time at its sole discretion, is made available daily to Authorized Participants, market makers, and other interested parties through Vanguard’s proprietary portal system. For Creation Unit redemptions, unlike purchases, Vanguard Total Bond Market ETF does not assess a variable charge above the standard fee, nor do any of the ETF Funds impose an additional charge on investors who receive cash in lieu of one or more Redemption Securities. The maximum transaction fee on redemptions of Creation Units shall be 2% of the value of the Creation Units.

Placement of Redemption Orders. To initiate a redemption order for a Creation Unit, an Authorized Participant must submit such order in proper form to the Distributor before Closing Time in order to receive that day’s NAV. Authorized Participants must transmit orders using a transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement.

If on the settlement date (typically T+2) an Authorized Participant has failed to deliver all of the Vanguard ETF Shares it is seeking to redeem, the ETF Fund shall be entitled to cancel the redemption order. Alternatively, the ETF Fund may deliver to the Authorized Participant the full complement of Redemption Securities and cash in reliance on the

B-60


 

Authorized Participant’s undertaking to deliver the missing ETF Shares at a later date. Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of cash collateral in accordance with collateral procedures that are part of the Participant Agreement. In all cases the ETF Fund shall be entitled to charge the Authorized Participant for any costs (including investment losses, attorney’s fees, and interest) incurred by the ETF Fund as a result of the late delivery or failure to deliver.

If an Authorized Participant, or a redeeming investor acting through an Authorized Participant, is subject to a legal restriction with respect to a particular security included in the basket of Redemption Securities, such investor may be paid an equivalent amount of cash in lieu of the security. In addition, each ETF Fund reserves the right to redeem Creation Units partially for cash to the extent that the Fund could not lawfully deliver one or more Redemption Securities or could not do so without first registering such securities under federal or state law.

Suspension of Redemption Rights. The right of redemption may be suspended or the date of payment postponed with respect to an ETF Fund (1) for any period during which the NYSE or listing exchange is closed (other than customary weekend and holiday closings), (2) for any period during which trading on the NYSE or listing exchange is suspended or restricted, (3) for any period during which an emergency exists as a result of which disposal of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable, or (4) in such other circumstances as the SEC permits.

Precautionary Notes

A precautionary note to retail investors: The DTC or its nominee will be the registered owner of all outstanding ETF Shares. Your ownership of ETF Shares will be shown on the records of the DTC and the DTC Participant broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of ETF Shares, and tax information. Your broker also will be responsible for distributing income and capital gains distributions and for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services.

A precautionary note to purchasers of Creation Units: You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing fund.

Because new ETF Shares may be issued on an ongoing basis, a “distribution” of ETF Shares could be occurring at any time. Certain activities that you perform as a dealer could, depending on the circumstances, result in your being deemed a participant in the distribution in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933 (the 1933 Act). For example, you could be deemed a statutory underwriter if you purchase Creation Units from the issuing fund, break them down into the constituent ETF Shares, and sell those shares directly to customers or if you choose to couple the creation of a supply of new ETF Shares with an active selling effort involving solicitation of secondary market demand for ETF Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter.

Dealers who are not “underwriters” but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with ETF Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the 1933 Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the 1933 Act.

A precautionary note to shareholders redeeming Creation Units: An Authorized Participant that is not a “qualified institutional buyer” as defined in Rule 144A under the 1933 Act will not be able to receive, as part of the redemption basket, restricted securities eligible for resale under Rule 144A.

A precautionary note to investment companies: Vanguard ETF Shares are issued by registered investment companies, and therefore the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the Investment Company Act of 1940. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard.

B-61


 

FINANCIAL STATEMENTS

Each Fund’s Financial Statements for the fiscal year ended December 31, 2018, appearing in the Funds‘ 2018 Annual Reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference into this Statement of Additional Information. For a more complete discussion of each Fund’s performance, please see the Funds‘ Annual and Semiannual Reports to Shareholders, which may be obtained without charge.

DESCRIPTION OF BOND RATINGS

Moody’s Rating Symbols

The following describe characteristics of the global long-term (original maturity of 1 year or more) bond ratings provided by Moody’s Investors Service, Inc. (Moody’s):

Aaa —Judged to be obligations of the highest quality, they are subject to the lowest level of credit risk.

Aa —Judged to be obligations of high quality, they are subject to very low credit risk. Together with the Aaa group, they make up what are generally known as high-grade bonds.

A —Judged to be upper-medium-grade obligations, they are subject to low credit risk.

Baa —Judged to be medium-grade obligations, subject to moderate credit risk, they may possess certain speculative characteristics.

Ba —Judged to be speculative obligations, they are subject to substantial credit risk.

B —Considered to be speculative obligations, they are subject to high credit risk.

Caa —Judged to be speculative obligations of poor standing, they are subject to very high credit risk.

Ca —Viewed as highly speculative obligations, they are likely in, or very near, default, with some prospect of recovery of principal and interest.

C —Viewed as the lowest rated obligations, they are typically in default, with little prospect for recovery of principal and interest.

Moody’s also supplies numerical indicators (1, 2, and 3) to rating categories. The modifier 1 indicates that the security is in the higher end of its rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a ranking toward the lower end of the category.

The following describe characteristics of the global short-term (original maturity of 13 months or less) bond ratings provided by Moody’s. This ratings scale also applies to U.S. municipal tax-exempt commercial paper.

Prime-1 (P-1) —Judged to have a superior ability to repay short-term debt obligations. Prime-2 (P-2) —Judged to have a strong ability to repay short-term debt obligations. Prime-3 (P-3) —Judged to have an acceptable ability to repay short-term debt obligations. Not Prime (NP) —Cannot be judged to be in any of the prime rating categories.

The following describe characteristics of the U.S. municipal short-term bond ratings provided by Moody’s:

Moody’s ratings for state and municipal notes and other short-term (up to 3 years) obligations are designated Municipal Investment Grade (MIG).

MIG 1 —Indicates superior quality, enjoying the excellent protection of established cash flows, liquidity support, and broad-based access to the market for refinancing.

MIG 2 —Indicates strong credit quality with ample margins of protection, although not as large as in the preceding group.

MIG 3 —Indicates acceptable credit quality, with narrow liquidity and cash-flow protection and less well-established market access for refinancing.

SG —Indicates speculative credit quality with questionable margins of protection.

B-62


 

Standard and Poor’s Rating Symbols

The following describe characteristics of the long-term (original maturity of 1 year or more) bond ratings provided by Standard and Poor’s:

AAA —These are the highest rated obligations. The capacity to pay interest and repay principal is extremely strong.

AA —These also qualify as high-grade obligations. They have a very strong capacity to pay interest and repay principal, and they differ from AAA issues only in small degree.

A —These are regarded as upper-medium-grade obligations. They have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.

BBB —These are regarded as having an adequate capacity to pay interest and repay principal. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity in this regard. This group is the lowest that qualifies for commercial bank investment.

BB, B, CCC, CC, and C —These obligations range from speculative to significantly speculative with respect to the capacity to pay interest and repay principal. BB indicates the lowest degree of speculation and C the highest.

D —These obligations are in default, and payment of principal and/or interest is likely in arrears.

The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the major rating categories.

The following describe characteristics of short-term (original maturity of 365 days or less) bond and commercial paper ratings designations provided by Standard and Poor’s:

A-1 —These are the highest rated obligations. The capacity of the obligor to pay interest and repay principal is strong. The addition of a plus sign (+) would indicate a very strong capacity.

A-2 —These obligations are somewhat susceptible to changing economic conditions. The obligor has a satisfactory capacity to pay interest and repay principal.

A-3 —These obligations are more susceptible to the adverse effects of changing economic conditions, which could lead to a weakened capacity to pay interest and repay principal.

B —These obligations are vulnerable to nonpayment and are significantly speculative, but the obligor currently has the capacity to meet its financial commitments.

C —These obligations are vulnerable to nonpayment, but the obligor must rely on favorable economic conditions to meet its financial commitment.

D —These obligations are in default, and payment of principal and/or interest is likely in arrears.

The following describe characteristics of U.S. municipal short-term (original maturity of 3 years or less) note ratings provided by Standard and Poor’s:

SP-1 —This designation indicates a strong capacity to pay principal and interest. SP-2 —This designation indicates a satisfactory capacity to pay principal and interest. SP-3 —This designation indicates a speculative capacity to pay principal and interest.

B-63


 

SAI 084 042019


 

PART C

VANGUARD BOND INDEX FUNDS
OTHER INFORMATION

Item 28. Exhibits

(a)       Articles of Incorporation, Amended and Restated Agreement and Declaration of Trust, is filed herewith.
(b)       By-Laws, Amended and Restated By-Laws, filed with Post-Effective Amendment No. 79, dated April 26, 2018, are hereby incorporated by reference.
(c)       Instruments Defining Rights of Security Holders, reference is made to Articles III and V of the Registrant’s Amended and Restated Agreement and Declaration of Trust, refer to Exhibit (a) above.
(d)       Investment Advisory Contracts, The Vanguard Group, Inc., provides investment advisory services to the Funds pursuant to the Fifth Amended and Restated Funds' Service Agreement, refer to Exhibit (h) below.
(e)       Underwriting Contracts, not applicable.
(f)       Bonus or Profit Sharing Contracts, reference is made to the section entitled “Management of the Funds” in Part B of this Registration Statement.
(g)       Custodian Agreement, for JPMorgan Chase Bank, is filed herewith.
(h)       Other Material Contracts, Fifth Amended and Restated Funds’ Service Agreement, filed with Post-Effective Amendment No. 79, dated April 26, 2018, and Form of Authorized Participant Agreement, filed with Post-Effective Amendment No. 56, dated April 25, 2011, are hereby incorporated by reference.
(i)       Legal Opinion, not applicable.
(j)       Other Opinions, Consent of Independent Registered Public Accounting Firm, is filed herewith.
(k)       Omitted Financial Statements, not applicable.
(l)       Initial Capital Agreements, not applicable.
(m)       Rule 12b-1 Plan, not applicable.
(n)       Rule 18f-3 Plan, is filed herewith.
(o)       Reserved.
(p)       Code of Ethics, for The Vanguard Group, Inc., is filed herewith .

Item 29. Persons Controlled by or under Common Control with Registrant

None.

Item 30. Indemnification

The Registrant’s organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacities. Article VII, Section 2 of the Amended and Restated Agreement and Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee’s or officer’s office with the Registrant.

C-1


 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the Securities Act) may be permitted for directors, officers, or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Item 31. Business and Other Connections of Investment Adviser

The Vanguard Group, Inc. (Vanguard), is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Advisers Act). The list required by this Item 31 of officers and directors of Vanguard, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953).

Item 32. Principal Underwriters

(a)       Vanguard Marketing Corporation, a wholly owned subsidiary of The Vanguard Group, Inc., is the principal underwriter of each fund within the Vanguard group of investment companies, a family of more than 200 funds.
(b)       The principal business address of each named director and officer of Vanguard Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.

Name   Positions and Office with Underwriter   Positions and Office with Funds  
Karin A.Risi   Chairman, Director, Principal and Chief Executive Officer   None  
  Designee    
Scott A. Conking   Director and Principal   None  
Kevin Jestice   Director and Principal   None  
Christopher D. McIsaac   Director and Principal   None  
Thomas M. Rampulla   Director and Principal   None  
Michael Rollings   Director and Principal   Finance Director  
John E. Schadl   Director, Principal and General Counsel   Chief Compliance Officer  
Mortimer J. Buckley   President   Chairman of the Board of Trustees, Chief  
    Executive Officer, and President  
Brian Dvorak   Assistant Vice President   None  
Beth Morales Singh   Secretary   None  
Michael Kimmel   Assistant Secretary   None  
Aisling Murphy   Chief Compliance Officer   None  
John T. Marcante   Chief Information Officer   None  
Alonzo Ellis   Chief Information Security Officer   None  
Salvatore L. Pantalone   Financial and Operations Principal and Treasurer   None  
Amy M. Laursen   Financial and Operations Principal   None  
Danielle Corey   Annuity and Insurance Officer   None  
Jeff Seglem   Annuity and Insurance Officer   None  
Matthew Benchener   Principal   None  
John Bendl   Principal   None  
Saundra K. Cusumano   Principal   None  

 

C-2


 

Name     Positions and Office with Underwriter   Positions and Office with Funds  
James M. Delaplane Jr.   Principal   None  
Kathleen A. Graham-Kelly   Principal   None  
Andrew Kadjeski   Principal   None  
Martha G. King   Principal   None  
Mike Lucci   Principal   None  
Brian McCarthy   Principal   None  
James M. Norris   Principal   None  
David Petty   Principal   None  
 
(c)   Not applicable.    

 

Item 33. Location of Accounts and Records

The books, accounts, and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder will be maintained at the offices of the Registrant,100 Vanguard Boulevard, Malvern, PA 19355; the Registrant’s Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; the Registrant’s Custodian, JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179; and the Registrant’s investment advisor at the location identified in this Registration Statement.

Item 34. Management Services

Other than as set forth in the section entitled “Management of the Funds” in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract.

Item 35. Undertakings

Not applicable.

C-3


 

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 25th day of April, 2019.

VANGUARD BOND INDEX FUNDS

BY:______ s/ Mortimer J. Buckley*

Mortimer J. Buckley
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:

Signature   Title   Date  
 
/s/ Mortimer J. Buckley*   Chairman and Chief Executive   April 25, 2019  
  Officer    
Mortimer J. Buckley      
/s/ Emerson U. Fullwood*   Trustee   April 25, 2019  
Emerson U. Fullwood      
/s/ Amy Gutmann*   Trustee   April 25, 2019  
Amy Gutmann      
/s/ F. Joseph Loughrey*   Trustee   April 25, 2019  
F. Joseph Loughrey      
/s/ Mark Loughridge*   Trustee   April 25, 2019  
Mark Loughridge      
/s/ Scott C. Malpass*   Trustee   April 25, 2019  
Scott C. Malpass      
/s/ Deanna Mulligan*   Trustee   April 25, 2019  
Deanna Mulligan      
/s/ André F. Perold*   Trustee   April 25, 2019  
André F. Perold      
/s/ Sarah Bloom Raskin*   Trustee   April 25, 2019  
Sarah Bloom Raskin      
/s/ Peter F. Volanakis*   Trustee   April 25, 2019  
Peter F. Volanakis      
/s/ Thomas J. Higgins*   Chief Financial Officer   April 25, 2019  
Thomas J. Higgins      

 

*By: /s/ Anne E. Robinson

Anne E. Robinson, pursuant to a Power of Attorney filed on January 18, 2018, see File Number 33-32216, Incorporated by Reference.

C-4


 

INDEX TO EXHIBITS    
Articles of Incorporation, Amended and Restated Declaration of Trust   Ex-99.A  
Custodian Agreement, JP Morgan Chase Bank, N.A.   Ex-99.G  
Other Opinions, Consent of Independent Registered Public Accounting Firm   Ex-99.J  
Rule 18f-3 Plan   Ex-99.N  
Codes of Ethics, The Vanguard Group, Inc.   Ex-99.P  

 

C-5


AMENDMENT NO. 3

TO AMENDED AND RESTATED

AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

      This Amendment No. 3 (the "Amendment") to the Amended and Restated Agreement and Declaration of Trust of Vanguard Bond Index Funds (the "Trust") amends, effective February 5, 2019, the Amended and Restated Agreement and Declaration of Trust of the Trust dated as of November 19, 2008, as amended (the "Agreement").

By resolutions adopted at a meeting of the Trust's Board of Trustees (the

"Board") on October 29, 2018, the Board approved this Amendment. Under Article VIII, Section 4 of the Agreement, this Amendment may be executed by a duly authorized officer of the Trust./

      WHEREAS, the Trust desires to amend the Agreement to reflect the addition of an Admiral share class to the Vanguard Long-Term Bond Index Fund, a series of the Trust;

NOW, THEREFORE, the Agreement is hereby amended as follows:

1. Schedule A of the Agreement is hereby amended and restated to read in its entirety as set forth on Exhibit 1 to this Amendment.

2. All references in the Agreement to the "Amended Declaration of Trust" or "Declaration of Trust" shall mean the Agreement as amended by this Amendment.

3. Except as specifically amended by this Amendment, the Agreement is hereby confirmed and remains in full force and effect.

IN WITNESS WHEREOF, the undersigned, a duly authorized officer of the Trust,

has executed this Amendment as of February 5 , 2019.


 

EXHIBIT 1

      TO AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

SCHEDULE A

VANGUARD BOND INDEX FUNDS

SERIES AND CLASSES OF THE TRUST

SERIES

Vanguard Inflation-Protected Securities Fund

Vanguard Intermediate-Term Bond Index Fund

Vanguard Long-Term Bond Index Fund

Vanguard Short-Term Bond Index Fund

Vanguard Total Bond Market Index Fund

Vanguard Total Bond Market II Index Fund

CLASSES

Investor, Admiral, Institutional

Investor, Admiral, ETF, Signal, Institutional

Investor, Admiral, ETF, Institutional

Investor, Admiral, ETF, Signal

Investor, Admiral, ETF, Signal, Institutional,
Institutional Plus, Institutional Select

Investor, Institutional


 

      AMENDMENT NO. 2 TO AMENDED AND RESTATED

AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

      This Amendment No. 2 (the "Amendment") to the Amended and Restated Agreement and Declaration of Trust of Vanguard Bond Index Funds (the "Trust") amends, effective March 29, 2016, the Amended and Restated Agreement and Declaration of Trust of the Trust dated as of November 19, 2008, as amended (the "Agreement").

      By resolutions adopted at a meeting of the Trust's Board of Trustees (the "Board") on December 16, 2015, the Board approved this Amendment. Under Article VIII, Section 4 of the Agreement, this Amendment may be executed by a duly authorized officer of the Trust.

      WHEREAS, the Trust desires to amend the Agreement to reflect the addition of an Institutional Select share class to the Vanguard Total Bond Market Index Fund, a series of the Trust;

NOW, THEREFORE, the Agreement is hereby amended as follows:

1.       Schedule A of the Agreement is hereby amended and restated to read in its entirety as set forth on Exhibit 1 to this Amendment.
2.       All references in the Agreement to the "Amended Declaration of Trust" or "Declaration of Truse shall mean the Agreement as amended by this Amendment.
3.       Except as specifically amended by this Amendment, the Agreement is hereby confirmed and remains in full force and effect.

      IN WITNESS WHEREOF, the undersigned, a duly authorized officer of the Trust, has executed this Amendment as of March gp , 2016.

VANGUARD BOND IND • FUNDS

By:
Name: Heidi Stam
Title: Secretary

48032


 

EXHIBIT 1

      TO AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

SCHEDULE A

VANGUARD BOND INDEX FUNDS

SERIES AND CLASSES OF THE TRUST

SERIES

Vanguard Inflation-Protected Securities Fund

Vanguard Intermediate-Term Bond Index Fund

Vanguard Long-Term Bond Index Fund

Vanguard Short-Term Bond Index Fund

Vanguard Total Bond Market Index Fund

Vanguard Total Bond Market II Index Fund

CLASSES

Investor, Admiral, Institutional

Investor, Admiral, ETF, Signal, Institutional

Investor, ETF, Institutional

Investor, Admiral, ETF, Signal

Investor, Admiral, ETF, Signal, Institutional,
Institutional Plus, Institutional Select

Investor, .Institutional

48032 9/17/2009


 

      AMENDMENT NO. 1 TO AMENDED AND RESTATED

AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

      This Amendment No. 1 (the "Amendmenr) to the Amended and Restated Agreement and Declaration of Trust of Vanguard Bond Index Funds (the "Trusr) amends, effective September 18, 2009, the Amended and Restated Agreement and Declaration of Trust of the Trust dated as of November 19, 2008, as amended (the "Agreemenr).

      By resolutions adopted at a meeting of the Trust's Board of Trustees (the "Boare) on September 18, 2009, the Board approved this Amendment. Under Article VIII, Section 4 of the Agreement, this Amendment may be executed by a duly authorized officer of the Trust.

      WHEREAS, the Trust desires to amend the Agreement to reflect the addition of an Institutional Plus Share class to the Vanguard Total Bond Market Index Fund, a series of the Trust;

NOW, THEREFORE, the Agreement is hereby amended as follows:

1.       Schedule A of the Agreement is hereby amended and restated to read in its entirety as set forth on Exhibit 1 to this Amendment.
2.       All references in the Agreement to the "Amended Declaration of Trusr or "Declaration of Trusr shall mean the Agreement as amended by this Amendment.
3.       Except as specifically amended by this Amendment, the Agreement is hereby confirmed and remains in full force and effect.

      IN WITNESS WHEREOF, the undersigned, a duly authorized officer of the Trust, has executed this Amendment as of September 18, 2009.

VANGUARD BOND INDEX FUNDS

)

Name: Arthur S. Gabinet
Title: Assistant Secretary

48032 9/17/2009


 

EXHIBIT 1

      TO AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FIJNDS

"SCHEDULE A

VANGUARD BOND INDEX FUNDS

SERIES AND CLASSES OF THE TRUST

SERIES

Inflation-Protected Securities Fund
Intermediate-Term Bond Index Fund
Long-Term Bond Index Fund
Short-Term Bond Index Fund
Total Bond Market Index Fund

Total Bond Market II Index Fund

CLASSES

Investor, Admiral, Institutional
Investor, Admiral, ETF, Signal, Institutional
Investor, ETF, Institutional
Investor, Admiral, ETF, Signal
Investor, Admiral, ETF, Signal, Institutional,
Institutional Plus
Investor, Institutional"

48032 9/17/2009


 

AMENDED AND RESTATED

AGREEMENT AND DECLARATION OF TRUST

OF

VANGUARD BOND INDEX FUNDS

      WHEREAS, this AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST of Vanguard Bond Index Funds (the "Trust") is made and entered into as of the date set forth below by the Trustees named hereunder for the purpose of continuing the Trust as a Delaware statutory trust in accordance with the provisions hereinafter set forth;

      WHEREAS, the Trust was formed upon the filing of a certificate of trust in the Office of the Secretary of State of the State of Delaware on March 13, 1998 pursuant to a declaration of trust dated March 13, 1998 (the "Original Declaration of Trust");

      WHEREAS, the Original Declaration of Trust was amended on July 19, 2002 (as so amended, the "Amended Declaration of Trust"); and

      WHEREAS, the Trustees consider it appropriate to amend and restate the Amended Declaration of Trust in accordance with the terms of the Amended Declaration of Trust and the Delaware Act.

      NOW, THEREFORE, the Amended Declaration of Trust is hereby amended and restated as follows and the Trustees do hereby declare that the Trustees will hold IN TRUST all cash, securities and other assets that the Trust now possesses or may hereafter acquire from time to time in any manner and manage and dispose of the same upon the following terms and conditions.

ARTICLE I.

Name and Definitions

      Section 1. Name. The name of the Trust is "VANGUARD BOND INDEX FUNDS" and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. If the Trustees determine to change the name of the Trust, they may adopt such other name for the Trust as they deem proper. Any name change shall become effective upon approval by the Trustees of such change and the filing of a certificate of amendment under the Delaware Act. Any such action shall have the status of an amendment to this Declaration of Trust.

      Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided:

48032 9/17/2009


 

      (a) "Amended Declaration of Trust" shall have the meaning set forth in the recitals to this Declaration of Trust;

  (b)   "By-Laws" shall mean the By-Laws of the Trust as amended from  
time to time;      
 
  (c)   "Commission7 shall have the respective meanings given it in  

 

Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act;

      (d) "Declaration of Trust" shall mean this Amended and Restated Agreement and Declaration of Trust, as amended or restated from time to time;

      (e) "Delaware Ace refers to Delaware Statutory Trust Act, 12 Del. C. § 3801 et. seq. (as amended and in effect from time to time);

      (0 "Interested Person" shall have the meaning given it in Section 2(a)(19) of the 1940 Act;

      (g) "Investment Adviser" or "Adviser" means a party furnishing services to the Trust pursuant to any contract described in Article IV, Section 6(a) hereof;

      (h) "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time. References herein to specific sections of the 1940 Act shall be deemed to include such Rules and Regulations as are applicable to such sections as determined by the Trustees or their designees;

      (i) "Original Declaration of Trust" shall have the meaning set forth in the recitals to this Declaration of Trust;

      (j) 'Principal Underwriter" shall have the respective meanings given it in Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act;

      (k) "Prior Declaration of Trust" refers to the original Declaration of Trust and the Arnended Declaration of Trust, each as from time to tirne in effect prior to the date hereof;

      (1) "Persoe means and includes individuals, corporations, partnerships, trusts, foundations, plans, associations, joint ventures, estates and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign;

      (m) "Series" refers to each Series of Shares referenced in, or established under or in accordance with, the provisions of Article M.

(n) "Shareholder" means a record owner of outstanding Shares;

2


 

      (o) "Shares" means the shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares;

(p) "Trust" shall have the meaning set forth in the recitals to this

Declaration of Trust;

      (q) "Trustees" or "Board of Trustees" refers to the persons who have signed this Declaration of Trust and all other persons who were or may from time to time be duly elected or appointed to serve on the Board of Trustees in accordance with the provisions hereof or of the Prior Declaration of Trust, so long as they continue in office in accordance with the terms hereof and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder; and

      (r) "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust.

ARTICLE II.

Purpose of Trust

      The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1 940 Act through one or more Series investing primarily in securities.

ARTICLE III.

Shares

      Section 1 . Division of Beneficial Interest. The beneficial interest in the Trust shall at all times be divided into an unlimited number of Shares, with a par value of $ .00 1 per Share unless the Trustees shall designate another par value in connection with the issuance of Shares or with respect to outstanding Shares as provided in Section 5 of this Article III. The Trustees may authorize the division of Shares into separate Series and the division of Series into separate classes of Shares. The different Series shall be established and designated, and the variations in the relative rights and preferences as between the different Series shall be fixed and determined, by the Trustees. If no Series shall be established or if only one Series shall be established, the Shares shall have the rights and preferences provided for herein and in Article III, Section 6 hereof to the extent relevant and not otherwise provided for herein.

      Subject to the provisions of Section 6 of this Article III, each Share shall have voting rights as provided in Article V hereof, and holders of the Shares of any Series shall be entitled to receive dividends, when, if and as declared with respect thereto in the manner provided in Article VI, Section 1 hereof. No Share shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions of the Trust or

3


 

otherwise. All dividends and distributions shall be made ratably among all Shareholders of a Series (or class) from the assets held with respect to such Series according to the number of Shares of such Series (or class) held of record by such Shareholders on the record date for any dividend or distribution. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or any Series. The Trustees may from time to time divide or combine the Shares of a Series into a greater or lesser number of Shares of such Series without thereby materially changing the proportionate beneficial interest of such Shares in the assets held with respect to that Series or materially affecting the rights of Shares of any other Series.

      All references to Shares in this Declaration of Trust shall be deemed to be Shares of the Trust and of any or all Series or classes thereof, as the context may require. All provisions herein relating to the Trust shall apply equally to each Series of the Trust and each class thereof, except as the context otherwise requires.

      All Shares issued hereunder, including Shares issued in connection with a dividend in Shares or a split or reverse split of Shares, shall be fully paid and non-assessable.

      Section 2. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series (and class). No certificates evidencing the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the transfer of Shares of each Series (and class) and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders of each Series (and class) and as to the number of Shares of each Series (and class) held from time to time by each Shareholder.

      Section 3. Investments in the Trust. Investments may be accepted by the Trust from such Persons, at such times, on such terms, and for such consideration as the Trustees from time to time may authorize. Each investment shall be credited to the Shareholder's account in the form of full and fractional Shares of the Trust, in such Series (or class) as the purchaser shall select, at the net asset value per Share next determined for such Series (or class) after receipt of the investment; provided, however, that the Trustees may, in their sole discretion, impose a sales charge or reimbursement fee upon investments in the Trust.

      Section 4. Status of Shares and Limitation of Personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this Declaration of Trust and the By-Laws of the Trust. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof. The death, incapacity, dissolution, termination or bankruptcy of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any such Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle such representative only to the rights of such Shareholder under this Declaration of Trust. Ownership of Shares shall not entitle a Shareholder to any title in or to the whole or any part of

4


 

the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer, employee nor agent of the Trust shall have any power to bind personally any Shareholder, or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time agree to pay.

      Section 5. Power of Board of Trustees to Change Provisions Relating to Shares. Notwithstanding any other provision of this Declaration of Trust to the contrary, and without limiting the power of the Board of Trustees to amend the Declaration of Trust as provided elsewhere herein, the Board of Trustees shall have the power to amend this Declaration of Trust, at any time and from time to time, in such manner as the Board of Trustees may determine in their sole discretion, without the need for Shareholder action, so as to add to, delete, replace or otherwise modify any provisions relating to the Shares contained in this Declaration of Trust, provided that before adopting any such amendment without Shareholder approval the Board of Trustees shall determine that it is consistent with the fair and equitable treatment of all Shareholders and that Shareholder approval is not required by the 1940 Act or other applicable federal law. If Shares have been issued, Shareholder approval shall be required to adopt any amendments to this Declaration of Trust which would adversely affect to a material degree the rights and preferences of the Shares of any Series (or class) or to increase or decrease the par value of the Shares of any Series (or class).

      Section 6. Establishment and Designation of Shares. The Series and classes of Shares existing as of the date of this Declaration of Trust are those Series and classes that have been established under the Prior Declaration of Trust and not heretofore terminated which are indicated on Schedule A attached hereto and made a part hereof (Schedule A"). The establishment of any additional Series (or class) of Shares shall be effective upon the adoption by the Trustees of a resolution that sets forth the designation of, or otherwise identifies, such Series (or class), whether directly in such resolution or by reference to, or approval of, another document that sets forth the designation of, or otherwise identifies, such Series (or class) including any registration statement of the Trust or such Series (or class), any amendment and/or restatement of this Declaration of Trust and/or Schedule A or as otherwise provided in such resolution. Upon the establishment of any additional Series (or class) of Shares or the termination of any existing Series (or class) of Shares, Schedule A shall be amended to reflect the addition or termination of such Series (or class) and any officer of the Trust is hereby authorized to make such amendment; provided that amendment of Schedule A shall not be a condition precedent to the establishment or termination of any Series (or class) in accordance with this Declaration of Trust. The relative rights and preferences of the Shares of the Trust and each Series and each class thereof shall be as set forth herein and as set forth in any registration statement relating thereto, unless otherwise provided in the resolution establishing such Series or class.

      Shares of each Series (or class) established pursuant to this Section 6, unless otherwise provided in the resolution establishing such Series (or class) or in any registration statement relating thereto, shall have the following relative rights and preferences:

5


 

      (a) Assets Held with Respect to a Particular Series. All consideration received by the Trust for the issue or sale of Shares of a Series, including dividends and distributions paid by, and reinvested in, such Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments that are not readily identifiable as assets held with respect to the Trust or any particular Series (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among the Trust and/or any one or more of the Series in such manner and on such basis as the Trustees, in their sole discretion, deem fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error.

      (b) Liabilities Held with Respect to a Particular Series. The assets of the Trust held with respect to each Series shall be charged with the liabilities of the Trust with respect to such Series and all expenses, costs, charges and reserves attributable to such Series, and any general liabilities of the Trust that are not readily identifiable as being held in respect of a Series shall be allocated and charged by the Trustees to and arnong the Trust and/or any one or more Series in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges, and reserves so charged to a Series are herein referred to as "liabilities held with respect to" that Series. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error. All liabilities held with respect to a particular Series shall be enforceable against the assets held with respect to such Series only and not against the assets of the Trust generally or against the assets held with respect to any other Series and, except as otherwise provided in this Declaration of Trust, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other Series thereof shall be enforceable against the assets of such Series. As and to the extent provided in Section 3804(a) of the Delaware Act, separate and distinct records shall be maintained for each Series and the assets held with respect to each Series shall be held in such separate and distinct records (directly or indirectly, including through a nominee or otherwise) and accounted for in such separate and distinct records separately from the assets held with respect to all other Series and the General Assets of the Trust not allocated to such Series. Notice of this limitation on inter-Series liabilities shall be set forth in the certificate of trust of the Trust (whether originally or by amendment).

6


 

      (c) Dividends, Distributions, Redemptions, and Repurchases. No dividend or distribution including any distribution paid in connection with termination of the Trust or of any Series (or class) with respect to, or any redemption or repurchase of, the Shares of any Series (or class) shall be effected by the Trust other than from the assets held with respect to such Series, nor shall any Shareholder of any Series otherwise have any right or claim against the assets held with respect to any other Series except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders in absence of manifest error.

      (d) Voting. All Shares entitled to vote on a matter shall vote without differentiation between the separate Series on a one-vote-per-each dollar (and a fractional vote for each fractional dollar) of the net asset value of each Share (including fractional shares) basis; provided however, if a matter to be voted on affects only the interests of one or more but not all Series (or one or more but not all of a class of a Series), then only the Shareholders of such affected Series (or class) shall be entitled to vote on the matter.

      (e) Equality. All the Shares of each Series shall represent an equal proportionate undivided interest in the assets held with respect to such Series (subject to the liabilities of such Series and such rights and preferences as may have been established and designated with respect to classes of Shares within such Series), and each Share of a Series shall be equal to each other Share of such Series.

      (0 Fractions. Any fractional Share of a Series shall have proportionately all the rights and obligations of a whole share of such Series, including rights with respect to voting, receipt of dividends and distributions and redemption of Shares.

      (g) Exchange Privilege. The Trustees shall have the authority to provide that the Shareholders of any Series shall have the right to exchange such Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Trustees.

      (h) Combination of Series. The Trustees shall have the authority, without the approval of the Shareholders of any Series unless otherwise required by applicable federal law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series.

      (i) Elimination of Series. At any time that there are no Shares outstanding of a Series (or class), the Trustees may abolish such Series (or class).

7


 

ARTICLE IV.

The Board of Trustees

      Section 1. Number, Election and Tenure. The number of Trustees constituting the Board of Trustees shall be fixed from time to time by a written instrument signed, or by resolution approved at a duly constituted meeting, by a majority of the Board of Trustees, provided, however, that the number of Trustees shall at all times be at least one (1). Subject to the requirements of Section 16(a) of the 1940 Act, the Board of Trustees, by action of a majority of the then Trustees at a duly constituted meeting, may fill vacancies in the Board of Trustees and remove Trustees with or without cause. Each Trustee shall serve during the continued lifetime of the Trust until he or she dies, resigns, is declared bankrupt or incompetent by a court of competent jurisdiction, or is removed. Any Trustee may resign at any time by written instrument signed by him and delivered to any officer of the Trust or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no Trustee resigning and no Trustee removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages or other payment on account of such removal. Any Trustee may be removed at any meeting of Shareholders by a vote of two-thirds of the total combined net asset value of all Shares of the Trust issued and outstanding. A meeting of Shareholders for the purpose of electing or removing one or more Trustees may be called (i) by the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning 10% or more of the Shares entitled to vote.

      Section 2. Effect of Death, Resignation, etc. of a Trustee. The death, declination, resignation, retirement, removal, or incapacity of one or more Trustees, or all of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled as provided in Article IV, Section 1, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration of Trust.

      Section 3. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Board of Trustees, and such Board of Trustees shall have all powers necessary or convenient to carry out that responsibility including the power to engage in transactions of all kinds on behalf of the Trust. Trustees, in all instances, shall act as principals and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts, documents and instruments that they may consider desirable, necessary or appropriate in connection with the administration of the Trust. Without limiting the foregoing, the Trustees may: adopt, amend and repeal By-Laws not inconsistent with this Declaration of Trust providing for the regulation and management of the affairs of the Trust; elect and remove such officers and appoint and terminate such agents as they consider appropriate; appoint from their own number and establish and terminate one or more committees consisting of one or more Trustees who may exercise the powers and authority of the Board of Trustees to the extent that the Trustees

8


 

determine; employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities or with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both; provide for the issuance and distribution of Shares by the Trust directly or through one or more Principal Underwriters or otherwise; redeem, repurchase and transfer Shares pursuant to applicable federal law; set record dates for the determination of Shareholders with respect to various matters; declare and pay dividends and distributions to Shareholders of each Series from the assets of such Series; establish from time to time, in accordance with the provisions of Article III, Section 6 hereof, any Series of Shares, each such Series to operate as a separate and distinct investment medium and with separately defined investment objectives and policies and distinct investment purpose; and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian, transfer or shareholder servicing agent, Investment Adviser or Principal Underwriter. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Trustees.

Without limiting the foregoing, the Trust shall have power and authority:

      (a) To invest and reinvest cash and cash items, to hold cash uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of all types of securities, futures contracts and options thereon, and forward currency contracts of every nature and kind, including all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers acceptances, and other securities of any kind, issued, created, guaranteed, or sponsored by any and all Persons, including states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality or organization, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities, futures contracts and options thereon, and forward currency contracts, to change the investments of the assets of the Trust; and to exercise any and all rights, powers, and privileges of ownership or interest in respect of any and all such investments of every kind and description, including the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments;

      (b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series;

9


 

      (c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper;

      (d) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities;

      (e) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to the applicable provisions of the 1940 Act;

      (0 To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust;

      (g) To join with other security holders in acting through a committee, depository, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depository or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or trustee as the Trustees shall deem proper;

      (h) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or against the Trust or a Series, or any matter in controversy, including but not limited to claims for taxes;

      (i) To enter into joint ventures, general or limited partnerships and any other combinations or associations;

      (i) To borrow funds or other property in the name of the Trust or Series exclusively for Trust (or such Series) purposes;

      (k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof;

      To purchase and pay for entirely out of Trust Property such insurance as the Trustees may deem necessary, desirable or appropriate for the conduct of the business, including insurance policies insuring the assets of the Trust or payment of distributions

1 0


 

and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Adviser, principal underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Adviser, Principal Underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such Person against liability;

      (m) To adopt, establish and cany out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust; and

      (n) Subject to the 1 940 Act, to engage in any other lawful act or activity in which a statutory trust organized under the Delaware Act may engage.

      The Trust shall not be limited to investing in obligations maturing before the possible termination of the Trust or one or more of its Series. The Trust shall not in any way be bound or limited by any present or future law or custom in regard to investment by fiduciaries. The Trust shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder.

      Section 4. Payment of Expenses by the Trust. Subject to the provisions of Article III, Section 6(b), the Trustees are authorized to pay or cause to be paid out of the principal or income of the Trust or Series, or partly out of the principal and partly out of income, and to charge or allocate the same to, between or among such one or more of the Series that may be established or designated pursuant to Article III, Section 6, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or Series, or in connection with the management thereof, including, but not limited to, the Trustees compensation and such expenses and charges for the services of the Trust's officers, employees, Investment Adviser, Principal Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur.

      Section 5. Ownership of Assets of the Trust. Title to all of the assets of the Trust shall at all times be considered as vested in the Trust, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal, or death of a Trustee he or she shall automatically cease to have any such title in any of the Trust Property, and the title of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. The Trustees may determine that

11


 

the Trust or the Trustees, acting for and on behalf of the Trust, shall be deemed to hold beneficial ownership of any income earned on the securities owned by the Trust, whether domestic or foreign.

Section 6. Service Contracts.

      (a) The Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory, management and/or administrative services for the Trust or for any Series with any Person; and any such contract may contain such other terms as the Trustees may determine, including authority for the Investment Adviser to determine from time to time without prior consultation with the Trustees what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments, and such other responsibilities as may specifically be delegated to such Person.

      (b) The Trustees may also, at any time and from time to time, contract with any Persons, appointing such Persons exclusive or nonexclusive distributor or Principal Underwriter for the Shares of one or more of the Series or other securities to be issued by the Trust. Every such contract may contain such other terms as the Trustees may determine.

      (c) The Trustees are also empowered, at any time and from time to time, to contract with any Persons, appointing such Person(s) to serve as custodian(s), transfer agent and/or shareholder servicing agent for the Trust or one or more of its Series. Every such contract shall comply with such terms as may be required by the Trustees.

      (d) The Trustees are further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust or one or more of the Series, as the Trustees determine to be in the best interests of the Trust and the applicable Series.

(e)       The fact that:
  (i) any of the Shareholders, Trustees, or officers of the Trust is

a shareholder, director, officer, partner, trustee, employee, Investment Adviser, Principal Underwriter, distributor, or affiliate or agent of or for any Person with which an advisory, management or administration contract, or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made, or that

      (ii) any Person with which an advisory, management or administration contract or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made also has an advisory, management or administration contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other service contract, or has other business or interests with any other Person,

12


 

shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust or its Shareholders, provided approval of each such contract is made pursuant to the applicable requirements of the 1940 Act.

ARTICLE V.

Shareholders Voting Powers and Meetings

      Subject to the provisions of Article III, Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, and (ii) with respect to such additional matters relating to the Trust as may be required by the applicable provisions of the 1940 Act, including Section 16(a) thereof, and (iii) on such other matters as the Trustees may consider necessary or desirable. Provisions relating to meetings, quorum, required vote, record date and other matters relating to Shareholder voting rights are as provided in the By-Laws.

ARTICLE VI.

Net Asset Value, Distributions, and Redernptions

      Section 1. Determination of Net Asset Value, Net Income, and Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their absolute discretion, may prescribe and shall set forth in the By-Laws or in a duly adopted resolution of the Trustees such bases and time for determining the per Share net asset value of the Shares of the Trust or any Series (or class) and the declaration and payment of dividends and distributions on the Shares of the Trust or any Series (or class), as they may deem necessary or desirable.

      Section 2. Redemptions and Repurchases. The Trust shall purchase such Shares as are offered by any Shareholder for redemption, upon receipt by the Trust or a Person designated by the Trust that the Trust redeem such Shares or in accordance with such procedures for redemption as the Trustees may from time to time authorize; and the Trust will pay therefor the net asset value thereof, in accordance with the By-Laws and the applicable provisions of the 1940 Act. Payment for said Shares shall be made by the Trust to the Shareholder within seven days after the date on which the request for redemption is received in proper form. The obligation set forth in this Section 2 is subject to the provision that in the event that any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays, or if permitted by the Rules of the Commission during periods when trading on the Exchange is restricted or during any emergency which makes it impracticable for the Trust to dispose of the investments of the applicable Series or to determine fairly the value of the net assets held with respect to such Series or during any other period permitted by order of the Commission for the protection of investors, such obligations may be suspended or postponed by the Trustees.

13


 

      The redemption price may in any case or cases be paid in cash or wholly or partly in kind in accordance with Rule 18f-1 under the 1940 Act if the Trustees determine that such payment is advisable in the interest of the remaining Shareholders of the Series of which the Shares are being redeemed. Subject to the foregoing, the selection and quantity of securities or other property so paid or delivered as all or part of the redemption price shall be determined by or under authority of the Trustees. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind.

      Section 3. Redemptions at the Option of the Trust. The Trust shall have the right, at its option, upon 30 days notice to the affected Shareholder at any time to redeem Shares of any Shareholder at the net asset value thereof as described in Section 1 of this Article VI: (i) if at such time such Shareholder owns Shares of any Series having an aggregate net asset value of less than a minimum value determined from time to time by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a Series equal to or in excess of a maximum percentage of the outstanding Shares of such Series determined from time to time by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal to or in excess of a maximum percentage, determined from time to time by the Trustees, of the outstanding Shares of the Trust.

      Section 4. Transfer of Shares. The Trust shall transfer shares held of record by any Person to any other Person upon receipt by the Trust or a Person designated by the Trust of a written request therefore in such form and pursuant to such procedures as may be approved by the Trustees.

ARTICLE VII.

Compensation and Limitation of Liability

      Section 1. Compensation of Trustees. Any Trustee, whether or not he is a salaried officer or employee of the Trust, may be compensated for his services as Trustee or as a member of a committee of Trustees, or as chairman of a committee by fixed periodic payments or by fees for attendance at meetings, by both or otherwise, and in addition may be reimbursed for transportation and other expenses, all in such manner and amounts as the Board of Trustees may from time to time determine. Nothing herein shall in any way prevent the employment of any Trustee to provide advisory, management, legal, accounting, investment banking or other services to the Trust and to be specially compensated for such services by the Trust.

      Section 2. Limitation of Liability and Indemnification. A Trustee, when acting in such capacity, shall not be personally liable to any Person, other than the Trust or a Shareholder to the extent provided in this Article VII, for any act, omission or obligation of the Trust, of such Trustee or of any other Trustee.=The Trustees shall not be responsible or liable in any event for any neglect or wrong-doing of any officer, agent, employee, Investment Adviser or Principal Underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, and, subject to the provisions of the By-Laws, the Trust out of its assets may

14


 

indemnify and hold harmless each and every Trustee and officer of the Trust from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to such Trustee's or officer's performance of his or her duties as a Trustee or officer of the Trust.

      Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been issued, executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon.

      Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers hereunder shall be binding upon everyone interested in or dealing with the Trust. A Trustee shall be liable to the Trust and to any Shareholder solely for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice nor for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required.

      Section 4. Insurance. The Trustees shall be entitled and empowered to the fullest extent permitted by law to purchase with Trust assets insurance for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify him or her against such liability under the provisions of this Article.

ARTICLE VIII.

Miscellaneous

      Section 1. Liability of Third Persons Dealing with Trustees. No Person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order.

      Section 2. Termination of the Trust or Any Series. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be dissolved at any time by the Trustees upon 60 days prior written notice to the Shareholders. Any Series of Shares may be dissolved at any time by the Trustees upon 60 days prior written notice to the Shareholders of such Series. Any action to dissolve the Trust shall be deemed to also be an action to dissolve each Series and each class thereof.

15


 

      In accordance with Section 3808 of the Delaware Act, upon dissolution of the Trust or any Series, as the case may be, after paying or otherwise providing for all charges, taxes, expenses and liabilities held, severally, with respect to each Series or the applicable Series, as the case may be, whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees consider appropriate, reduce the remaining assets held, severally, with respect to each Series or the applicable Series, as the case may be, to distributable form in cash or shares or other securities, and any combination thereof, and distribute the proceeds held with respect to each Series or the applicable Series, as the case may be, to the Shareholders of that Series, as a Series, ratably according to the number of Shares of that Series held by the several Shareholders on the date of termination.

Section 3. Reorganization and Master/Feeder.

      (a) Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, (i) cause the Trust to convert or merge, reorganize or consolidate with or into one or more trusts, partnerships, limited liability companies, associations, corporations or other business entities (or a series of any of the foregoing to the extent permitted by law) (including trusts, partnerships, limited liability companies, associations, corporations or other business entities created by the Trustees to accomplish such conversion, merger, reorganization or consolidation) so long as the surviving or resulting entity is an open-end management investment company under the 1940 Act, or is a series thereof, to the extent permitted by law, and that, in the case of any trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such conversion, merger, reorganization or consolidation, may succeed to or assume the Trust's registration under the 1940 Act and that, in any case, is formed, organized or existing under the laws of the United States or of a state, commonwealth, possession or colony of the United States, (ii) cause the Shares to be exchanged under or pursuant to any state or federal statute to the extent permitted by law, (iii) cause the Trust to incorporate under the laws of a state, commonwealth, possession or colony of the United States (iv) sell or convey all or substantially all of the assets of the Trust or any Series or Class to another Series or Class of the Trust or to another trust, partnership, limited liability company, association, corporation or other business entity (or a series of any of the foregoing to the extent permitted by law) (including a trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such sale and conveyance), organized under the laws of the United States or of any state, commonwealth, possession or colony of the United States so long as such trust, partnership, limited liability company, association, corporation or other business entity is an open-end management investment company under the 1940 Act and, in the case of any trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such sale and conveyance, may succeed to or assume the Trust's registration under the 1940 Act, for adequate consideration as determined by the Trustees which may include the assumption of all outstanding obligations, taxes and other liabilities, accrued or contingent of the Trust or any affected Series or Class, and which may include Shares of such other Series or Class of the Trust or shares of beneficial interest, stock or other ownership interest of such trust, partnership, limited liability company, association, corporation or other business entity (or series thereof) or (v) at any time sell or convert into money all or any part of

1 6


 

the assets of the Trust or any Series or Class thereof. Any agreement of merger, reorganization, consolidation or conversion or exchange or certificate of merger, certificate of conversion or other applicable certificate may be signed by a majority of the Trustees and facsimile signatures conveyed by electronic or telecommunication means shall be valid.

      (b) Pursuant to and in accordance with the provisions of Section 3815(0 of the Delaware Act, and notwithstanding anything to the contrary contained in this Declaration of Trust, an agreement of merger or consolidation approved by the Trustees in accordance with this Section 3 may effect any amendment to this Declaration of Trust or effect the adoption of a new governing instrument of the Trust if the Trust is the surviving or resulting entity in the merger or consolidation.

      (c) Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, invest all or a portion of the Trust Property of any Series, or dispose of all or a portion of the Trust Property of any Series, and invest the proceeds of such disposition in interests issued by one or more other investment companies registered under the 1940 Act. Any such other investment company may (but need not) be a trust (formed under the laws of the State of Delaware or any other state or jurisdiction) (or subtrust thereof) which is classified as a partnership for federal income tax purposes. Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, cause a Series that is organized in the master/feeder fund structure to withdraw or redeem its Trust Property from the master fund and cause such Series to invest its Trust Property directly in securities and other financial instruments or in another master fund.

      Section 4. Amendments. Subject to the provisions of Section 5 of Article III relating to the requirement of Shareholder approval for certain amendments to this Declaration of Trust or requirements for certain determinations by the Board of Trustees for certain amendments hereto without Shareholder approval and any requirements under the 1940 Act requiring Shareholder approval of an amendment to this Declaration of Trust, the Trustees may, without any Shareholder vote or approval, amend this Declaration of Trust by making an amendment to this Declaration of Trust (including Schedule A), an agreement supplemental hereto, or an amended and restated trust instrument. Unless otherwise provided by the Trustees, any such amendment will be effective (i) upon the adoption by a majority of the Trustees then holding office of a resolution specifying the amendment, supplemental agreement or amendment and restatement or (ii) upon the execution in writing of an instrument signed by a majority of the Trustees then holding office specifying the amendment, supplemental agreement or amended and restated trust instrument. A certification signed by an officer of the Trust setting forth an amendment to this Declaration of Trust and reciting that it was duly adopted by the Trustees as aforesaid, or a copy of the instrument referenced above executed by the Trustees as aforesaid, shall be conclusive evidence of such amendment when lodged among the records of the Trust. The certificate of trust of the Trust may be restated and/or amended by any Trustee as necessary or desirable to reflect any change in the information set forth therein, and any such restatement and/or amendment shall be effective immediately upon filing with the Office of the Secretary of State of the State of Delaware or upon such future date as may be stated therein.

17


 

      Section 5. Filing of Copies, References, Headings. The original or a copy of this Declaration of Trust shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to any matters in connection with the Trust hereunder; and, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this Declaration of Trust. In this Declaration of Trust, references to this Declaration of Trust, and all expressions like "herein," "hereof and "hereunder," shall be deemed to refer to this Declaration of Trust. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this Declaration of Trust. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. This Declaration of Trust may be executed in any number of counterparts each of which shall be deemed an original but all of which together will constitute one and the same instrument. To the extent perrnitted by the 1940 Act, (i) any document, consent, instrument or notice referenced in or contemplated by this Declaration of Trust or the By-Laws that is to be executed by one or more Trustees may be executed by means of original, facsimile or electronic signature and (ii) any document, consent, instrument or notice referenced in or contemplated by this Declaration of Trust or the By-Laws that is to be delivered by one or more Trustees may be delivered by facsimile or electronic means (including e-mail), unless, in the case of either clause (i) or (ii), otherwise expressly provided herein or in the By-Laws or determined by the Trustees. The terms "include," "includes" and "including" and any comparable terms shall be deemed to mean "including, without limitation."

      Section 6. Applicable Law. This Agreement and Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the Delaware Act. The Trust shall be a Delaware statutory trust pursuant to the Delaware Act, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a statutory trust.

Section 7. Provisions in Conflict with Law or Regulations.

      (a) The provisions of the Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable federal laws and replations, the conflicting provision shall be deemed never to have constituted a part of the Declaration of Trust; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination.

      (b) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction.

18


 

      Section 8. Statutory Trust Only. It is the intention of the Trustees to create a statutory trust pursuant to the Delaware Act, and thereby to create only the relationship of trustee and beneficial owners within the meaning of such Act between the Trustees and each Shareholder. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment, joint venture, or any form of legal relationship other than a statutory trust pursuant to the Delaware Act. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.

      Section 9. Use of the Name "The Vanguard Group, Inc.". The name "The Vanguard Group, Inc." and any variants thereof and all rights to the use of the name "The Vanguard Group, Inc." or any variants thereof shall be the sole and exclusive property of The Vanguard Group, Inc. ("VGI"). VGI has permitted the use by the Trust of the identifying word "Vanguard" and the use of the name "Vanguarr as part of the name of the Trust and the name of any Series of Shares. Upon the Trust's withdrawal from the Amended and Restated Funds' Service Agreement among the Trust, the other investment companies within the Vanguard Group of Investment Companies and VGI, and upon the written request of VGI, the Trust and any Series of Shares thereof shall cease to use or in any way to refer to itself as related to "The Vanguard Group, Inc." or any variant thereof.

      Section 10. Derivative Actions. In addition to the requirements set forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative action on behalf of the Trust only if the following conditions are met:

      (a) The Shareholder or Shareholders must make a pre-suit demand upon the Trustees to bring the subject action unless an effort to cause the Trustees to bring such an action is not likely to succeed. For purposes of this Section 10(a), a demand on the Trustees shall only be deemed not likely to succeed and therefore excused if a majority of the Board of Trustees, or a majority of any committee established to consider the merits of such action, is composed of Trustees who are not "independent trustees" (as that term is defined in the Delaware Act).

      (b) Unless a demand is not required under paragraph (a) of this Section 10, Shareholders eligible to bring such derivative action under the Delaware Act who collectively hold at least 10% of the outstanding Shares of the Trust, or who collectively hold at least 10% of the outstanding Shares of the Series or class to which such action relates, shall join in the request for the Trustees to commence such action; and

      (c) Unless a demand is not required under paragraph (a) of this Section 10, the Trustees must be afforded a reasonable amount of time to consider such Shareholder request and to investigate the basis of such claim. The Trustees shall be entitled to retain counsel or other advisors in considering the merits of the request and shall require an undertaking by the Shareholders making such request to reimburse the Trust for the expense of any such advisors in the event that the Trustees determine not to bring such action.

1 9


 

SCHEDULE A

VANGUARD BOND INDEX FUNDS

SERIES AND CLASSES OF THE TRUST

SERIES

Inflation-Protected Securities Fund Intermediate-Term Bond Index Fund Long-Term Bond Index Fund Short-Term Bond Index Fund Total Bond Market Index Fund Total Bond Market II Index Fund

CLASSES

Investor, Admiral, Institutional

Investor, Admiral, ETF, Signal, Institutional Investor, ETF, Institutional Investor, Admiral, ETF, Signal Investor, Admiral, ETF, Signal, Institutional Investor, Institutional


 

TABLE OF CONTENTS
 
    Page  
 
ARTICLE I. Name and Definitions   1  
Section 1. Name   1  
Section 2. Definitions   1  
(a)   Amended Declaration of Trust   2  
(b)   By-Laws   2  
(c)   Commission   2  
(d)   Declaration of Trust   2  
(e) Delaware Act   2  
(0   Interested Person   2  
(g)   Investment Adviser or Adviser   2  
(h)   1940 Act   2  
(i) Original Declaration of Trust   2  
(i) Principal Underwriter   2  
(k)   Prior Declaration of Trust   2  
  Person   2  
(m)   Series   2  
(n)   Shareholder   2  
(o) Shares   3  
(D)   Trust   3  
(q)   Trustees or Board of Trustees   3  
(r)   Trust Property   3  
 
ARTICLE II. Purpose of Trust   3  
 
ARTICLE III. Shares   3  
 
Section 1. Division of Beneficial Interest   3  
Section 2. Ownership of Shares   4  
Section 3. Investments in the Trust   4  
Section 4.   Status of Shares and Limitation of Personal    
  Liability   4  
Section 5. Power of Board of Trustees to Change    
  Provisions Relating to Shares   5  
Section 6. Establishment and Designation of Shares   5  
(a)   Assets Held with Respect to a Particular Series   6  
(b)   Liabilities Held with Respect to a    
  Particular Series   6  
(c)   Dividends, Distributions, Redemptions, and    
  Repurchases   7  
(d)   Voting   7  
(e) Equality   7  
(0   Fractions   7  

 


 

(g)   Exchange Privilege   7  
(h)   Combination of Series   7  
  Elimination of Series   7  
 
ARTICLE IV. The Board of Trustees   8  
Section 1. Number, Election and Tenure   8  
Section 2. Effect of Death, Resignation, etc.    
 
of a Trustee   8  
Section 3. Powers   8  
Section 4. Payment of Expenses by the Trust   11  
Section 5. Ownership of Assets of the Trust   11  
Section 6.     Service Contracts   12  
 
ARTICLE V. Shareholders Voting Powers and Meetings   13  
 
ARTICLE VI. Net Asset Value, Distributions, and Redemptions   13  
Section 1. Determination of Net Asset Value, Net    
 
Income, and Distributions   13  
Section 2. Redemptions and Repurchases   13  
Section 3. Redemptions at the Option of the Trust   14  
Section 4.     Transfer of Shares   14  
 
ARTICLE VII. Compensation and Limitation of Liability   1 4  
 
Section 1. Compensation of Trustees   1 4  
Section 2. Limitation of Liability and Indemnification   1 4  
Section 3.     Trustee's Good Faith Action, Expert    
 
Advice, No Bond or Surety   1 5  
Section 4.     Insurance   1 5  
 
ARTICLE VIII. Miscellaneous   15  
Section 1. Liability of Third Persons Dealing    
 
with Trustees   15  
Section 2. Termination of the Trust or Any Series   15  
Section 3. Reorganization and Master/Feeder   16  
Section 4. Amendments   17  
Section 5. Filing of Copies, References, Headings   18  
Section 6. Applicable Law   18  
Section 7. Provisions in Conflict with Law or Regulations   18  
Section 8. Statutory Trust Only   19  
Section 9. Use of the Name "The Vanguard Group, Inc."   19  
Section 10.   Derivatives Actions   19  

 

11


AMENDED AND RESTATED GLOBAL CUSTODY AGREEMENT

This Amended and Restated Agreement, dated August 14, 2017, is between JPMorgan Chase Bank, N.A. (“Bank”), a national banking association with a place of business at 383 Madison Avenue, New York, NY 10179; and each of the open-end management investment companies listed on Exhibit 1 of this Agreement, registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”), organized as Delaware statutory trusts (each a “Trust”), severally and for and on behalf of certain of their respective portfolios listed on Exhibit 1 (each a “Fund”), each Trust and their respective Funds with a place of business at P.O. Box 2600 Valley Forge, PA 19482. Each Trust for which Bank serves as custodian under this Agreement, shall individually be referred to as “Customer.”

1. INTENTION OF THE PARTIES; DEFINITIONS

1.1       INTENTION OF THE PARTIES .
  (a)       This Agreement sets out the terms governing custodial, settlement and certain other
  associated       services offered by Bank to Customer. Bank shall be responsible for the performance of only

those duties that are set forth in this Agreement or expressly contained in Instructions that are consistent with the provisions of this Agreement and with Bank’s operations and procedures. Customer acknowledges that Bank is not providing any legal, tax or investment advice in providing the services hereunder.

      (b) Investing in foreign markets may be a risky enterprise. The holding of Global Assets and cash in foreign jurisdictions may involve risks of loss or other special features. Bank shall not be liable for any loss that results from the general risks of investing or Country Risk.

1.2       DEFINITIONS .
  (a) As used herein, the following terms have the meaning hereinafter stated.
ACCOUNT       has the meaning set forth in Section 2.1 of this Agreement.

AFFILIATE ” means an entity controlling, controlled by, or under common control with, Bank.

AFFILIATED SUBCUSTODIAN ” means a Subcustodian that is an Affiliate.

APPLICABLE LAW ” means any statute, whether national, state or local, applicable in the United States or any other country, the rules of the treaty establishing the European Community, other applicable treaties, any other law, rule, regulation or interpretation of any governmental entity, any applicable common law, and any decree, injunction, judgment, order, ruling, or writ of any governmental entity.

AUTHORIZED PERSON ” means any person (including an investment manager or other agent) who has been designated by written notice from Customer or its designated agent to act on behalf of Customer hereunder. Such persons shall continue to be Authorized Persons until such time as Bank receives Instructions from Customer or its designated agent that any such person is no longer an Authorized Person.

BANK INDEMNITEES ” means Bank, its Subcustodians, and their respective nominees, directors, officers and employees.

BANK’S LONDON BRANCH ” means the London branch office of Bank.

CASH ACCOUNT ” has the meaning set forth in Section 2.1(a)(ii).


 

CORPORATE ACTION ” means any subscription right, bonus issue, stock repurchase plan, redemption, exchange, calls, redemptions, tender offer, recapitalization, reorganization, conversions, consolidation, subdivision, takeover offer or similar matter with respect to a Financial Asset in the Securities Account that requires discretionary action by the holder, but does not include proxy voting.

COUNTRY RISK ” means the risk of investing or holding assets in a particular country or market, including, but not limited to, risks arising from: nationalization, expropriation or other governmental actions; the country’s financial infrastructure, including prevailing custody and settlement practices; laws applicable to the safekeeping and recovery of Financial Assets and cash held in custody; the regulation of the banking and securities industries, including changes in market rules; currency restrictions, devaluations or fluctuations; and market conditions affecting the orderly execution of securities transactions or the value of assets.

CUSTOMER ” means individually each Trust and their respective Funds as listed on Exhibit 1 hereto.

ENTITLEMENT HOLDER ” means the person named on the records of a Securities Intermediary as the person having a Securities Entitlement against the Securities Intermediary.

FINANCIAL ASSET ” means, as the context requires, either the asset itself or the means by which a person’s claim to it is evidenced, including a Security, a security certificate, or a Securities Entitlement. “Financial Asset” includes any Global Assets but does not include cash.

FUND ” means each portfolio of each Trust and listed on Exhibit 1 hereto.

GLOBAL ASSET ” means any “Financial Asset” (a) for which the principal trading market is located outside of the United States; (b) for which presentment for payment is to be made outside of the United States; or (c) which is acquired outside of the United States.

INSTRUCTIONS ” has the meaning set forth in Section 3.1 of this Agreement.

LIABILITIES ” means any liabilities, losses, claims, costs, damages, penalties, fines, obligations, or expenses of any kind whatsoever (including, without limitation, reasonable attorneys’, accountants’, consultants’ or experts’ fees and disbursements).

SECURITIES ” means stocks, bonds, rights, warrants and other negotiable and non-negotiable instruments, whether issued in certificated or uncertificated form, that are commonly traded or dealt in on securities exchanges or financial markets. “ Securities ” also means other obligations of an issuer, or shares, participations and interests in an issuer recognized in the country in which it is issued or dealt in as a medium for investment and any other property as may be acceptable to Bank for the Securities Account.

SECURITIES ACCOUNT ” means each Securities custody account on Bank’s records to which Financial Assets are or may be credited pursuant hereto.

SECURITIES DEPOSITORY ” has the meaning set forth in Section 5.1 of this Agreement.

SECURITIES ENTITLEMENT ” means the rights and property interest of an Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of Article 8 of the Uniform Commercial Code of the State of New York, as the same may be amended from time to time.

2


 

“SECURITIES INTERMEDIARY ” means Bank, a Subcustodian, a Securities Depository, and any other financial institution which in the ordinary course of business maintains custody accounts for others and acts in that capacity.

SUBCUSTODIAN ” has the meaning set forth in Section 5.1 and includes Affiliated Subcustodians.

TRUST ” means each open-end investment company organized as a Delaware business trust and listed on Exhibit 1 hereto.

      (b) All terms in the singular shall have the same meaning in the plural unless the context otherwise provides and vice versa.

2. WHAT BANK IS REQUIRED TO DO

2.1       Set Up Accounts .
  (a)       Bank shall establish and maintain the following accounts (“Accounts”):
    (i) a Securities Account in the name of Customer on behalf of each Fund for Financial
  Assets,       which may be received by Bank or its Subcustodian for the account of Customer, including
  as       an Entitlement Holder; and

      (ii) an account in the name of Customer (“Cash Account”) for any and all cash in any currency received by Bank or its Subcustodian for the account of Customer.

Notwithstanding paragraph (ii), cash held in respect of those markets where Customer is required to have a cash account in its own name held directly with the relevant Subcustodian shall be held in that manner and shall not be part of the Cash Account. Bank shall notify Customer prior to the establishment of such an account.

      (b) At the request of Customer, additional Accounts may be opened in the future, which shall be subject to the terms of this Agreement.

      (c) Except as precluded by Section 8-501(d) of the Uniform Commercial Code (“UCC”), Bank shall hold all Securities and other Financial Assets, other than cash, of a Fund that are delivered to it in a “securities account” with Bank for and in the name of such Fund and shall treat all such assets other than cash as “financial assets” as those terms are used in the UCC.

2.2 Cash Account .

Except as otherwise provided in Instructions acceptable to Bank, all cash held in the Cash Account shall be deposited during the period it is credited to the Account in one or more deposit accounts at Bank or at Bank’s London Branch. Any cash so deposited with Bank’s London Branch shall be payable exclusively by Bank’s London Branch in the applicable currency, subject to compliance with any Applicable Law, including, without limitation, any restrictions on transactions in the applicable currency imposed by the country of the applicable currency.

3


 

2.3       Segregation of Assets; Nominee Name .
  (a) Bank shall identify in its records that Financial Assets credited to Customer’s Securities
Account       belong to Customer on behalf of the relevant Fund (except as otherwise may be agreed by Bank

and Customer).

      (b) To the extent permitted by Applicable Law or market practice, Bank shall require each Subcustodian to identify in its own records that Financial Assets credited to Customer’s Securities Account belong to customers of Bank, such that it is readily apparent that the Financial Assets do not belong to Bank or the Subcustodian.

      (c) Bank is authorized, in its discretion, to hold in bearer form, such Financial Assets as are customarily held in bearer form or are delivered to Bank or its Subcustodian in bearer form; and to register in the name of the Customer, Bank, a Subcustodian, a Securities Depository, or their respective nominees, such Financial Assets as are customarily held in registered form. Customer authorizes Bank or its Subcustodian to hold Financial Assets in omnibus accounts and shall accept delivery of Financial Assets of the same class and denomination as those deposited with Bank or its Subcustodian.

      (d) Upon receipt of Instruction, Bank shall establish and maintain a segregated account or accounts for and on behalf of each Fund for purposes of segregating cash, government securities, and other assets in connection with derivative transactions entered into by a Fund or options purchased, sold or written by the Fund.

2.4 Settlement of Trades .

When Bank receives an Instruction directing settlement of a trade in Financial Assets that includes all information required by Bank, Bank shall use reasonable care to effect such settlement as instructed. Settlement of purchases and sales of Financial Assets shall be conducted in accordance with prevailing standards of the market in which the transaction occurs. The risk of loss shall be Customer’s whenever Bank delivers Financial Assets or payment in accordance with applicable market practice in advance of receipt or settlement of the expected consideration. In the case of the failure of Customer’s counterparty to deliver the expected consideration as agreed, Bank shall contact the counterparty to seek settlement and, if the settlement is not received, notify Customer, but Bank shall not be obligated to institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action.

2.5       Contractual Settlement Date Accounting .
  (a) Bank shall effect book entries on a “contractual settlement date accounting” basis as
described       below with respect to the settlement of trades in those markets where Bank generally offers

contractual settlement day accounting and shall notify Customer of these markets from time to time.

      (i) Sales: On the settlement date for a sale, Bank shall credit the Cash Account with the sale proceeds of the sale and transfer the relevant Financial Assets to an account pending settlement of the trade if not already delivered.

      (ii) Purchases: On the settlement date for the purchase (or earlier, if market practice requires delivery of the purchase price before the settlement date), Bank shall debit the Cash Account with the settlement monies and credit a separate account. Bank then shall post the Securities Account as awaiting receipt of the expected Financial Assets. Customer shall not be entitled to the delivery of Financial Assets that are awaiting receipt until Bank or a Subcustodian actually receives them.

4


 

Bank reserves the right to restrict in good faith the availability of contractual day settlement accounting for credit reasons. Bank, whenever reasonably possible, will notify Customer prior to imposing such restrictions.

      (b) Bank may (in its discretion) upon at least 48 hours prior oral or written notification to Customer, reverse any debit or credit made pursuant to Section 2.5(a) prior to a transaction’s actual settlement, and Customer shall be responsible for any costs or liabilities resulting from such reversal. Customer acknowledges that the procedures described in this sub-section are of an administrative nature, and Bank does not undertake to make loans and/or Financial Assets available to Customer.

2.6 Actual Settlement Date Accounting .

With respect to any sale or purchase transaction that is not posted to the Account on the contractual settlement date as referred to in Section 2.5, Bank shall post the transaction on the date on which the cash or Financial Assets received as consideration for the transaction is actually received by Bank.

2.7       Income Collection; Autocredit .
  (a) Bank shall credit the Cash Account with income and redemption proceeds on Financial
Assets       in accordance with the times notified by Bank from time to time on or after the anticipated payment

date, net of any taxes that are withheld by Bank or any third party. Where no time is specified for a particular market, income and redemption proceeds from Financial Assets shall be credited only after actual receipt and reconciliation. Bank may reverse such credits upon at least 48 hours prior oral or written notification to Customer when Bank believes that the corresponding payment shall not be received by Bank within a reasonable period or such credit was incorrect.

      (b) Bank shall make reasonable endeavors in its discretion to contact appropriate parties to collect unpaid interest, dividends or redemption proceeds, but neither Bank nor its Subcustodians shall be obliged to file any formal notice of default, institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action.

2.8 Fractions / Redemptions by Lot .

In the event that, as a result of holding Financial Assets in an omnibus account, the Customer receives fractional interests in Financial Assets arising out of a corporate action or class action litigation, Bank will credit the Customer with the amount of cash the Customer would have received, as reasonably determined by Bank, had the Financial Assets not been held in an omnibus account, and the Customer shall relinquish to Bank its interest in such fractional interests. If some, but not all, of an outstanding class of Financial Asset is called for redemption, Bank may allot the amount redeemed among the respective beneficial holders of such class of Financial Asset in any manner Bank reasonably deems to be fair and equitable. Bank will promptly notify Customer of any action taken pursuant to this section.

2.9 Presentation of Coupons; Certain Other Ministerial Acts .

Until Bank receives Instructions to the contrary, Bank shall:

      (a) present all Financial Assets for which Bank has received notice of a call for redemption or that have otherwise matured, and all income and interest coupons and other income items that call for payment upon presentation;

5


 

      (b) execute in the name of Customer such certificates as may be required to obtain payment in respect of Financial Assets; and

      (c) exchange interim or temporary documents of title held in the Securities Account for definitive documents of title.

2.10       Corporate Actions; Class Action Litigation .
  (a) Bank will follow Corporate Actions through receipt of notices from issuers, from
Subcustodians,       Securities Depositories and notices published in industry publications and reported in

reporting services. Bank will promptly notify Customer of any Corporate Action of which information is either (i) received by it or by a Subcustodian to the extent that Bank’s central corporate actions department has actual knowledge of the Corporate Action in time to notify its customers in a timely manner; or (ii) published via a formal notice in publications and reporting services routinely used by Bank for this purpose in time for Bank to notify its customers in a timely manner. Any notices received by Bank’s corporate actions department about U.S. settled securities class action litigation that requires action by affected owners of the underlying Financial Assets will be promptly provided to Customer if Bank, using reasonable care and diligence in the circumstances, identifies that Customer was a shareholder and held the relevant Financial Assets in custody with Bank at the relevant time. Bank will not make filings in the name of Customer in respect to such notifications except as otherwise agreed in writing between Customer and Bank.

      (b) If an Authorized Person fails to provide Bank with timely Instructions with respect to any Corporate Action or class action, neither Bank nor its Subcustodians or their respective nominees will take any action in relation to that Corporate Action or class action, except as otherwise agreed in writing by Bank and Customer or as may be set forth by Bank as a default action in the notification it provides under Section 2.10(a) with respect to that Corporate Action or class action. If Customer provides Bank with Instructions with respect to any Corporate Action after the deadline set by Bank but before the deadline set by a Securities Depository, Bank shall use commercially reasonable efforts to act on such Instructions. If Bank fails to act on Instructions provided by Customer prior to the deadline set by Bank with respect to any Corporate Action, Bank will be liable for direct losses incurred by Customer.

2.11       Proxy Voting .
  (a) Bank shall provide Customer or its agent with details of Securities in the Account on a
daily       basis (“Daily Holdings Data”), and Bank or its agent shall act in accordance with Instructions from

an Authorized Person in relation to matters Customer or its agent determine in their absolute discretion are to be voted upon at meetings of holders of Financial Assets, based upon such Daily Holdings Data (“the proxy voting service”). Neither Bank nor its agent shall be under any duty to provide Customer or its agent with information which it or they receive on matters to be voted upon at meetings of holders of Financial Assets.

      (b) Bank or its agent shall act upon Instructions to vote, provided Instructions are received by Bank or its agent at its proxy voting department by the relevant deadline for such Instructions as determined by Bank or its agent. If Instructions are not received in a timely manner, neither Bank nor its agent shall be obligated to provide further notice to Customer.

      (c) In markets where the proxy voting service is not available or where Bank has not received a duly completed enrollment form or other relevant documentation, Bank or its agent shall endeavor to act upon Instructions to vote on matters before meetings of holders of Financial Assets where it is reasonably

6


 

practicable for Bank or its agent (or its Subcustodians or nominees as the case may be) to do so and where such Instructions are received in time for Bank or its agent to take timely action.

      (d) Customer acknowledges that the provision of the proxy voting service may be precluded or restricted under a variety of circumstances. These circumstances include, but are not limited to: (i) the Financial Assets being on loan or out for registration, (ii) the pendency of conversion or another corporate action, or (iii) Financial Assets being held at Customer’s request in a name not subject to the control of Bank or its Subcustodian, in a margin or collateral account at Bank or another bank or broker, or otherwise in a manner which affects voting, local market regulations or practices, or restrictions by the issuer. Additionally, in some markets, Bank may be required to vote all shares held for a particular issue for all of Bank’s customers in the same way. Bank or its agent shall inform Customer or its agent where this is the case.

      (e) Notwithstanding the fact that Bank may act in a fiduciary capacity with respect to Customer under other agreements or otherwise hereunder, in performing the proxy voting service Bank shall be acting solely as the agent of Customer, and shall not exercise any discretion with regard to such proxy voting service or vote any proxy except when directed by an Authorized Person.

2.12       Statements and Information Available On-Line .
  (a) Bank will send, or make available on-line, to Customer, at times mutually agreed, a
statement       of account in Bank’s standard format for each Account maintained by Customer with Bank,

identifying the Financial Assets and cash held in each Account. Bank also will provide to Customer, upon request, the capability to reformat the information contained in each statement of account. In addition, Bank will send, or make available on-line, to Customer an advice or notification of any transfers of cash or Financial Assets with respect to each Account. Bank will not be liable with respect to any matter set forth in those portions of any such statement of account or advice (or reasonably implied therefrom) to which Customer has not given Bank a written exception or objection within ninety days of receipt of such statement, provided such matter is not the result of Bank’s willful misconduct or bad faith.

      (b) Prices and other information obtained from third parties which may be contained in any statement sent to Customer have been obtained from sources Bank believes to be reliable. Bank does not, however, make any representation as to the accuracy of such information or that the prices specified necessarily reflect the proceeds that would be received on a disposal of the relevant Financial Assets.

      (c) Customer understands that records and reports, other than statements of account, that are available to it on-line on a real-time basis may not be accurate due to mis-postings, delays in updating Account records, and other causes. Bank will not be liable for any loss or damage arising out of the inaccuracy of any such records or reports that are accessed on-line on a real-time basis.

2.13       Access to Bank’s Records .
  (a) Bank shall create and maintain all records relating to its activities and obligations under
this       Agreement in such manner as will meet the obligations of Customer under the 1940 Act, with particular

attention to Section 31 thereof and rules 31a-1 and 31a-2 thereunder. All such records shall be property of Customer. Bank will allow Customer’s duly authorized officers, employees, and agents, including Customer’s independent public accountants, and the employees and agents of the SEC access at all times during the regular business hours of Bank to such records. Except, in the case of access by the SEC as otherwise required by the SEC, such access will be subject to reasonable notice to Bank. Subject to restrictions under Applicable Law, Bank also will obtain an undertaking to permit Customer’s independent

7


 

public accountants reasonable access to the records of any Subcustodian of Securities held in the Securities Account as may be required in connection with such examination.

      (b) In addition, Bank shall cooperate with and supply necessary information to any entity or entities appointed by the Customer to keep its books of account and/or compute its net asset value. Bank shall provide reports and other data as Customer may from time to time reasonably request to enable Customer to obtain, from year to year, favorable opinions from Customer’s independent accountants with respect to Bank’s activities hereunder in connection with (i) the preparation of any registration statement of Customer and any other reports required by a governmental agency or regulatory authority with jurisdiction over the Fund, and (ii) the fulfillment by Customer of any other requirements of a governmental agency or regulatory authority with jurisdiction over the Fund.

      (c) Upon reasonable request of Customer, Bank shall provide Customer with a copy of Bank’s Service Organizational Control (SOC) 1 reports (or any successor reports) prepared in accordance with the requirements of AT-C section 320, Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting (or any successor attestation standard). In addition, from time to time as requested, Bank will furnish Customer a “gap” or “bridge” letter that will address any material changes that might have occurred in Customer’s controls covered in the SOC Report from the end of the SOC Report period through a specified requested date. Bank shall use commercially reasonable efforts to provide Customer with such reports as Customer may reasonably request or otherwise reasonably require to fulfill its duties under Rule 38a-l of the 1940 Act or similar legal and regulatory requirements. Upon reasonable request by Customer, Bank shall also provide to Customer customary sub-certifications in connection with Sarbanes-Oxley Act of 2002 certification requirements. Upon written request, Bank shall provide Customer with information about Bank’s processes for the management and monitoring of Subcustodians for safeguarding Financial Assets.

2.14       Maintenance of Financial Assets at Bank and at Subcustodian Locations .
  (a) Unless Instructions require another location acceptable to Bank, Global Assets shall be
held       in the country or jurisdiction in which their principal trading market is located, where such Global

Assets may be presented for payment, where such Financial Assets were acquired, or where such Financial Assets are held. Bank reserves the right to refuse to accept delivery of Global Assets or cash in countries and jurisdictions other than those referred to in Schedule 1 to this Agreement, as in effect from time to time.

      (b) Bank shall not be obliged to follow an Instruction to hold Financial Assets with, or have them registered or recorded in the name of, any person not chosen by Bank. However, if Customer does instruct Bank to hold Securities with or register or record Securities in the name of a person not chosen by Bank, the consequences of doing so are at Customer’s own risk and Bank shall not be liable therefor.

2.15 Tax Reclaims .

Bank shall provide tax reclamation services as provided in Section 8.2.

2.16 Foreign Exchange Transactions .

To facilitate the administration of Customer’s trading and investment activity, Bank may, but shall not be obliged to, enter into spot or forward foreign exchange contracts with Customer, or an Authorized Person, and may also provide foreign exchange contracts and facilities through its Affiliates or Subcustodians. Instructions, including standing instructions, may be issued with respect to such contracts, but Bank may establish rules or limitations concerning any foreign exchange facility made available. In all cases where Bank, its Affiliates or Subcustodians enter into a master foreign exchange contract that covers foreign

8


 

exchange transactions for the Accounts, the terms and conditions of that foreign exchange contract and, to the extent not inconsistent, this Agreement, shall apply to such transactions.

2.17       Compliance with Securities and Exchange Commission (“SEC”) rule 17f-5 (“rule 17f-5”) .
  (a) Customer’s board of directors (or equivalent body) (hereinafter ‘Board’) hereby delegates
to       Bank, and, except as to the country or countries as to which Bank may, from time to time, advise

Customer that it does not accept such delegation, Bank hereby accepts the delegation to it, of the obligation to perform as Customer’s ‘Foreign Custody Manager’ (as that term is defined in rule 17f-5(a)(3) as promulgated under the 1940 Act), including for the purposes of: (i) selecting Eligible Foreign Custodians (as that term is defined in rule 17f-5(a)(1), and as the same may be amended from time to time, or that have otherwise been exempted pursuant to an SEC exemptive order) to hold foreign Financial Assets and cash, (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in rule 17f-5(c)(2)), and (iii) monitoring such foreign custody arrangements (as set forth in rule 17f-5(c)(3)).

(b)       In connection with the foregoing, Bank shall:
  (i) provide written reports notifying Customer’s Board of the placement of Financial
Assets       and cash with particular Eligible Foreign Custodians and of any material change in the

arrangements with such Eligible Foreign Custodians, with such reports to be provided to Customer’s Board at such times as the Board deems reasonable and appropriate based on the circumstances of Customer’s foreign custody arrangements (and until further notice from Customer such reports shall be provided not less than quarterly with respect to the placement of Financial Assets and cash with particular Eligible Foreign Custodians and with reasonable promptness upon the occurrence of any material change in the arrangements with such Eligible Foreign Custodians);

      (ii) exercise such reasonable care, prudence and diligence in performing as Customer’s Foreign Custody Manager as a person having responsibility for the safekeeping of foreign Financial Assets and cash would exercise;

      (iii) in selecting an Eligible Foreign Custodian, first have determined that foreign Financial Assets and cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such foreign Financial Assets and cash, including, without limitation, those factors set forth in rule 17f-5(c)(1)(i)-(iv);

      (iv) determine that the written contract with an Eligible Foreign Custodian requires that the Eligible Foreign Custodian shall provide reasonable care for foreign Financial Assets and cash based on the standards applicable to custodians in the relevant market, including, without limitation, those factors set forth in rule 17f-5(c)(2).

      (v) have established a system to monitor the continued appropriateness of maintaining foreign Financial Assets and cash with particular Eligible Foreign Custodians and of the governing contractual arrangements; it being understood, however, that in the event that Bank shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford foreign Financial Assets and cash reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, Bank shall promptly so advise Customer and shall then act in accordance with the Instructions of Customer with respect to the disposition of the affected foreign Financial Assets and cash.

9


 

      (c) Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain foreign Financial Assets and cash on behalf of Customer with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Bank. Each such contract shall, except as set forth in the last paragraph of this subsection (c), include provisions that provide:

      (i) For indemnification or insurance arrangements (or any combination of the foregoing) that will adequately protect Customer against the risk of loss of Financial Assets and cash held in accordance with such contract;

      (ii) That Customer’s Financial Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash, liens or rights in favor of creditors of such Eligible Foreign Custodian arising under bankruptcy, insolvency or similar laws;

      (iii) That beneficial ownership of Customer’s Assets will be freely transferable without the payment of money or value other than for safe custody or administration;

      (iv) That adequate records will be maintained identifying Customer’s Assets as belonging to Customer or as being held by a third party for the benefit of Customer;

      (v) That Customer’s independent public accountants will be given access to those records described in (iv) above or confirmation of the contents of those records; and

      (vi) That Customer will receive sufficient and timely periodic reports with respect to the safekeeping of Customer’s Assets, including, but not limited to, notification of any transfer to or from Customer’s account or a third party account containing Assets held for the benefit of Customer.

Such contract may contain, in lieu of any or all of the provisions specified in this subsection (c), such other provisions that Bank determines will provide, in their entirety, the same or a greater level of care and protection for Customer’s Assets as the specified provisions, in their entirety.

      (d) Except as expressly provided herein, Customer shall be solely responsible to assure that the maintenance of foreign Financial Assets and cash hereunder complies with the rules, regulations, interpretations and exemptive orders as promulgated by or under the authority of the SEC.

      (e) Bank represents to Customer that it is a U.S. Bank as defined in rule 17f-5(a)(7). Customer represents to Bank that: (1) the foreign Financial Assets and cash being placed and maintained in Bank’s custody are subject to the 1940 Act, as the same may be amended from time to time; (2) its Board has determined that it is reasonable to rely on Bank to perform as Customer’s Foreign Custody Manager; and (3) its Board or its investment adviser shall have determined that Customer may maintain foreign Financial Assets and cash in each country in which Customer’s Financial Assets and cash shall be held hereunder and determined to accept Country Risk. Nothing contained herein shall require Bank to make any selection or to engage in any monitoring on behalf of Customer that would entail consideration of Country Risk.

      (f) Bank shall provide to Customer such information relating to Country Risk as is specified in Appendix 1 hereto. Customer hereby acknowledges that: (i) such information is solely designed to inform Customer of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) Bank has gathered the information from sources it considers reliable,

10


 

but that Bank shall have no responsibility for inaccuracies or incomplete information, provided that Bank transmits the information using reasonable care.

2.18       Compliance with SEC rule 17f-7 (“rule 17f-7”) .
  (a)       Bank shall, for consideration by Customer, provide an analysis of the custody risks
  associated       with maintaining Customer’s foreign Financial Assets with each Eligible Securities Depository

used by Bank as of the date hereof (or, in the case of an Eligible Securities Depository not used by Bank as of the date hereof, prior to the initial placement of Customer’s foreign Financial Assets at such Depository) and at which any foreign Financial Assets of Customer are held or are expected to be held. The foregoing analysis will be provided to Customer at Bank’s Website. In connection with the foregoing, Customer shall notify Bank of any Eligible Securities Depositories at which it does not choose to have its foreign Financial Assets held. Bank shall monitor the custody risks associated with maintaining Customer’s Financial Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify Customer or its investment adviser of any material changes in such risks.

      (b) Bank shall exercise reasonable care, prudence and diligence in performing the requirements set forth in Section 2.18(a) above.

      (c) Based on the information available to it in the exercise of diligence, Bank shall determine the eligibility under rule 17f-7 of each depository before including it on Schedule 3 hereto and shall promptly advise Customer if any Eligible Securities Depository ceases to be eligible. (Eligible Securities Depositories used by Bank as of the date hereof are set forth in Schedule 3 hereto, and as the same may be amended on notice to Customer from time to time.)

2.19 Service Level Agreement .

Subject to the terms and conditions of this Agreement, Bank agrees to perform the custody services provided for under this Agreement in a manner that meets or exceeds any service levels as may be agreed upon by the parties from time to time in a written document that is executed by both parties on or after the date of this Agreement, unless that written document specifically states that it is not contractually binding. For the avoidance of doubt, Bank’s Service Directory shall not be deemed to be such a written document.

3. INSTRUCTIONS

3.1       Acting on Instructions; Unclear Instructions .
  (a)       Bank is authorized to act under this Agreement (or to refrain from taking action) in
  accordance       with the instructions received by Bank, via telephone, telex, facsimile transmission, or other

teleprocess or electronic instruction or trade information system acceptable to Bank (“Instructions”). Bank shall have no responsibility for the authenticity or propriety of any Instructions that Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify. Customer authorizes Bank to accept and act upon any Instructions received by it without inquiry. Customer shall indemnify the Bank Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against the Bank Indemnitees as a result of any action or omission taken in accordance with any Instructions or other directions upon which Bank is authorized to rely under the terms of this Agreement, provided that Bank shall not be indemnified against or held harmless from any Liabilities arising out of Bank’s negligence, bad faith, fraud, or willful misconduct.

11


 

      (b) Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or superseded.

      (c) Bank may (in its sole discretion and without affecting any part of this Section 3.1) seek clarification or confirmation of an Instruction from an Authorized Person and may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. Bank shall not, except as provided in Section 7.1 hereof, be liable for any loss arising from any delay while it seeks such clarification or confirmation.

      (d) In executing or paying a payment order Bank may rely upon the identifying number (e.g. Fedwire routing number or account) of any party as instructed in the payment order. Customer assumes full responsibility for any inconsistency within an Instruction between the name and identifying number of any party in payment orders issued to Bank in Customer’s name.

3.2 Security Devices .

Either party may record any of their telephonic communications. Customer shall comply with any security procedures reasonably required by Bank from time to time with respect to verification of Instructions. Customer shall be responsible for safeguarding any test keys, identification codes or other security devices that Bank shall make available to Customer or any Authorized Person.

3.3 Instructions; Contrary to Law/Market Practice .

Bank need not act upon Instructions which it reasonably believes to be contrary to law, regulation or market practice but shall be under no duty to investigate whether any Instructions comply with Applicable Law or market practice. Bank shall notify Customer as soon as reasonably practicable if it does not act upon Instructions under this Section.

3.4 Cut-off Times .

Bank has established cut-off times for receipt of some categories of Instruction, which shall be made available to Customer. If Bank receives an Instruction after its established cut-off time, it shall attempt to act upon the Instruction on the day requested if Bank deems it practicable to do so or otherwise as soon as practicable on the next business day.

3.5 Electronic Access .

Access by the Customer to certain systems, applications or products of Bank shall be governed by this Agreement and the terms and conditions set forth in Annex A Electronic Access.

4. FEES, EXPENSES AND OTHER AMOUNTS OWING TO BANK

4.1 Fees and Expenses .

Customer shall pay Bank for its services hereunder the fees set forth in Schedule 2 hereto or such other amounts as may be agreed upon in writing from time to time.

4.2 Overdrafts .

If a debit to any currency in the Cash Account results in a debit balance in that currency then Bank may, in its discretion, advance an amount equal to the overdraft and such an advance shall be deemed a loan to

12


 

Customer, payable on demand, bearing interest at the rate agreed by Customer and Bank for the Accounts from time to time, or, in the absence of such an agreement, at the rate charged by Bank from time to time, for overdrafts incurred by customers similar to Customer, from the date of such advance to the date of payment (both after as well as before judgment) and otherwise on the terms on which Bank makes similar advances available from time to time. Bank shall promptly notify Customer of such an advance. No prior action or course of dealing on Bank’s part with respect to the settlement of transactions on Customer’s behalf shall be asserted by Customer against Bank for Bank’s refusal to make advances to the Cash Account or to settle any transaction for which Customer does not have sufficient available funds in the applicable currency in the Account.

4.3       Bank’s Right Over Securities; Set-off .
  (a) Customer grants Bank a security interest in and a lien on the Financial Assets held in the
Securities       Account of a particular Fund as shall have a fair market value equal to the aggregate amount of

all overdrafts of such Fund, together with accrued interest, as security for any and all amounts which are now or become owing to Bank with respect to that Fund under any provision of this Agreement, whether or not matured or contingent (“Indebtedness”). Such lien and security interest shall be effective only so long as such advance, overdraft, or accrued interest thereon remains outstanding and Bank shall have all the rights and remedies of a secured party under the New York Uniform Commercial Code in respect of the repayment of the advance, overdraft or accrued interest. In this regard, Bank shall be entitled to (i) without notice to Customer, withhold delivery of such Financial Assets, and (ii) with two business days’ prior notice to the Customer and an opportunity for the Customer to satisfy such Indebtedness to Bank, sell or otherwise realize any of such Financial Assets and to apply the proceeds and any other monies credited to the Cash Account in satisfaction of such Indebtedness solely to the extent of such Indebtedness, provided, however, that Bank shall only be obligated to provide the Customer with same-day prior notice if Bank, in its reasonable business judgment, determines that, due to market conditions or other special circumstances, a delay would be likely to materially prejudice its ability to recover the Indebtedness. During any such notice period, Bank will, at Customer’s request, consult with Customer regarding the selection of Financial Assets to be sold by Bank to satisfy the Indebtedness. For the avoidance of doubt, only advances made by Bank under Section 4.2 are “Indebtedness” subject to this Section 4.3. No other outstanding amounts payable by Customer to Bank (including, without limitation, amounts payable by Customer under Section 4.1) are “Indebtedness” subject to this Section 4.3.

      (b) Bank shall be further entitled to set any such Indebtedness off against any cash or deposit account of the Fund that incurred the Indebtedness with Bank or any of its Affiliates of which the Fund is the beneficial owner, regardless of the currency involved; Bank shall provide prior notice to Customer of its intent to exercise its set off rights against any cash or deposit account of the Fund, which notice shall be provided at least on the same day as the set off is effected, provided however that no prior notice is required in cases where Bank, in its reasonable business judgment, determines that, due to market conditions or other special circumstances, the delay required in order to provide prior notice would be likely to materially prejudice its ability to recover the Indebtedness.

5. SUBCUSTODIANS, SECURITIES DEPOSITORIES, AND OTHER AGENTS

5.1       Appointment of Subcustodians; Use of Securities Depositories .
  (a) Bank is authorized under this Agreement to act through and hold Customer’s Global Assets
with       subcustodians, being at the date of this Agreement the entities listed in Schedule 1 and/or such other

entities as Bank may appoint as subcustodians (“Subcustodians”). At the request of Customer, Bank may, but need not, add to Schedule 1 an Eligible Foreign Custodian where Bank has not acted as Foreign Custody Manager with respect to the selection thereof. Bank shall notify Customer in the event that it elects to add

13


 

any such entity. Bank shall use reasonable care, prudence and diligence in the selection and continued appointment of such Subcustodians. In addition, Bank and each Subcustodian may deposit Global Assets with, and hold Global Assets in, any securities depository, settlement system, dematerialized book entry system or similar system (together a “Securities Depository”) on such terms as such systems customarily operate and Customer shall provide Bank with such documentation or acknowledgements that Bank may require to hold the Global Assets in such systems.

      (b) Any agreement Bank enters into with a Subcustodian for holding Bank’s customers’ assets shall provide that: (i) such assets shall not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar laws; (ii) beneficial ownership of such assets shall be freely transferable without the payment of money or value other than for safe custody or administration; (iii) adequate records will be maintained identifying the assets as belonging to Customer or as being held by a third party for the benefit of Customer; (iv) Customer and Customer’s independent public accountants will be given reasonable access to those records or confirmation of the contents of those records; and (v) Customer will receive periodic reports with respect to the safekeeping of Customer’s assets, including, but not limited to, notification of any transfer to or from Customer’s account or a third party account containing assets held for the benefit of Customer. Where a Subcustodian deposits Securities with a Securities Depository, Bank shall cause the Subcustodian to identify on its records as belonging to Bank, as agent, the Securities shown on the Subcustodian’s account at such Securities Depository. The foregoing shall not apply to the extent of any special agreement or arrangement made by Customer with any particular Subcustodian.

      (c) Bank shall have no responsibility for any act or omission by (or the insolvency of) any Securities Depository. In the event Customer incurs a loss due to the negligence, bad faith, willful misconduct, or insolvency of a Securities Depository, Bank shall make reasonable endeavors to seek recovery from the Securities Depository.

(d)       The term Subcustodian as used herein shall mean the following:
  (i)       a “U.S. Bank” as such term is defined in rule 17f-5; and
  (ii)       an “Eligible Foreign Custodian” as such term is defined in rule 17f-5 and any other
entity       that shall have been so qualified by exemptive order, rule or other appropriate action of the

SEC.

      (iii) For purposes of clarity, it is agreed that as used in Section 5.2(a), the term Subcustodian shall not include any Eligible Foreign Custodian as to which Bank has not acted as Foreign Custody Manager.

      (e) The term ‘securities depository’ as used herein when referring to a securities depository located outside the U.S. shall mean an “Eligible Securities Depository” as defined in rule 17f-7, or that has otherwise been made exempt pursuant to an SEC exemptive order.

      (f) The term ‘securities depository’ as used herein when referring to a securities depository located in the U.S. shall mean a “Securities Depository” as defined in rule 17f-4.

14


 

5.2       Liability for Subcustodians .
  (a) Subject to the exculpation from consequential damages set forth in Section 7.1(b), Bank
shall       be liable for direct Liabilities incurred by Customer that result from: (i) the acts or omissions of any

Subcustodian selected by Bank, whether domestic or foreign, to the same extent as if such act or omission was performed by Bank itself, taking into account the standards and market practice prevailing in the relevant market; or (ii) the insolvency of any Affiliated Subcustodian. Subject to the terms and conditions of this Agreement, including the exculpation from consequential damages set forth in Section 7.1(b), Bank shall take full responsibility for any Liabilities that result from or that are caused by the fraud, willful misconduct, or negligence of its Subcustodians or the insolvency of an Affiliated Subcustodian. In the event of any Liabilities suffered or incurred by Customer caused by or resulting from the acts or omissions of any Subcustodian for which Bank would otherwise be liable, Bank shall promptly reimburse Customer in the amount of any such Liabilities.

      (b) Subject to Section 7.1(a) and Bank’s duty to use reasonable care, prudence and diligence in the monitoring of a Subcustodian’s financial condition as reflected in its published financial statements and other publicly available financial information concerning it, Bank shall not be responsible for the insolvency of any Subcustodian which is not a branch or an Affiliated Subcustodian.

      (c) Bank reserves the right to add, replace or remove Subcustodians. Bank shall give Customer prompt notice of any such action, which shall be advance notice if practicable. Upon request by Customer, Bank shall identify the name, address and principal place of business of any Subcustodian and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian.

5.3       Use of Agents .
  (a) Bank may provide certain services under this Agreement through third parties. These third
parties       may be Affiliates. Except to the extent provided in Section 5.2 with respect to Subcustodians, Bank

shall not be responsible for any loss as a result of a failure by any broker or any other third party that it selects and retains using reasonable care and without negligence to provide ancillary services, such as pricing, proxy voting, and corporate action services, that it does not customarily provide itself. Nevertheless, Bank shall be liable for the performance of any such service provider selected by Bank that is an Affiliate to the same extent as Bank would have been liable if it performed such services itself.

      (b) Bank shall execute transactions involving Financial Assets of United States origin through a broker which is an Affiliate (i) in the case of the sale under Section 2.8 of a fractional interest or (ii) if an Authorized Person directs Bank to use the affiliated broker or otherwise requests that Bank select a broker for that transaction, unless, in either case, the Affiliate does not execute similar transactions in such Financial Assets. The affiliated broker may charge its customary commission (or retain its customary spread) with respect to either such transaction.

6. ADDITIONAL PROVISIONS RELATING TO CUSTOMER

6.1       Representations of Customer and Bank .
  (a) Customer represents and warrants to Bank that: (i) it has full authority and power, and has
obtained       all necessary authorizations and consents, to deposit and control the Financial Assets and cash in

the Accounts, to use Bank as its custodian in accordance with the terms of this Agreement and to incur indebtedness, pledge Financial Assets as contemplated by Section 4.3, and enter into foreign exchange transactions; and (ii) this Agreement is its legal, valid and binding obligation, enforceable in accordance

15


 

with its terms and it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Bank may rely upon the above or the certification of such other facts as may be required to administer Bank’s obligations hereunder.

      (b) Bank represents and warrants to Customer that this Agreement is its legal, valid and binding obligation, enforceable in accordance with its terms and it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Customer may rely upon the above or the certification of such other facts as may be required to administer Customer’s obligations hereunder.

6.2 Customer to Provide Certain Information to Bank .

Upon request, Customer shall promptly provide to Bank such information about itself and its financial status as Bank may reasonably request, including Customer’s organizational documents and its current audited and unaudited financial statements.

6.3 Customer is Liable to Bank Even if it is Acting for Another Person .

If Customer is acting as an agent for a disclosed or undisclosed principal in respect of any transaction, cash, or Financial Asset, Bank nevertheless shall treat Customer as its principal for all purposes under this Agreement. In this regard, Customer shall be liable to Bank as a principal in respect of any transactions relating to the Account. The foregoing shall not affect any rights Bank might have against Customer’s principal.

6.4 Several Obligations of the Trusts and the Funds .

This Agreement is executed on behalf of the Board of Trustees of each Fund as Trustees and not individually and the obligations of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of each Fund severally and not jointly. With respect to any obligations of Customer arising out of this Agreement, Bank shall look for payment or satisfaction of any obligation solely to the assets of the Fund to which such obligation relates as though Bank had separately contracted by separate written instrument with respect to the Fund.

7. WHEN BANK IS LIABLE TO CUSTOMER

7.1       Standard of Care; Liability .
  (a) Notwithstanding any other provision of this Agreement, Bank shall exercise reasonable
care,       prudence and diligence in carrying out all of its duties and obligations under this Agreement (except

to the extent Applicable Law provides for a higher standard of care, in which case such higher standard shall apply), and shall be liable to Customer for any and all Liabilities suffered or incurred by Customer resulting from the failure of Bank to exercise such reasonable care, prudence and diligence or resulting from Bank’s negligence, willful misconduct, or fraud and to the extent provided in Section 5.2(a). Unless otherwise specified or required by Applicable Law, Bank shall not be in violation of this Agreement with respect to any matter as to which it has satisfied the standard of care under this Agreement.

      (b) Bank shall not be liable under any circumstances for any indirect, incidental, consequential or special damages (including, without limitation, lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to the Accounts or Bank’s performance hereunder or Bank’s role as custodian.

16


 

      (c) Subject to the limitations set forth in this Agreement, each Customer severally and not jointly shall indemnify the Bank Indemnitees against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of the Bank Indemnitees in connection with or arising out of Bank’s performance under this Agreement, provided the Bank Indemnitees have not acted with negligence or bad faith or engaged in fraud or willful misconduct in connection with the Liabilities in question. Nevertheless, Customer shall not be obligated to indemnify any Bank Indemnitee under the preceding sentence with respect to any Liability for which Bank is liable under Section 5.2 of this Agreement. Bank shall use all commercially reasonable efforts to mitigate any Liability for which indemnity is sought hereunder (provided, however, that reasonable expenses incurred with respect to such mitigation shall be Liabilities subject to indemnification hereunder).

      (d) Subject to any obligation Customer may have to indemnify Bank with respect to amounts claimed by third parties, Customer shall have no liability whatsoever for any consequential, special, indirect or speculative loss or damages (including, but not limited to, lost profits) suffered by Bank Indemnitees in connection with the transactions and services contemplated hereby and the relationship established hereby even if Customer has been advised as to the possibility of the same and regardless of the form of action.

      (e) Without limiting Subsections 7.1 (a) or (b), Bank shall have no duty or responsibility to: (i) question Instructions or make any suggestions to Customer or an Authorized Person regarding such Instructions, provided that Bank believes in good faith that such Instructions have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify; (ii) supervise or make recommendations with respect to investments or the retention of Financial Assets; (iii) advise Customer or an Authorized Person regarding any default in the payment of principal or income of any security other than as provided in Section 2.7(b) of this Agreement; (iv) except as otherwise expressly required herein, evaluate or report to Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which Bank is instructed to deliver Financial Assets or cash; or (v) except for trades settled at DTC where the broker provides DTC trade confirmation and Customer provides for Bank to receive the trade instruction, review or reconcile trade confirmations received from brokers (and Customer or its Authorized Persons issuing Instructions shall bear any responsibility to review such confirmations against Instructions issued to and statements issued by Bank).

      (f) Bank shall indemnify the Customer from and against any and all Liabilities which may be imposed on, incurred by, or asserted against the Customer resulting directly either from Bank’s negligence, bad faith, fraud or willful misconduct in the performance of its obligations or duties hereunder, or from any act or omission by a Subcustodian in the performance of its subcustodial obligations or duties hereunder for which Bank is expressly liable under Section 5.2, taking into account the standards and market practice prevailing in the relevant market, provided that (i) in no event shall the Bank be obliged to indemnify Customer from against any Liability (or any claim for a Liability) to the extent such Liability is described in clause 7.1(b) this Agreement and (ii) the Customer shall use all commercially reasonable efforts to mitigate any Liability for which indemnity is sought hereunder (provided, however, that reasonable expenses incurred with respect to such mitigation shall be Liabilities subject to indemnification hereunder).

7.2 Force Majeure .

So long as Bank maintains and updates its business continuation and disaster recovery procedures as set forth in Section 10.8, Bank shall have no liability for any damage, loss or expense of any nature that Customer may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (except by Bank or Bank Indemnitees), malfunction of equipment or software (except to the extent such malfunction is primarily attributable to Bank’s negligence, or willful misconduct in maintaining the equipment or software), failure of or the effect of rules or operations of any external funds

17


 

transfer system, inability to obtain or interruption of external communications facilities, or any cause beyond the reasonable control of Bank (including without limitation, the non-availability of appropriate foreign exchange). Bank shall endeavor to promptly notify Customer when it becomes aware of any situation outlined above, but shall not be liable for failure to do so. If Bank is prevented from carrying out its obligations under this Agreement for a period of thirty days, Customer may terminate the Agreement by giving Bank not less than thirty days’ notice, without prejudice to any of the rights of any party accrued prior to the date of termination.

7.3 Bank May Consult With Counsel .

Bank shall be entitled to rely on, and may act upon the advice of professional advisers in relation to matters of law, regulation or market practice (which may be the professional advisers of Customer), and shall not be liable to Customer for any action reasonably taken or omitted pursuant to such advice; provided that Bank has selected and retained such professional advisers using reasonable care and acts reasonably in reliance on the advice.

7.4 Bank Provides Diverse Financial Services and May Generate Profits as a Result .

Customer acknowledges that Bank or its Affiliates may have a material interest in transactions entered into by Customer with respect to the Account or that circumstances are such that Bank may have a potential conflict of duty or interest. For example, Bank or its Affiliates may act as a market maker in the Financial Assets to which Instructions relate, provide brokerage services to other customers, act as financial adviser to the issuer of such Financial Assets, act in the same transaction as agent for more than one customer, have a material interest in the issue of the Financial Assets, or earn profits from any of these activities. Customer acknowledges that Bank or its Affiliates may be in possession of information tending to show that the Instructions received may not be in the best interests of Customer. Bank is not under any duty to disclose any such information.

8. TAXATION

8.1       Tax Obligations .
  (a) Customer confirms that Bank is authorized to deduct from any cash received or credited to
the       Cash Account any taxes or levies required by any revenue or Governmental authority for whatever

reason in respect of Customer’s Accounts.

      (b) If Bank does not receive appropriate declarations, documentation and information then additional United Kingdom taxation shall be deducted from all income received in respect of the Financial Assets issued outside the United Kingdom (which shall for this purpose include United Kingdom Eurobonds) and any applicable United States tax (including, but not limited to, non-resident alien tax) shall be deducted from United States source income. Customer shall provide to Bank such certifications, documentation, and information as it may require in connection with taxation, and warrants that, when given, this information is true and correct in every respect, not misleading in any way, and contains all material information. Customer undertakes to notify Bank immediately if any information requires updating or correcting.

      (c) Customer shall be responsible for the payment of all taxes relating to the Financial Assets in the Securities Account, and Customer shall pay, indemnify and hold Bank harmless from and against any and all liabilities, penalties, interest or additions to tax with respect to or resulting from, any delay in, or failure by, Bank (1) to pay, withhold or report any U.S. federal, state or local taxes or foreign taxes imposed on, or (2) to report interest, dividend or other income paid or credited to the Cash Account, whether

18


 

such failure or delay by Bank to pay, withhold or report tax or income is the result of (x) Customer’s failure to comply with the terms of this paragraph, or (y) Bank’s own acts or omissions; provided however, Customer shall not be liable to Bank for any penalty or additions to tax due as a result of Bank’s failure to pay or withhold tax or to report interest, dividend or other income paid or credited to the Cash Account solely as a result of Bank’s negligent acts or omissions.

8.2       Tax Reclaims .
  (a) Subject to the provisions of this Section, Bank shall apply for a reduction of withholding
tax       and any refund of any tax paid or tax credits in respect of income payments on Financial Assets credited

to the Securities Account that Bank believes may be available.

      (b) The provision of a tax reclamation service by Bank is conditional upon Bank receiving from Customer (i) a declaration of its identity and place of residence and (ii) certain other documentation (pro forma copies of which are available from Bank). If Financial Assets credited to the Account are beneficially owned by someone other than Customer, this information shall be necessary with respect to the beneficial owner. Customer acknowledges that Bank shall be unable to perform tax reclamation services unless it receives this information.

      (c) Bank shall perform tax reclamation services only with respect to taxation levied by the revenue authorities of the countries advised to Customer from time to time and Bank may, by notification in writing, in its absolute discretion, supplement or amend the countries in which the tax reclamation services are offered. Other than as expressly provided in this Section 8.2, Bank shall have no responsibility with regard to Customer’s tax position or status in any jurisdiction.

      (d) Customer confirms that Bank is authorized to disclose any information requested by any revenue authority or any governmental body in relation to the processing of any tax reclaim.

9. TERMINATION

      (a) Either party may terminate this Agreement by an instrument in writing delivered or mailed, postage prepaid, to the other party, such termination to take effect not sooner than sixty days after the date of such delivery or mailing if termination is being sought by Customer, for itself or on behalf of a Fund, and not sooner than one hundred twenty days after the date of such delivery or mailing if termination is being sought by Bank. Termination of this Agreement with respect to any one particular Fund shall in no way affect the rights and duties under this Agreement with respect to any other Fund. If Customer gives notice of termination, it must provide full details of the persons to whom Bank must deliver Financial Assets and cash. If Bank gives notice of termination, then Customer must, within one hundred twenty days following receipt of the notice, notify Bank of details of its new custodian, failing which Bank may elect (at any time after one hundred twenty days following Customer’s receipt of the notice) either to retain the Financial Assets and cash until such details are given, continuing to charge fees due (in which case Bank’s sole obligation shall be for the safekeeping of the Financial Assets and cash), or deliver the Financial Assets and cash to Customer. Bank shall in any event be entitled to deduct any uncontested amounts owing to it prior to delivery of the Financial Assets and cash (and, accordingly, Bank shall be entitled to deduct cash from the Cash Account in satisfaction of uncontested amounts owing to it); provided, however, that Bank shall first provide Customer with a statement setting forth such amounts owing to it and provide Customer two days’ advance notice before effecting any such deduction, during which time Customer shall be entitled to determine the priority order in which such Financial Assets and cash are to be used to satisfy the outstanding uncontested amounts. Customer shall reimburse Bank promptly for all reasonable out-of-pocket expenses it incurs in delivering Financial Assets upon termination by Customer. Termination

19


 

pursuant to this Section shall not affect any of the liabilities either party owes to the other arising under this Agreement prior to such termination.

      (b) In the event of any termination of the Agreement for any reason whatsoever, Bank shall, for a period of up to one hundred twenty days after termination of the Agreement, (i) continue to provide all or part of the services under the Agreement if requested by Customer, which services shall be subject to the terms and conditions of the Agreement during the transition period unless otherwise agreed to by the parties; (ii) provide to Customer or any successor custodian all assistance reasonably requested to enable Customer or the successor custodian to commence providing services similar to those under the Agreement; and (iii) subject to the same limitations in place during the term of the Agreement, provide Customer with access to all records in the possession of Bank relating to Customer. In connection with any termination of the Agreement for any reason whatsoever, the parties shall also promptly develop a transition plan setting forth a reasonable timetable for the transition of Financial Assets and cash to Customer or any successor custodian and describing the parties’ respective responsibilities for transitioning the services back to Customer or any successor custodian in an orderly and uninterrupted fashion. Customer will use all reasonable efforts to transition to a successor custodian as soon as possible following the effective date of termination.

10. MISCELLANEOUS

10.1 Notices .

Notices (other than Instructions) shall be served by registered mail or hand delivery to the address of the respective parties as set out on the first page of this Agreement, unless notice of a new address is given to the other party in writing. Notice shall not be deemed to be given unless it has been received.

10.2 Successors and Assigns .

This Agreement shall be binding on each of the parties’ successors and assigns, but the parties agree that neither party can assign its rights and obligations under this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld.

10.3 Interpretation .

Headings are for convenience only and are not intended to affect interpretation. References to sections are to sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the sections and paragraphs of the sub-sections in which they appear.

10.4 Entire Agreement .

This Agreement amends and restates the Amended and Restated Global Custody Agreement dated as of June 25, 2001 between Customer and Bank (the “Prior Agreement”), and the terms of this Agreement replace the terms of the Prior Agreement effective as of the date of this Agreement. This Agreement, including any Schedules, Appendices, Annexes, Exhibits, and Riders (and any separate agreement which Bank and Customer may enter into with respect to the services provided under this Agreement), sets out the entire Agreement between the parties in connection with the subject matter, and, unless otherwise agreed to by the parties, this Agreement supersedes any other agreement, statement, or representation relating to the services provided under this Agreement, whether oral or written. Amendments must be in writing and signed by both parties. For clarity, however, the continuation of any other agreements that reference the Prior Agreement is not intended to be affected by the fact of the amendment and restatement of the Prior Agreement by this Agreement, and reference in such agreements to the Prior Agreement shall be considered

20


 

to be a reference to this Agreement effective as of the date of this Agreement (provided that matters relating to the time period prior to the date of this Agreement are governed by the terms of the Prior Agreement).

10.5       Information Concerning Deposits at Bank .
  (a) Under U.S. federal law, deposit accounts that the Customer maintains in Bank’s foreign
branches       (outside of the U.S.) are not insured by the Federal Deposit Insurance Corporation. In the event

of Bank’s liquidation, foreign branch deposits have a lesser preference than U.S. deposits, and such foreign deposits are subject to cross-border risks.

      (b) Bank’s London Branch is a participant in the UK Financial Services Compensation Scheme (the "FSCS"), and the following terms apply to the extent any amount standing to the credit of the Cash Account is deposited in one or more deposit accounts at Bank’s London Branch. The terms of the FSCS offer protection in connection with deposits to certain types of claimants to whom Bank’s London Branch provides services in the event that they suffer a financial loss as a direct consequence of Bank’s London Branch being unable to meet any of its obligations and, subject to the FSCS rules regarding eligible deposits, the Customer may have a right to claim compensation from the FSCS. Subject to the FSCS rules, the maximum compensation payable by the FSCS, as at the date of this Agreement, in relation to eligible deposits is £85,000.

      (c) In the event that Bank incurs a loss attributable to Country Risk with respect to any cash balance it maintains on deposit at a Subcustodian or other correspondent bank in regard to its global custody or trust businesses in the country where the Subcustodian or other correspondent bank is located, Bank may set such loss off against Customer’s Cash Account to the extent that such loss is directly attributable to Customer’s investments in that market.

10.6 Confidentiality .

The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party shall be used by the other party solely for the purpose of rendering or obtaining services pursuant to this Agreement, and except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this provision, or that is required to be disclosed by or to any regulatory authority, any external or internal accountant, auditor or counsels of the parties, by judicial or administrative process or otherwise by Applicable Law, or to any disclosure made by a party if such party’s counsel has advised that such party could be liable under any Applicable Law or any judicial or administrative order or process for failure to make such disclosure.

10.7 Data Privacy and Security .

Bank will implement and maintain a written information security program, in compliance with all federal, state and local laws and regulations (including any similar international laws) applicable to Bank, that contains reasonable and appropriate security measures designed to safeguard the personal information of the Funds’ shareholders, employees, trustees and/or officers that Bank or any Subcustodian receives, stores, maintains, processes, transmits or otherwise accesses in connection with the provision of services hereunder. In this regard, Bank will establish and maintain policies, procedures, and technical, physical, and administrative safeguards, designed to (i) ensure the security and confidentiality of all personal information and any other confidential information that Bank receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder, (ii) protect against any

21


 

reasonably foreseeable threats or hazards to the security or integrity of personal information or other confidential information, (iii) protect against unauthorized access to or use of personal information or other confidential information, (iv) maintain reasonable procedures to detect and respond to any internal or external security breaches, and (v) ensure appropriate disposal of personal information or other confidential information.

Bank will monitor and review its information security program and revise it, as necessary and in its sole discretion, to ensure it appropriately addresses any applicable legal and regulatory requirements. Bank shall periodically test and review its information security program.

Bank shall respond to Customer’s reasonable requests for information concerning Bank’s information security program and, upon request, Bank will provide a copy of its applicable policies and procedures, or in Bank’s discretion, summaries thereof, to Customer, to the extent Bank is able to do so without divulging information Bank reasonably believes to be proprietary or Bank confidential information. Upon reasonable request, Bank shall discuss with Customer the information security program of Bank. Bank also agrees, upon reasonable request, to complete any security questionnaire provided by Customer to the extent Bank is able to do so without divulging sensitive, proprietary, or Bank confidential information and return it in a commercially reasonable period of time (or provide an alternative response that reasonably addresses the points included in the questionnaire). Customer acknowledges that certain information provided by Bank, including internal policies and procedures, may be proprietary to Bank, and agrees to protect the confidentiality of all such materials it receives from Bank.

Bank agrees to resolve promptly any applicable control deficiencies that come to its attention that do not meet the standards established by federal and state privacy and data security laws, rules, regulations, and/or generally accepted industry standards related to Bank’s information security program.

Bank shall: (i) promptly notify Customer of any confirmed unauthorized access to personal information or other confidential information of Customer (“Breach of Security”); (ii) promptly furnish to Customer appropriate details of such Breach of Security and assist Customer in assessing the Breach of Security to the extent it is not privileged information or part of an investigation; (iii) reasonably cooperate with Customer in any litigation and investigation of third parties reasonably deemed necessary by Customer to protect its proprietary and other rights; (iv) use reasonable precautions to prevent a recurrence of a Breach of Security; and (v) take all reasonable and appropriate action to mitigate any potential harm related to a Breach of Security, including any reasonable steps requested by Customer that are practicable for Bank to implement. Nothing in the immediately preceding sentence shall obligate Bank to provide Customer with information regarding any of Bank’s other customers or clients that are affected by a Breach of Security, nor shall the immediately preceding sentence limit Bank’s ability to take any actions that Bank believes are appropriate to remediate any Breach of Security unless such actions would prejudice or otherwise limit Customer’s ability to bring its own claims or actions against third parties related to the Breach of Security. If Bank discovers or becomes aware of a suspected data or security breach that may involve an improper access, use, disclosure, or alteration of personal information or other confidential information of Customer, Bank shall, except to the extent prohibited by Applicable Law or directed otherwise by a governmental authority not to do so, promptly notify Customer that it is investigating a potential breach and keep Customer informed as reasonably practicable of material developments relating to the investigation until Bank either confirms that such a breach has occurred (in which case the first sentence of this paragraph will apply) or confirms that no data or security breach involving personal information or other confidential information of Customer has occurred.

For these purposes, “personal information” shall mean (i) an individual’s name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) driver’s license number, (c) state identification card number, (d) debit or credit card number, (e) financial account

22


 

number, (f) passport number, or (g) personal identification number or password that would permit access to a person’s account or (ii) any combination of the foregoing that would allow a person to log onto or access an individual’s account. This provision will survive termination or expiration of the Agreement for so long as Bank or any Subcustodian continues to possess or have access to personal information related to Customer. Notwithstanding the foregoing “personal information” shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.

10.8 Business Continuity and Disaster Recovery .

Bank shall maintain and update from time to time business continuation and disaster recovery procedures with respect to its global custody business, which are designed, in the event of a significant business disruption affecting Bank, to be sufficient to enable Bank to resume and continue to perform its duties and obligations under this Agreement without undue delay or disruption. Bank shall test the operability of such procedures at least annually. Bank shall enter into and shall maintain in effect at all times during the term of this Agreement reasonable provision for (i) periodic back-up of the computer files and data with respect to Customer and (ii) use of alternative electronic data processing equipment to provide services under this Agreement. Upon reasonable request, Bank shall discuss with Customer any business continuation and disaster recovery procedures of Bank. Bank represents that its business continuation and disaster recovery procedures are appropriate for its business as a global custodian to investment companies registered under the 1940 Act.

10.9 Insurance .

Bank shall not be required to maintain any insurance coverage for the benefit of Customer.

10.10 Governing Law and Jurisdiction, Certification of Residency .

This Agreement shall be construed, regulated, and administered under the laws of the United States or State of New York, as applicable, without regard to New York’s principles regarding conflict of laws. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by Applicable Law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. Customer certifies that it is a resident of the United States and shall notify Bank of any changes in residency. Bank may rely upon this certification or the certification of such other facts as may be required to administer Bank’s obligations hereunder. Customer shall indemnify Bank against all losses, liability, claims or demands arising directly or indirectly from any such certifications.

10.11       Severability and Waiver .
  (a) If one or more provisions of this Agreement are held invalid, illegal or unenforceable in
any       respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and

enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions shall not in any way be affected or impaired.

23


 

      (b) Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right hereunder operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless in writing and signed by the party against whom the waiver is to be enforced.

10.12 Counterparts .

This Agreement may be executed in several counterparts, each of which shall be deemed to be an original and together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

[Signature page to follow.]

24


 



 

EXHIBIT 1

Vanguard Admiral Funds

Vanguard S&P 500 Growth Index Fund Vanguard S&P 500 Value Index Fund

Vanguard S&P Mid-Cap 400 Growth Index Fund Vanguard S&P Mid-Cap 400 Index Fund Vanguard S&P Mid-Cap 400 Value Index Fund Vanguard S&P Small-Cap 600 Growth Index Fund Vanguard S&P Small-Cap 600 Index Fund Vanguard S&P Small-Cap 600 Value Index Fund

Vanguard Bond Index Funds

Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market II Index Fund

Vanguard Chester Funds

Vanguard Institutional Target Retirement 2015 Fund Vanguard Institutional Target Retirement 2020 Fund Vanguard Institutional Target Retirement 2025 Fund Vanguard Institutional Target Retirement 2030 Fund Vanguard Institutional Target Retirement 2035 Fund Vanguard Institutional Target Retirement 2040 Fund Vanguard Institutional Target Retirement 2045 Fund Vanguard Institutional Target Retirement 2050 Fund Vanguard Institutional Target Retirement 2055 Fund Vanguard Institutional Target Retirement 2060 Fund Vanguard Institutional Target Retirement 2065 Fund Vanguard Institutional Target Retirement Income Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund Vanguard Target Retirement 2055 Fund Vanguard Target Retirement 2060 Fund Vanguard Target Retirement 2065 Fund Vanguard Target Retirement Income Fund

Vanguard CMT Funds

Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds Vanguard GNMA Fund


 

Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund Vanguard REIT II Index Fund Vanguard Ultra-Short-Term Bond Fund

Vanguard Index Funds

Vanguard Growth Index Fund Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund Vanguard Total Stock Market Index Fund

Vanguard Malvern Funds

Vanguard Short-Term Inflation-Protected Securities Index Fund

Vanguard Scottsdale Funds

Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Short-Term Government Bond Index Fund

Vanguard Specialized Funds

Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund Vanguard Precious Metals and Mining Fund

Vanguard STAR Funds

Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds

Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds Vanguard Balanced Index Fund

Vanguard Variable Insurance Funds Global Bond Index Portfolio Total Bond Market Index Portfolio

Total International Stock Market Index Portfolio

Vanguard Wellesley Income Fund Vanguard Wellesley Income Fund


 

Vanguard Wellington Fund
Vanguard Wellington Fund

Vanguard Whitehall Funds
Vanguard International Explorer Fund

Vanguard World Fund

Vanguard Extended Duration Treasury Index Fund Vanguard Global Wellesley Fund Vanguard Global Wellington Fund Vanguard International Growth Fund

The terms and conditions as set forth in the Agreement (except for Sections 2.1 and 2.2) apply with respect to the Trusts and Funds listed below limited to their use of account number P 62749 in Vanguard Directly Managed Securities Lending transactions:

Vanguard Chester Funds
Vanguard PRIMECAP Fund

Vanguard Explorer Fund
Vanguard Explorer Fund

Vanguard Fenway Funds
Vanguard Equity Income Fund
Vanguard PRIMECAP Core Fund

Vanguard Horizon Funds
Vanguard Capital Opportunity Fund
Vanguard Global Equity Fund
Vanguard Strategic Equity Fund
Vanguard Strategic Small-Cap Equity Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Growth Index Fund
Vanguard Small-Cap Value Index Fund
Vanguard Value Index Fund

Vanguard Institutional Index Funds Vanguard Institutional Index Fund

Vanguard Institutional Total Stock Market Index Fund

Vanguard International Equity Index Funds

Vanguard Emerging Markets Stock Index Fund Vanguard European Stock Index Fund Vanguard FTSE All-World ex-US Index Fund


 

Vanguard FTSE All-World ex-US Small-Cap Index Fund Vanguard Global ex-U.S. Real Estate Index Fund Vanguard Pacific Stock Index Fund Vanguard Total World Stock Index Fund

Vanguard Malvern Funds

Vanguard Capital Value Fund Vanguard U.S. Value Fund

Vanguard Montgomery Funds Vanguard Market Neutral Fund

Vanguard Morgan Growth Fund Vanguard Morgan Growth Fund

Vanguard Quantitative Funds

Vanguard Growth and Income Fund

Vanguard Scottsdale Funds

Vanguard Explorer Value Fund

Vanguard Russell 1000 Growth Index Fund Vanguard Russell 1000 Index Fund Vanguard Russell 1000 Value Index Fund Vanguard Russell 2000 Growth Index Fund Vanguard Russell 2000 Index Fund Vanguard Russell 2000 Value Index Fund Vanguard Russell 3000 Index Fund

Vanguard Specialized Funds

Vanguard Dividend Growth Fund Vanguard Energy Fund Vanguard REIT Index Fund

Vanguard Tax-Managed Funds

Vanguard Developed Markets Index Fund

Vanguard Trustees’ Equity Fund

Vanguard Emerging Markets Select Stock Fund Vanguard International Value Fund

Vanguard Variable Insurance Funds Balanced Portfolio Capital Growth Portfolio Diversified Value Portfolio Equity Income Portfolio Equity Index Portfolio Growth Portfolio International Portfolio Mid-Cap Index Portfolio REIT Index Portfolio Small Company Growth Portfolio


 

Vanguard Whitehall Funds

Vanguard Global Minimum Volatility Fund Vanguard High Dividend Yield Index Fund

Vanguard International Dividend Appreciation Index Fund Vanguard International High Dividend Yield Index Fund Vanguard Mid-Cap Growth Fund Vanguard Selected Value Fund

Vanguard Windsor Funds Vanguard Windsor Fund Vanguard Windsor II Fund

Vanguard World Fund

Vanguard Consumer Discretionary Index Fund Vanguard Consumer Staples Index Fund Vanguard Energy Index Fund Vanguard Financials Index Fund Vanguard FTSE Social Index Fund Vanguard Health Care Index Fund Vanguard Industrials Index Fund Vanguard Information Technology Index Fund Vanguard Materials Index Fund Vanguard Mega Cap Growth Index Fund Vanguard Mega Cap Index Fund Vanguard Mega Cap Value Index Fund Vanguard Telecommunication Services Index Fund Vanguard U.S. Growth Fund Vanguard Utilities Index Fund


 

APPENDIX 1

Information Regarding Country Risk

      1. To aid Customer in its determinations regarding Country Risk, Bank shall furnish annually and upon the initial placing of Financial Assets and cash into a country the following information (check items applicable):

A.       Opinions of local counsel concerning:

      _X_ i. Whether applicable foreign law would restrict the access afforded Customer’s independent public accountants to books and records kept by an eligible foreign custodian located in that country.

_X_   ii. Whether applicable foreign law would restrict the Customer’s ability to recover its  

 

Financial Assets and cash in the event of the bankruptcy of an Eligible Foreign Custodian located in that country.

_X_ iii. Whether applicable foreign law would restrict the Customer’s ability to recover

Financial Assets that are lost while under the control of an Eligible Foreign Custodian located in the country.

B.       Written information concerning:
_X_   i.   The   foreseeability   of   expropriation,   nationalization,   freezes,   or   confiscation   of  

 

Customer’s Financial Assets.

_X_   ii. Whether difficulties in converting Customer’s cash and cash equivalents to U.S. dollars  
are reasonably foreseeable.  

 

C.       A market report with respect to the following topics:
(i)       securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv)

securities settlement and registration, (v) taxation, and (vi) depositories (including depository evaluation), if any.

      2. To aid Customer in monitoring Country Risk, Bank shall furnish Customer the following additional information:

Market flashes, including with respect to changes in the information in market reports.


 

ANNEX A - Electronic Access

      1. Bank may permit the Customer and its Authorized Persons to access certain electronic systems and applications (collectively, the “Products”) and to access or receive electronically Data (as defined below) in connection with the Agreement. Bank may, from time to time, introduce new features to the Products or otherwise modify or delete existing features of the Products in its sole discretion. Bank shall endeavor to give the Customer reasonable notice of its termination or suspension of access to the Products, including suspension or cancelation of any User Codes, but may do so immediately if Bank determines, in its sole discretion, that providing access to the Products would violate Applicable Law or that the security or integrity of the Products is known or reasonably suspected to be at risk. Access to the Products shall be subject to the Security Procedure.

      2. In consideration of the fees paid by the Customer to Bank and subject to any applicable software license addendum in relation to Bank-owned or sublicensed software provided for a particular application and Applicable Law, Bank grants to the Customer a non-exclusive, non-transferable, limited and revocable license to use the Products and the information and data made available through the Products or transferred electronically (the “Data”) for the Customer’s internal business use only. The Customer may download the Data and print out hard copies for its reference, provided that it does not remove any copyright or other notices contained therein. The license granted herein will permit use by the Customer’s Authorized Person, provided that such use shall be in compliance with the Agreement, including this Annex. The Customer acknowledges that elements of the Data, including prices, Corporate Action information, and reference data, may have been licensed by Bank from third parties and that any use of such Data beyond that authorized by the foregoing license, may require the permission of one or more third parties in addition to Bank. Notwithstanding the foregoing, nothing in this Section 2, or elsewhere in this Annex, shall be deemed to give Bank or its licensors ownership of, or any rights in or to, any confidential information of the Customer, including as it may be accessible or receivable through the Products, and all rights in and to such information shall be retained exclusively by the Customer.

      3. The Customer acknowledges that there are security, cyberfraud, corruption, transaction error and access availability risks associated with using open networks such as the internet, and the Customer hereby expressly assumes such risks; for clarity, however, the foregoing shall not relieve Bank of its obligation under the first sentence of Section 4 of this Annex. The Customer is solely responsible for obtaining, maintaining and operating all systems, software (including antivirus software, anti-spyware software, and other internet security software) and personnel necessary for the Customer to access and use the Products. All such software must be interoperable with Bank’s software. Each of the Customer and Bank shall be responsible for the proper functioning, maintenance and security of its own systems, services, software and other equipment.

      4. In cases where Bank’s website is unexpectedly down or otherwise unavailable, Bank shall, absent a force majeure event, provide other appropriate means for the Customer or its Authorized Persons to instruct Bank or obtain reports from Bank. Provided that Bank complies with its obligation to provide such other appropriate means, Bank shall not be liable for any Liabilities arising out of the Customer’s inability to access or use the Products via Bank’s website in the absence of Bank’s gross negligence, fraud or willful misconduct.

      5. Use of the Products may be monitored, tracked, and recorded. In using the Products, the Customer hereby expressly consents to such monitoring, tracking, and recording, and will ensure that all persons using the Products through or on behalf of Customer are advised of and have consented to this monitoring, tracking and recording, and Bank’s right to disclose data derived from such activity in accordance with the Agreement, including this Annex. Bank shall own all right, title and interest in the data reflecting Customer’s usage of the Products or Bank’s website (including, but not limited to, general usage


 

data and aggregated transaction data). For clarity, the foregoing shall not be deemed to give Bank ownership of, or any rights in or to, the Customer’s confidential information (whether or not in aggregated form), the use or disclosure of which shall at all times be subject to Section 10.6 of this Agreement other otherwise agreed to by the Parties.

      6. The Customer shall not knowingly use the Products to transmit (i) any virus, worm, or destructive element or any programs or data that may be reasonably expected to interfere with or disrupt the Products or servers connected to the Products; (ii) material that violates the rights of another, including but not limited to the intellectual property rights of another; and (iii) “junk mail”, “spam”, “chain letters” or unsolicited mass distribution of e-mail.

      7. The Customer shall promptly and accurately designate in writing to Bank the geographic location of its users upon written request. The Customer further represents and warrants to Bank that the Customer shall not access the Products from any jurisdiction which Bank informs the Customer or where the Customer has actual knowledge that the Products are not authorized for use due to local regulations or laws, including applicable software export rules and regulations. Prior to submitting any document which designates the persons authorized to act on the Customer’s behalf, the Customer shall obtain from each individual referred to in such document all necessary consents to enable Bank to process the data set out therein for the purposes of providing the Products.

      8. Bank and Customer will be subject to and shall comply with all Applicable Law concerning restricting collection, use, disclosure, processing and free movement of the Data (collectively, the “Privacy Regulations”). The Privacy Regulations may include, as applicable, the Federal “Privacy of Consumer Financial Information” Regulation (12 CFR Part 40) and Interagency Guidelines Establishing Information Security Standards (App B to 12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the Gramm-Leach-Bliley Act of 1999 (15 U.S.C. §6801, et seq.), the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. §1320d), The Data Protection Act 1998 and Directive 95/46/EC, 2009/136/EC and 2002/58/EC of the European Parliament and of the Council, as amended from time to time, and applicable implementing legislation in connection with the protection of individuals with regard to processing of personal data and the free movement of such data.

      9. The Customer shall be responsible for the compliance of its Authorized Persons with the terms of the Agreement, including this Annex.


 

SCHEDULE 1 – AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK  
 
ARGENTINA   HSBC Bank Argentina S.A.   HSBC Bank Argentina S.A.  
  Bouchard 680, 9th Floor   Buenos Aires  
  C1106ABJ Buenos Aires    
  ARGENTINA    
 
AUSTRALIA   JPMorgan Chase Bank, N.A.**   Australia and New Zealand Banking  
  Level 31, 101 Collins Street   Group Ltd.  
  Melbourne 3000   Melbourne  
  AUSTRALIA    
 
AUSTRIA   UniCredit Bank Austria AG   J.P. Morgan AG**  
  Julius Tandler Platz 3   Frankfurt am Main  
  A 1090 Vienna    
  AUSTRIA    
 
BAHRAIN   HSBC Bank Middle East Limited   HSBC Bank Middle East Limited  
  Road No 2832   Al Seef  
  Al Seef 428    
  BAHRAIN    
 
BANGLADESH   Standard Chartered Bank   Standard Chartered Bank  
  Portlink Tower   Dhaka  
  Level 6, 67 Gulshan Avenue    
  Gulshan    
  Dhaka 1212    
  BANGLADESH    
 
BELGIUM   BNP Paribas Securities Services S.C.A.   J.P. Morgan A.G.**  
  Central Plaza Building   Frankfurt am Main  
  Rue de Loxum, 25    
  7th Floor    
  1000 Brussels    
  BELGIUM    
 
BERMUDA   HSBC Bank Bermuda Limited   HSBC Bank Bermuda Limited  
  6 Front Street   Hamilton  
  Hamilton HM 11    
  BERMUDA    
 
BOTSWANA   Standard Chartered Bank Botswana Limited   Standard Chartered Bank Botswana  
  5th Floor, Standard House   Limited  
  P.O. Box 496   Gaborone  
  Queens Road, The Mall    
  Gaborone    
  BOTSWANA    

 


 

BRAZIL   J.P. Morgan S.A. DTVM**   J.P. Morgan S.A. DTVM**  
  Av. Brigadeiro Faria Lima, 3729, Floor 06   Sao Paulo  
  Sao Paulo SP 04538 905    
  BRAZIL    
 
BULGARIA   Citibank Europe plc   ING Bank N.V.  
  Serdika Offices   Sofia  
  10th Floor    
  48 Sitnyakovo Blvd    
  Sofia 1505    
  BULGARIA    
 
CANADA   Canadian Imperial Bank of Commerce   Royal Bank of Canada  
  1 York Street, Suite 900   Toronto  
  Toronto Ontario M5J 0B6    
  CANADA    
 
  Royal Bank of Canada    
  155 Wellington Street West,    
  Toronto Ontario M5V 3L3    
  CANADA    
 
CHILE   Banco Santander Chile   Banco Santander Chile  
  Bandera 140, Piso 4   Santiago  
  Santiago    
  CHILE    
 
CHINA A   HSBC Bank (China) Company Limited   HSBC Bank (China) Company Limited  
SHARE   33/F, HSBC Building, Shanghai ifc   Shanghai  
  8 Century Avenue, Pudong    
  Shanghai 200120    
  THE PEOPLE'S REPUBLIC OF CHINA    
 
CHINA B   HSBC Bank (China) Company Limited   JPMorgan Chase Bank, N.A.**  
SHARE   33/F, HSBC Building, Shanghai ifc   New York  
  8 Century Avenue, Pudong    
  Shanghai 200120   JPMorgan Chase Bank, N.A.**  
  THE PEOPLE'S REPUBLIC OF CHINA   Hong Kong  
 
CHINA   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
CONNECT   48th Floor, One Island East   Hong Kong  
  18 Westlands Road, Quarry Bay    
  HONG KONG    
 
COLOMBIA   Cititrust Colombia S.A.   Cititrust Colombia S.A.  
  Carrera 9 A # 99 02, 3rd floor   Bogotá  
  Bogota    
  COLOMBIA    

 


 

*COSTA RICA*   Banco BCT, S.A.   Banco BCT, S.A.  
  150 Metros Norte de la Catedral   San Jose  
  Metropolitana    
  Edificio BCT    
  San Jose    
  COSTA RICA    

 

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR

FURTHER INFORMATION*

CROATIA   Privredna banka Zagreb d.d.   Zagrebacka banka d.d.  
  Radnicka cesta 50   Zagreb  
  10000 Zagreb    
  CROATIA    
 
CYPRUS   HSBC Bank plc   J.P. Morgan AG**  
  109 111, Messogian Ave.   Frankfurt am Main  
  115 26 Athens    
  GREECE    
 
CZECH   UniCredit Bank Czech Republic and Slovakia,   Ceskoslovenska obchodni banka, a.s.  
REPUBLIC   a.s.   Prague  
  BB Centrum FILADELFIE    
  Zeletavska 1525 1    
  140 92 Prague 1    
  CZECH REPUBLIC    
 
DENMARK   Nordea Bank AB (publ)   Nordea Bank AB (publ)  
  Christiansbro   Copenhagen  
  Strandgade 3    
  P.O. Box 850    
  DK 0900 Copenhagen    
  DENMARK    
 
EGYPT   Citibank, N.A.   Citibank, N.A.  
  4 Ahmed Pasha Street   Cairo  
  Garden City    
  Cairo    
  EGYPT    
 
ESTONIA   Swedbank AS   J.P. Morgan AG**  
  Liivalaia 8   Frankfurt am Main  
  15040 Tallinn    
  ESTONIA    
 
FINLAND   Nordea Bank AB (publ)   J.P. Morgan AG**  
  Aleksis Kiven katu 3 5   Frankfurt am Main  
  FIN 00020 NORDEA Helsinki    
  FINLAND    
 
FRANCE   BNP Paribas Securities Services S.C.A.   J.P. Morgan AG**  
  3, rue d'Antin   Frankfurt am Main  
  75002 Paris    
  FRANCE    

 


 

GERMANY   Deutsche Bank AG   J.P. Morgan AG**  
  Alfred Herrhausen Allee 16 24   Frankfurt am Main  
  D 65760 Eschborn    
  GERMANY    
 
  J.P. Morgan AG#**    
  Taunustor 1 (TaunusTurm)    
  60310 Frankfurt am Main    
  GERMANY    
  # Custodian for local German custody clients    
  only.    
 
GHANA   Standard Chartered Bank Ghana Limited   Standard Chartered Bank Ghana Limited  
  Accra High Street   Accra  
  P.O. Box 768    
  Accra    
  GHANA    
 
GREECE   HSBC Bank plc   J.P. Morgan AG**  
  Messogion 109 111   Frankfurt am Main  
  11526 Athens    
  GREECE    
 
HONG KONG   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
  48th Floor, One Island East   Hong Kong  
  18 Westlands Road, Quarry Bay    
  HONG KONG    
 
HUNGARY   Deutsche Bank AG   ING Bank N.V.  
  Hold utca 27   Budapest  
  H 1054 Budapest    
  HUNGARY    
 
*ICELAND*   Islandsbanki hf.   Islandsbanki hf.  
  Kirkjusandur 2   Reykjavik  
  IS 155 Reykjavik    
  ICELAND    

 

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR

FURTHER INFORMATION*

INDIA   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
  6th Floor, Paradigm ‘B’ Wing   Mumbai  
  Mindspace, Malad (West)    
  Mumbai 400 064    
  INDIA    
 
INDONESIA   PT Bank HSBC Indonesia   PT Bank HSBC Indonesia  
  Menara Mulia 25th Floor   Jakarta  
  Jl. Jendral Gatot Subroto Kav. 9 11    
  Jakarta 12930    
  INDONESIA    

 


 

IRELAND   JPMorgan Chase Bank, N.A.**   J.P. Morgan AG**  
  25 Bank Street, Canary Wharf   Frankfurt am Main  
  London E14 5JP    
  UNITED KINGDOM    
 
ISRAEL   Bank Leumi le Israel B.M.   Bank Leumi le Israel B.M.  
  35, Yehuda Halevi Street   Tel Aviv  
  65136 Tel Aviv    
  ISRAEL    
 
ITALY   BNP Paribas Securities Services S.C.A.   J.P. Morgan AG**  
  Piazza Lina Bo Bardi, 3   Frankfurt am Main  
  20124 Milan    
  ITALY    
 
JAPAN   Mizuho Bank, Ltd.   JPMorgan Chase Bank, N.A.**  
  2 15 1, Konan   Tokyo  
  Minato ku    
  Tokyo 108 6009    
  JAPAN    
 
  The Bank of Tokyo Mitsubishi UFJ, Ltd.    
  1 3 2 Nihombashi Hongoku cho    
  Chuo ku    
  Tokyo 103 0021    
  JAPAN    
 
JORDAN   Standard Chartered Bank   Standard Chartered Bank  
  Shmeissani Branch   Amman  
  Al Thaqafa Street    
  Building # 2    
  P.O. Box 926190    
  Amman    
  JORDAN    
 
KAZAKHSTAN   JSC Citibank Kazakhstan   Subsidiary Bank Sberbank of Russia Joint  
  Park Palace, Building A, Floor 2   Stock Company  
  41 Kazybek Bi   Almaty  
  Almaty 050010    
  KAZAKHSTAN    
 
KENYA   Standard Chartered Bank Kenya Limited   Standard Chartered Bank Kenya Limited  
  Chiromo   Nairobi  
  48 Westlands Road    
  Nairobi 00100    
  KENYA    
 
KUWAIT   HSBC Bank Middle East Limited   HSBC Bank Middle East Limited  
  Kuwait City, Sharq Area   Safat  
  Abdulaziz Al Sager Street    
  Al Hamra Tower, 37F    
  Safat 13017    
  KUWAIT    

 


 

LATVIA   Swedbank AS   J.P. Morgan AG**  
  Balasta dambis 1a   Frankfurt am Main  
  Riga LV 1048    
  LATVIA    
 
LITHUANIA   AB SEB Bankas   J.P. Morgan AG**  
  12 Gedimino pr.   Frankfurt am Main  
  LT 2600 Vilnius    
  LITHUANIA    
 
LUXEMBOURG   BNP Paribas Securities Services S.C.A.   J.P. Morgan AG**  
  33, Rue de Gasperich   Frankfurt am Main  
  L 5826 Hesperange    
  LUXEMBOURG    
 
*MALAWI*   Standard Bank Limited, Malawi   Standard Bank Limited, Malawi  
  1st Floor Kaomba House   Blantyre  
  Cnr Glyn Jones Road & Victoria Avenue    
  Blantyre    
  MALAWI    

 

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR

FURTHER INFORMATION*

MALAYSIA   HSBC Bank Malaysia Berhad   HSBC Bank Malaysia Berhad  
  2 Leboh Ampang   Kuala Lumpur  
  12th Floor, South Tower    
  50100 Kuala Lumpur    
  MALAYSIA    
 
MAURITIUS   The Hongkong and Shanghai Banking   The Hongkong and Shanghai Banking  
  Corporation Limited   Corporation Limited  
  HSBC Centre   Ebene  
  18 Cybercity    
  Ebene    
  MAURITIUS    
 
MEXICO   Banco Nacional de Mexico, S.A.   Banco Santander (Mexico), S.A.  
  Act. Roberto Medellin No. 800 3er Piso Norte   Mexico, D.F.  
  Colonia Santa Fe    
  01210 Mexico, D.F.    
  MEXICO    
 
MOROCCO   Société Générale Marocaine de Banques   Attijariwafa Bank S.A.  
  55 Boulevard Abdelmoumen   Casablanca  
  Casablanca 20100    
  MOROCCO    

 


 

NAMIBIA   Standard Bank Namibia Limited   The Standard Bank of South Africa  
  2nd Floor, Town Square Building   Limited  
  Corner of Werner List and Post Street Mall   Johannesburg  
  P.O. Box 3327    
  Windhoek    
  NAMIBIA    
 
NETHERLANDS   BNP Paribas Securities Services S.C.A.   J.P. Morgan AG**  
  Herengracht 595   Frankfurt am Main  
  1017 CE Amsterdam    
  NETHERLANDS    
 
NEW ZEALAND   JPMorgan Chase Bank, N.A.**   Westpac Banking Corporation  
  Level 13, 2 Hunter Street   Wellington  
  Wellington 6011    
  NEW ZEALAND    
 
NIGERIA   Stanbic IBTC Bank Plc   Stanbic IBTC Bank Plc  
  Plot 1712   Lagos  
  Idejo Street    
  Victoria Island    
  Lagos    
  NIGERIA    
 
NORWAY   Nordea Bank AB (publ)   Nordea Bank AB (publ)  
  Essendropsgate 7   Oslo  
  P.O. Box 1166    
  NO 0107 Oslo    
  NORWAY    
 
OMAN   HSBC Bank Oman S.A.O.G.   HSBC Bank Oman S.A.O.G.  
  2nd Floor Al Khuwair   Seeb  
  P.O. Box 1727 PC 111    
  Seeb    
  OMAN    
 
PAKISTAN   Standard Chartered Bank (Pakistan) Limited   Standard Chartered Bank (Pakistan)  
  P.O. Box 4896   Limited  
  Ismail Ibrahim Chundrigar Road   Karachi  
  Karachi 74000    
  PAKISTAN    
 
PERU   Citibank del Perú S.A.   Banco de Crédito del Perú  
  Av. Canaval y Moreryra 480 Piso 3   Lima  
  San Isidro    
  Lima 27    
  PERU    

 


 

PHILIPPINES   The Hongkong and Shanghai Banking   The Hongkong and Shanghai Banking  
  Corporation Limited   Corporation Limited  
  7/F HSBC Centre   Taguig City  
  3058 Fifth Avenue West    
  Bonifacio Global City    
  1634 Taguig City    
  PHILIPPINES    
 
POLAND   Bank Handlowy w. Warszawie S.A.   mBank S.A.  
  ul. Senatorska 16   Warsaw  
  00 923 Warsaw    
  POLAND    
 
PORTUGAL   BNP Paribas Securities Services S.C.A.   J.P. Morgan AG**  
  Avenida D.João II, Lote 1.18.01, Bloco B,   Frankfurt am Main  
  7º andar    
  1998 028 Lisbon    
  PORTUGAL    
 
QATAR   HSBC Bank Middle East Limited   The Commercial Bank (P.Q.S.C.)  
  2nd Floor, Ali Bin Ali Tower   Doha  
  Building 150 (Airport Road)    
  P.O. Box 57    
  Doha    
  QATAR    
 
ROMANIA   Citibank Europe plc   ING Bank N.V.  
  145 Calea Victoriei   Bucharest  
  1st District    
  010072 Bucharest    
  ROMANIA    
 
RUSSIA   J.P. Morgan Bank International (Limited   JPMorgan Chase Bank, N.A.**  
  Liability Company)**   New York  
  10, Butyrsky Val    
  White Square Business Centre    
  Floor 12    
  Moscow 125047    
  RUSSIA    
 
SAUDI ARABIA   HSBC Saudi Arabia   HSBC Saudi Arabia  
  2/F HSBC Building   Riyadh  
  7267 Olaya Street North, Al Murooj    
  Riyadh 12283 2255    
  SAUDI ARABIA    
 
SERBIA   Unicredit Bank Srbija a.d.   Unicredit Bank Srbija a.d.  
  Rajiceva 27 29   Belgrade  
  11000 Belgrade    
  SERBIA    

 


 

SINGAPORE   DBS Bank Ltd   Oversea Chinese Banking Corporation  
  10 Toh Guan Road   Singapore  
  DBS Asia Gateway, Level 04 11 (4B)    
  608838    
  SINGAPORE    
 
SLOVAK   UniCredit Bank Czech Republic and Slovakia,   J.P. Morgan AG**  
REPUBLIC   a.s.   Frankfurt am Main  
  Sancova 1/A    
  SK 813 33 Bratislava    
  SLOVAK REPUBLIC    
 
SLOVENIA   UniCredit Banka Slovenija d.d.   J.P. Morgan AG**  
  Smartinska 140   Frankfurt am Main  
  SI 1000 Ljubljana    
  SLOVENIA    
 
SOUTH AFRICA   FirstRand Bank Limited   The Standard Bank of South Africa  
  1 Mezzanine Floor, 3 First Place, Bank City   Limited  
  Cnr Simmonds and Jeppe Streets   Johannesburg  
  Johannesburg 2001    
  SOUTH AFRICA    
 
SOUTH KOREA   Standard Chartered Bank Korea Limited   Standard Chartered Bank Korea Limited  
  47 Jongro, Jongro Gu   Seoul  
  Seoul 03160    
  SOUTH KOREA    
 
  Kookmin Bank Co., Ltd.   Kookmin Bank Co., Ltd.  
  84, Namdaemun ro, Jung gu   Seoul  
  Seoul 100 845    
  SOUTH KOREA    
 
SPAIN   Santander Securities Services, S.A.   J.P. Morgan AG**  
  Ciudad Grupo Santander   Frankfurt am Main  
  Avenida de Cantabria, s/n    
  Edificio Ecinar, planta baja    
  Boadilla del Monte    
  28660 Madrid    
  SPAIN    
 
SRI LANKA   The Hongkong and Shanghai Banking   The Hongkong and Shanghai Banking  
  Corporation Limited   Corporation Limited  
  24 Sir Baron Jayatillaka Mawatha   Colombo  
  Colombo 1    
  SRI LANKA    
 
SWEDEN   Nordea Bank AB (publ)   Svenska Handelsbanken  
  Hamngatan 10   Stockholm  
  SE 105 71 Stockholm    
  SWEDEN    

 


 

SWITZERLAND   UBS Switzerland AG   UBS Switzerland AG  
  45 Bahnhofstrasse   Zurich  
  8021 Zurich    
  SWITZERLAND    
 
TAIWAN   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
  8th Floor, Cathay Xin Yi Trading Building   Taipei  
  No. 108, Section 5, Xin Yi Road    
  Taipei 11047    
  TAIWAN    
 
*TANZANIA*   Stanbic Bank Tanzania Limited   Stanbic Bank Tanzania Limited  
  Stanbic Centre   Dar es Salaam  
  Corner Kinondoni and A.H. Mwinyi Roads    
  P.O. Box 72648    
  Dar es Salaam    
  TANZANIA    

 

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR

FURTHER INFORMATION*

THAILAND   Standard Chartered Bank (Thai) Public   Standard Chartered Bank (Thai) Public  
  Company Limited   Company Limited  
  14th Floor, Zone B   Bangkok  
  Sathorn Nakorn Tower    
  90 North Sathorn Road Bangrak    
  Silom, Bangrak    
  Bangkok 10500    
  THAILAND    
 
TRINIDAD AND   Republic Bank Limited   Republic Bank Limited  
TOBAGO   9 17 Park Street   Port of Spain  
  Port of Spain    
  TRINIDAD AND TOBAGO    
 
TUNISIA   Banque Internationale Arabe de Tunisie, S.A.   Banque Internationale Arabe de Tunisie,  
  70 72 Avenue Habib Bourguiba   S.A.  
  P.O. Box 520   Tunis  
  Tunis 1000    
  TUNISIA    
 
TURKEY   Citibank A.S.   JPMorgan Chase Bank, N.A.**  
  Inkilap Mah., Yilmaz Plaza   Istanbul  
  O. Faik Atakan Caddesi No: 3    
  34768 Umraniye, Istanbul    
  TURKEY    
 
UGANDA   Standard Chartered Bank Uganda Limited   Standard Chartered Bank Uganda Limited  
  5 Speke Road   Kampala  
  P.O. Box 7111    
  Kampala    
  UGANDA    

 


 

*UKRAINE*   PJSC Citibank   PJSC Citibank  
  16 G Dilova Street   Kiev  
  03150 Kiev    
  UKRAINE   JPMorgan Chase Bank, N.A.**  
    New York  

 

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR

FURTHER INFORMATION*

UNITED ARAB   HSBC Bank Middle East Limited   The National Bank of Abu Dhabi  
EMIRATES   Emaar Square, Level 4, Building No. 5   Abu Dhabi  
ADX   P.O. Box 502601    
  Dubai    
  UNITED ARAB EMIRATES    
 
UNITED ARAB   HSBC Bank Middle East Limited   The National Bank of Abu Dhabi  
EMIRATES   Emaar Square, Level 4, Building No. 5   Abu Dhabi  
DFM   P.O. Box 502601    
  Dubai    
  UNITED ARAB EMIRATES    
 
UNITED ARAB   HSBC Bank Middle East Limited   JPMorgan Chase Bank, N.A. **  
EMIRATES   Emaar Square, Level 4, Building No. 5   New York  
NASDAQ   P.O. Box 502601    
DUBAI   Dubai    
  UNITED ARAB EMIRATES    
 
UNITED   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
KINGDOM   25 Bank Street, Canary Wharf   London  
  London E14 5JP    
  UNITED KINGDOM    
 
  Deutsche Bank AG Depository and Clearing   Varies by currency  
  Centre    
  10 Bishops Square    
  London E1 6EG    
  UNITED KINGDOM    
 
UNITED   JPMorgan Chase Bank, N.A.**   JPMorgan Chase Bank, N.A.**  
STATES   4 New York Plaza   New York  
  New York NY 10004    
  UNITED STATES    
 
URUGUAY   Banco Itaú Uruguay S.A.   Banco Itaú Uruguay S.A.  
  Zabala 1463   Montevideo  
  11000 Montevideo    
  URUGUAY    
 
VENEZUELA   Citibank, N.A.   Citibank, N.A.  
  Avenida Casanova   Caracas  
  Centro Comercial El Recreo    
  Torre Norte, Piso 19    
  Caracas 1050    
  VENEZUELA    

 


 

VIETNAM   HSBC Bank (Vietnam) Ltd.   HSBC Bank (Vietnam) Ltd.  
  Centre Point     Ho Chi Minh City  
  106 Nguyen Van Troi Street    
  Phu Nhuan District    
  Ho Chi Minh City    
  VIETNAM      
 
 
*WAEMU   Standard Chartered Bank Côte d’Ivoire SA   Standard Chartered Bank Côte d’Ivoire SA  
BENIN,   23 Boulevard de la Republique 1   Abidjan  
BURKINA   01 B.P. 1141      
FASO, GUINEA   Abidjan 17      
BISSAU, IVORY   IVORY COAST    
COAST, MALI,        
NIGER,        
SENEGAL,        
TOGO*        
 
*RESTRICTED SERVICE ONLY.   PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR  
FURTHER INFORMATION*      
 
ZAMBIA   Standard Chartered Bank Zambia Plc   Standard Chartered Bank Zambia Plc  
  Standard Chartered House   Lusaka  
  Cairo Road      
  P.O. Box 32238    
  Lusaka 10101      
  ZAMBIA      
 
*ZIMBABWE*   Stanbic Bank Zimbabwe Limited   Stanbic Bank Zimbabwe Limited  
  Stanbic Centre, 3rd Floor   Harare  
  59 Samora Machel Avenue    
  Harare      
  ZIMBABWE      
 
*RESTRICTED SERVICE ONLY.   PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR  
FURTHER INFORMATION*      
 
 
 
** J.P. Morgan affiliate   Correspondent banks are listed for information only.  
 
       

 

This document is for information only and its contents are subject to change. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with J.P. Morgan. Neither this document nor any of its contents may be disclosed to any third party or used for any other purpose without the proper written consent of J.P. Morgan. J.P. Morgan has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.


 

SCHEDULE 3 – SECURITIES DEPOSITORIES
 
 
Market   Depository   Instruments  
 
ARGENTINA   CVSA   Equity, Corporate Debt, Government Debt  
  (Caja de Valores S.A.)    
 
AUSTRALIA   ASX Settlement   Equity  
  (ASX Settlement Pty Limited)    
 
  Austraclear   Corporate Debt, Government Debt  
  (Austraclear Limited)    
 
AUSTRIA   OeKB CSD GmbH   Equity, Corporate Debt, Government Debt  
  (Oesterreichische Kontrollbank CSD    
  GmbH)    
 
BAHRAIN   CSD   Equity, Corporate Debt  
  (Bahrain Bourse - Clearing, Settlement and    
  Central Depository)    
 
BANGLADESH   BB   Government Debt  
  (Bangladesh Bank)    
 
  CDBL   Equity, Corporate Debt  
  (Central Depository Bangladesh Limited)    
 
BELGIUM   Euroclear Belgium   Equity, Corporate Debt  
  (Euroclear Belgium SA/NV)    
 
  NBB   Corporate Debt, Government Debt  
  (The National Bank of Belgium)    
 
BERMUDA   BSD   Equity, Corporate Debt, Government Debt  
  (Bermuda Stock Exchange - Bermuda    
  Securities Depository)    
 
BOTSWANA   BoB   Government Debt  
  (Bank of Botswana)    
 
  CSDB   Equity, Corporate Debt  
  (Central Securities Depository of Botswana    
  Ltd)    
 
BRAZIL   BM&FBOVESPA   Equity  
  (B3 S.A. - BM&FBOVESPA)    
 
  CETIP   Corporate Debt  
  (B3 S.A. - CETIP)    
 
  SELIC   Government Debt  
  (Banco Central do Brasil - Sistema Especial    
  de Liquidação e Custódia)    

 


 

BULGARIA   CDAD   Equity, Corporate Debt  
  (Central Depository AD)    
 
  BNB   Government Debt  
  (Bulgarian National Bank)    
 
CANADA   CDS Clearing   Equity, Corporate Debt, Government Debt  
  (CDS Clearing and Depository Services    
  Inc.)    
 
CHILE   DCV   Equity, Corporate Debt, Government Debt  
  (Depósito Central de Valores S.A.)    
 
CHINA A-SHARE   CSDCC   Equity, Corporate Debt, Government Debt  
  (China Securities Depository and Clearing    
  Corporation Limited)    
 
  SCH   Short-term Corporate Debt  
  (Shanghai Clearing House)    
 
  CCDC   Corporate Debt, Government Debt  
  (China Central Depository & Clearing Co.,    
  Ltd.)    
 
CHINA B-SHARE   CSDCC   Equity  
  (China Securities Depository and Clearing    
  Corporation Limited)    
 
CHINA   HKSCC - for China Connect   Equity  
CONNECT   (Hong Kong Securities Clearing Company    
  Limited)    
 
COLOMBIA   DCV   Government Debt  
  (Banco de la Républica de Colombia -    
  Depósito Central de Valores)    
 
  DECEVAL   Equity, Corporate Debt, Government Debt  
  (Depósito Centralizado de Valores de    
  Colombia S.A.)    
 
COSTA RICA   InterClear   Equity, Corporate Debt, Government Debt  
  (InterClear, S.A.)    
 
CROATIA   SKDD   Equity, Corporate Debt, Government Debt  
  (Sredi š nje klirin š ko depozitarno dru š tvo    
  d.d.)    
 
CYPRUS   CDCR   Equity, Corporate Debt, Government Debt  
  (Cyprus Stock Exchange - Central    
  Depository and Central Registry)    

 


 

CZECH   CNB   Short-Term Corporate Debt, Short-Term  
REPUBLIC   (Ceská národní banka)   Government Debt  
 
  CDCP   Equity, Long-Term Corporate Debt, Long-  
  (Centrální depozitár cenn ý ch papíru, a.s.)   Term Government Debt  
 
DENMARK   VP   Equity, Corporate Debt, Government Debt  
  (VP Securities A/S)    
 
EGYPT   MCDR   Equity, Corporate Debt, Treasury Bonds  
  (Misr for Central Clearing, Depository and    
  Registry)    
 
  CBE   Treasury Bills  
  (Central Bank of Egypt)    
 
ESTONIA   ECSD   Equity, Corporate Debt, Government Debt  
  (Eesti Väärtpaberikeskus AS)    
 
FINLAND   Euroclear Finland   Equity, Corporate Debt, Government Debt  
  (Euroclear Finland Oy)    
 
FRANCE   Euroclear France   Equity, Corporate Debt, Government Debt  
  (Euroclear France SA)    
 
GERMANY   CBF   Equity, Corporate Debt, Government Debt  
  (Clearstream Banking AG)    
 
GHANA   CSD   Equity, Corporate Debt, Government Debt  
  (Central Securities Depository (GH) Ltd.)    
 
GREECE   BoG   Government Debt  
  (Bank of Greece)    
 
  ATHEXCSD   Equity, Corporate Debt  
  (Hellenic Central Securities Depository)    
 
 
 
HONG KONG   HKSCC   Equity, Corporate Debt, Government Debt  
  (Hong Kong Securities Clearing Company    
  Limited)    
 
  CMU   Corporate Debt, Government Debt  
  (Hong Kong Monetary Authority - Central    
  Moneymarkets Unit)    
 
HUNGARY   KELER   Equity, Corporate Debt, Government Debt  
  (Központi Elszámolóház és Értéktár    
  (Budapest) Zrt.)    
 
ICELAND   Nasdaq CSD Iceland hf.   Equity, Corporate Debt, Government Debt  
  (Nasdaq ver ð bréfami ð stö ð hf.)    

 


 

INDIA   NSDL   Equity, Corporate Debt  
  (National Securities Depository Limited)    
 
  CDSL   Equity, Corporate Debt  
  (Central Depository Services (India)    
  Limited)    
 
  RBI   Government Debt  
  (Reserve Bank of India)    
 
INDONESIA   KSEI   Equity, Corporate Debt, Government Debt*  
  (PT Kustodian Sentral Efek Indonesia)   (*acts as sub-registry)  
 
  BI   Government Debt  
  (Bank Indonesia)    
 
INTERNATIONAL   Euroclear Bank   Internationally Traded Debt, Equity  
SECURITIES   (Euroclear Bank SA/NV)    
MARKET      
  CBL   Internationally Traded Debt, Equity  
  (Clearstream Banking S.A.)    
 
IRELAND   EUI   Equity, Corporate Debt  
  (Euroclear U.K. & Ireland Limited)    
 
ISRAEL   TASE-CH   Equity, Corporate Debt, Government Debt  
  (Tel-Aviv Stock Exchange Clearing House    
  Ltd.)    
 
ITALY   Monte Titoli   Equity, Corporate Debt, Government Debt  
  (Monte Titoli S.p.A.)    
 
JAPAN   JASDEC   Equity, Corporate Debt  
  (Japan Securities Depository Center,    
  Incorporated)    
 
  BOJ   Government Debt  
  (Bank of Japan)    
 
JORDAN   SDC   Equity, Corporate Debt  
  (Securities Depository Center)    
 
KAZAKHSTAN   KACD   Equity, Corporate Debt, Government Debt  
  (Central Securities Depository Joint-Stock    
  Company)    
 
KENYA   CDS   Government Debt  
  (Central Bank of Kenya - Central    
  Depository System)    
 
  CDSC   Equity, Corporate Debt  
  (Central Depository and Settlement    
  Corporation Limited)    

 


 

KUWAIT   KCC   Equity, Corporate Debt  
  (The Kuwait Clearing Company K.S.C.)    
 
LATVIA   LCD   Equity, Corporate Debt, Government Debt  
  (Latvian Central Depository)    
 
LITHUANIA   CSDL   Equity, Corporate Debt, Government Debt  
  (Central Securities Depository of    
  Lithuania)    
 
LUXEMBOURG   CBL   Equity, Corporate Debt, Government Debt  
  (Clearstream Banking S.A.)    
 
MALAYSIA   Bursa Depository   Equity, Corporate Debt  
  (Bursa Malaysia Depository Sdn Bhd)    
 
  BNM   Government Debt  
  (Bank Negara Malaysia)    
 
MAURITIUS   CDS   Equity, Corporate Debt  
  (Central Depository & Settlement Co. Ltd)    
 
  BOM   Government Debt  
  (Bank of Mauritius)    
 
MEXICO   Indeval   Equity, Corporate Debt, Government Debt  
  (S.D. Indeval S.A. de C.V.)    
 
MOROCCO   Maroclear   Equity, Corporate Debt, Government Debt  
  (Maroclear)    
 
NETHERLANDS   Euroclear Nederland   Equity, Corporate Debt, Government Debt  
  (Euroclear Nederland)    
 
NEW ZEALAND   NZCSD   Equity, Corporate Debt, Government Debt  
  (New Zealand Central Securities    
  Depository Limited)    
 
NIGERIA   CSCS   Equity, Corporate Debt  
  (Central Securities Clearing System Plc)    
 
  CBN   Government Debt  
  (Central Bank of Nigeria)    
 
NORWAY   VPS   Equity, Corporate Debt, Government Debt  
  (Verdipapirsentralen ASA)    
 
OMAN   MCD   Equity, Corporate Debt, Government Debt  
  (Muscat Clearing and Depository Co.    
  (S.A.O.C))    

 


 

PAKISTAN   SBP   Government Debt  
  (State Bank of Pakistan)    
 
  CDC   Equity, Corporate Debt  
  (Central Depository Company of Pakistan    
  Limited)    
 
PERU   CAVALI   Equity, Corporate Debt, Government Debt  
  (CAVALI S.A. I.C.L.V.)    
 
PHILIPPINES   PDTC   Equity, Corporate Debt  
  (Philippine Depository and Trust    
  Corporation)    
 
  RoSS   Government Debt  
  (Bureau of Treasury - Registry of Scripless    
  Securities)    
 
POLAND   KDPW   Equity, Corporate Debt, Long-Term  
  (Krajowy Depozyt Papierów   Government Debt  
  Wartosciowych S.A.)    
 
  RPW   Short-Term Government Debt  
  (National Bank of Poland - Registry of    
  Securities)    
 
PORTUGAL   INTERBOLSA   Equity, Corporate Debt, Government Debt  
  (Sociedade Gestora de Sistemas de    
  Liquidação e de Sistemas Centralizados de    
  Valores Mobiliários, S.A.)    
 
QATAR   QCSD   Equity, Government Debt  
  (Qatar Central Securities Depository)    
 
ROMANIA   CD S.A.   Equity, Corporate Debt  
  (Central Depository S.A.)    
 
  NBR   Government Debt  
  (National Bank of Romania)    
 
RUSSIA   NSD   Equity, Corporate Debt, Government Debt  
  (National Settlement Depository)    
 
SAUDI ARABIA   SDCC   Equity, Corporate Debt, Government Debt  
  (Securities Depository Center Company)    
 
SERBIA   CSD   Equity, Corporate Debt, Government Debt  
  (Central Securities Depository and Clearing    
  House)    

 


 

SINGAPORE   CDP   Equity, Corporate Debt, Government  
  (The Central Depository (Pte) Limited)   Securities  
 
  MAS   Government Securities  
  (Monetary Authority of Singapore)    
 
SLOVAK   CDCP   Equity, Corporate Debt, Government Debt  
REPUBLIC   (Centrálny depozitár cenn ý ch papierov SR,    
  a.s.)    
 
SLOVENIA   KDD   Equity, Corporate Debt, Government Debt  
  (Centralna klirin š ko depotna dru ~ ba d.d.)    
 
SOUTH AFRICA   Strate   Equity, Corporate Debt, Government Debt  
  (Strate (Pty) Limited)    
 
SOUTH KOREA   KSD   Equity, Corporate Debt, Government Debt  
  (Korea Securities Depository)    
 
SPAIN   IBERCLEAR   Equity, Corporate Debt, Government Debt  
  (Sociedad de Sistemas)    
 
SRI LANKA   CDS   Equity, Corporate Debt  
  (Central Depository Systems (Pvt.) Ltd.)    
 
  LankaSecure   Government Debt  
  (Central Bank of Sri Lanka - LankaSecure)    
 
SWEDEN   Euroclear Sweden   Equity, Corporate Debt, Government Debt  
  (Euroclear Sweden AB)    
 
SWITZERLAND   SIS   Equity, Corporate Debt, Government Debt  
  (SIX SIS AG)    
 
TAIWAN   TDCC   Equity, Corporate Debt  
  (Taiwan Depository and Clearing    
  Corporation)    
 
  CBC   Government Debt  
  (Central Bank of the Republic of China    
  (Taiwan))    
 
TANZANIA   CDS   Equity, Corporate Debt  
  (Dar es Salaam Stock Exchange Central    
  Depository System)    
 
THAILAND   TSD   Equity, Corporate Debt, Government Debt  
  (Thailand Securities Depository Company    
  Limited)    
 
TRINIDAD AND   TTCD   Equity, Corporate Debt, Government Debt  
TOBAGO   (Trinidad and Tobago Central Depository    
  Limited)    

 


 

TUNISIA   Tunisie Clearing   Equity, Corporate Debt, Government Debt  
  (Tunisie Clearing)    
 
TURKEY   CBRT   Government Debt  
  (Türkiye Cumhuriyet Merkez Bankasi    
  A.S.)    
 
  CRA   Equity, Corporate Debt, Government Debt  
  (Merkezi Kayit Kurulusu A.S.)    
 
UGANDA   CSD   Government Debt  
  (Bank of Uganda - Central Securities    
  Depository)    
 
  SCD   Equity, Corporate Debt  
  (Uganda Securities Exchange - Securities    
  Central Depository)    
 
UKRAINE   NDU   Equity, Corporate Debt  
  (National Depository of Ukraine)    
 
UNITED ARAB   ADX   Equity, Corporate Debt, Government Debt  
EMIRATES - ADX   (Abu Dhabi Securities Exchange)    
 
UNITED ARAB   DFM   Equity, Corporate Debt, Government Debt  
EMIRATES - DFM   (Dubai Financial Market)    
 
UNITED ARAB   NASDAQ Dubai   Corporate Debt  
EMIRATES -   (NASDAQ Dubai Limited)    
NASDAQ DUBAI      
 
UNITED   EUI   Equity, Corporate Debt, Government Debt  
KINGDOM   (Euroclear U.K. & Ireland Limited)    
 
UNITED STATES   FRB   Government Debt, Mortgage Backed  
  (Federal Reserve Bank)   Securities  
 
  DTC   Equity, Corporate Debt  
  (Depository Trust Company)    
 
URUGUAY   BCU   Government Debt  
  (Banco Central del Uruguay)    
 
VENEZUELA   CVV   Equity, Corporate Debt  
  (Caja Venezolana de Valores, S.A.)    
 
  BCV   Government Debt  
  (Banco Central de Venezuela)    
 
VIETNAM   VSD   Equity, Corporate Debt, Government Debt  
  (Vietnam Securities Depository)    

 


 

WAEMU - BENIN,   DC/BR   Equity, Corporate Debt, Government Debt  
BURKINA FASO,   (Le Dépositaire Central / Banque de    
GUINEA-BISSAU,   Règlement)    
IVORY COAST,      
MALI, NIGER,      
SENEGAL, TOGO      
 
ZAMBIA   LuSE CSD   Equity, Corporate Debt, Treasury Bonds  
  (Lusaka Stock Exchange Central Shares    
  Depository)    
 
  BoZ   Government Debt  
  (Bank of Zambia)    
 
ZIMBABWE   CDC   Equity  
  (Chengetedzai Depository Company    
  Limited)    

 

This document is for information only and its contents are subject to change. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with J.P. Morgan. Neither this document nor any of its contents may be disclosed to any third party or used for any other purpose without the proper written consent of J.P. Morgan. J.P. Morgan has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.


 

EXHIBIT 1—Amendment 2

The following is an amendment, dated as of December 22, 2017 (“Amendment”), to the Amended and Restated Global Custody Agreement, dated August 14, 2017, as amended from time to time (the “Agreement”), by and between JPMorgan Chase Bank, N.A. (“Bank”) and each open-end management investment company listed on Exhibit 1 thereto (each, a “Trust”). This Amendment serves to update the names of the Trusts and certain of their portfolios (each, a “Fund”) listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the following Trusts and Funds listed below. Capitalized terms used but not defined in this Amendment have the meanings ascribed to them in the Agreement.

Vanguard Admiral Funds

Vanguard S&P 500 Growth Index Fund Vanguard S&P 500 Value Index Fund Vanguard S&P Mid-Cap 400 Growth Index Fund Vanguard S&P Mid-Cap 400 Index Fund Vanguard S&P Mid-Cap 400 Value Index Fund Vanguard S&P Small-Cap 600 Growth Index Fund Vanguard S&P Small-Cap 600 Index Fund Vanguard S&P Small-Cap 600 Value Index Fund

Vanguard Bond Index Funds

Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market II Index Fund

Vanguard Chester Funds

Vanguard Institutional Target Retirement 2015 Fund Vanguard Institutional Target Retirement 2020 Fund Vanguard Institutional Target Retirement 2025 Fund Vanguard Institutional Target Retirement 2030 Fund Vanguard Institutional Target Retirement 2035 Fund Vanguard Institutional Target Retirement 2040 Fund Vanguard Institutional Target Retirement 2045 Fund Vanguard Institutional Target Retirement 2050 Fund Vanguard Institutional Target Retirement 2055 Fund Vanguard Institutional Target Retirement 2060 Fund Vanguard Institutional Target Retirement 2065 Fund Vanguard Institutional Target Retirement Income Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund


 

Vanguard Target Retirement 2050 Fund Vanguard Target Retirement 2055 Fund Vanguard Target Retirement 2060 Fund Vanguard Target Retirement 2065 Fund Vanguard Target Retirement Income Fund

Vanguard Fixed Income Securities Funds Vanguard GNMA Fund Vanguard REIT II Index Fund Vanguard Index Funds

Vanguard Extended Market Index Fund 1 Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund 1 Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Growth Index Fund 1 Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund 1 Vanguard Total Stock Market Index Fund

Vanguard International Equity Index Funds

Vanguard Emerging Markets Stock Index Fund 2

Vanguard Malvern Funds Vanguard Core Bond Fund 2

Vanguard Institutional Intermediate-Term Bond Fund 2 Vanguard Institutional Short-Term Bond Fund 2

Vanguard Scottsdale Funds

Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Intermediate-Term Treasury Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Long-Term Treasury Index Fund Vanguard Mortgage-Backed Securities Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Short-Term Treasury Index Fund Vanguard Total Corporate Bond ETF

Vanguard Specialized Funds

      Vanguard Precious Metals and Mining Fund Vanguard REIT Index Fund 1 Vanguard STAR Funds Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard STAR Fund 2 Vanguard Total International Stock Index Fund


 

Vanguard Tax-Managed Funds

Vanguard Tax-Managed Balanced Fund

Vanguard Tax-Managed Capital Appreciation Fund 1 Vanguard Tax-Managed Small-Cap Fund 1

Vanguard Trustees’ Equity Fund Vanguard Diversified Equity Fund 1 Vanguard International Value Fund 2 Vanguard Valley Forge Funds Vanguard Balanced Index Fund Vanguard Managed Payout Fund 1 Vanguard Variable Insurance Funds Conservative Allocation Portfolio 1

Equity Index Portfolio 2
Global Bond Index Portfolio
Mid-Cap Index Portfolio 2
Moderate Allocation Portfolio 1

REIT Index Portfolio 2

Total International Stock Market Index Portfolio Total Stock Market Index Portfolio 1

Vanguard Wellington Fund Vanguard Wellington Fund

Vanguard Whitehall Funds

Vanguard High Dividend Yield Index Fund 2 Vanguard International Explorer Fund

Vanguard World Fund

Vanguard Extended Duration Treasury Index Fund Vanguard Global Wellesley Income Fund Vanguard Global Wellington Fund

(Rest of page left intentionally blank)

1 Effective on or about February 20, 2018, or as otherwise agreed by the parties.

2 Effective on or about March 22, 2018, or as otherwise agreed by the parties.


 

Bank and each following Customer hereby agree that all of the terms and conditions as set forth in the Agreement except for Sections 2.1 and 2.2 are hereby incorporated by reference with respect to the Trusts and Funds listed below limited to their use of account number P 62749 in Vanguard Directly Managed Securities Lending transactions:

Vanguard Chester Funds
Vanguard PRIMECAP Fund

Vanguard Explorer Fund
Vanguard Explorer Fund

Vanguard Fenway Funds
Vanguard Equity Income Fund
Vanguard PRIMECAP Core Fund

Vanguard Horizon Funds

Vanguard Capital Opportunity Fund Vanguard Global Equity Fund Vanguard Strategic Equity Fund Vanguard Strategic Small-Cap Equity Fund

Vanguard Index Funds
Vanguard Extended Market Index Fund
Vanguard 500 Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small Cap Growth Index Fund
Vanguard Small Cap Value Index Fund
Vanguard Value Index Fund

Vanguard Institutional Index Funds Vanguard Institutional Index Fund

Vanguard Institutional Total Stock Market Index Fund

Vanguard Malvern Funds
Vanguard Capital Value Fund
Vanguard U.S. Value Fund

Vanguard Morgan Growth Fund
Vanguard Morgan Growth Fund

Vanguard Quantitative Funds

Vanguard Growth and Income Fund Vanguard Structured Broad Market Fund Vanguard Structured Large-Cap Equity Fund


 

Vanguard Scottsdale Funds Vanguard Explorer Value Fund Vanguard Russell 1000 Index Fund Vanguard Russell 1000 Value Index Fund Vanguard Russell 1000 Growth Index Fund Vanguard Russell 2000 Index Fund Vanguard Russell 2000 Value Index Fund Vanguard Russell 2000 Growth Index Fund Vanguard Russell 3000 Index Fund

Vanguard Specialized Funds

Vanguard Dividend Growth Fund Vanguard Energy Fund Vanguard REIT Index Fund

Vanguard Trustees’ Equity Fund

Vanguard Emerging Markets Select Stock Fund Vanguard International Value Fund

Vanguard Variable Insurance Funds Vanguard Balanced Portfolio Vanguard Capital Growth Portfolio Vanguard Diversified Value Portfolio Vanguard Equity Income Portfolio Vanguard Equity Index Portfolio Vanguard Growth Portfolio Vanguard Mid-Cap Index Portfolio Vanguard REIT Index Portfolio Vanguard Small Company Growth Portfolio Vanguard International Portfolio

Vanguard Whitehall Funds

Vanguard Global Minimum Volatility Fund Vanguard High Dividend Yield Index Fund Vanguard Mid-Cap Growth Fund Vanguard Selected Value Fund

Vanguard Windsor Funds Vanguard Windsor Fund Vanguard Windsor II Fund


 

Vanguard World Fund

Vanguard Consumer Discretionary Index Fund Vanguard Consumer Staples Index Fund Vanguard Energy Index Fund Vanguard FTSE Social Index Fund Vanguard Financials Index Fund Vanguard Health Care Index Fund Vanguard Industrials Index Fund Vanguard Information Technology Index Fund Vanguard Materials Index Fund Vanguard Mega Cap Index Fund Vanguard Mega Cap Growth Index Fund Vanguard Mega Cap Value Index Fund Vanguard Telecommunications Services Index Fund Vanguard U.S. Growth Fund Vanguard Utilities Index Fund

(Rest of page left intentionally blank)


 

IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute and deliver this Amendment as of the date set forth above.

JPMORGAN CHASE BANK, N.A.   EACH OF THE OPEN-END MANAGEMENT  
  INVESTMENT COMPANIES LISTED ON  
  EXHIBIT 1 HERETO  
By:   By:    
Name:   Name:   Thomas J. Higgins  
Title:   Title:   Chief Financial Officer  

 


 



 



 



 



 



 



 



 



 



 



 



 



 



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of Vanguard Bond Index Funds of our reports dated February 14, 2019, relating to the financial statements and financial highlights, which appear in Vanguard Inflation-Protected Securities Fund, Vanguard Intermediate-Term Bond Index Fund, Vanguard Long-Term Bond Index Fund, Vanguard Short-Term Bond Index Fund, Vanguard Total Bond Market Index Fund and Vanguard Total Bond Market II Index Fund’s Annual Reports on Form N -CSR for the year ended December 31, 2018. We also consent to the references to us under the headings “Financial Statements”, “Service Providers— Independent Registered Public Accounting F irm” and “Financial Highlights” in such Registration Statement.



VANGUARD FUNDS
MULTIPLE CLASS PLAN

I. INTRODUCTION

      This Multiple Class Plan (the “Plan”) describes seven separate classes of shares that may be offered by investment company members of The Vanguard Group of Mutual Funds (collectively the “Funds,” individually a “Fund”). The Plan has been adopted pursuant to Rule 18f-3 under the Investment Company Act of 1940 (the “1940 Act”) to allow each Fund to offer multiple classes of shares in a manner permitted by Rule 18f-3, subject to the requirements imposed by the Rule. Each Fund may offer any one or more of the specified classes.

      The Plan has been approved by the Board of Directors of The Vanguard Group, Inc. (“VGI”). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund (“Fund Board”), including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time.

II. SHARE CLASSES

A Fund may offer any one or more of the following share classes:

Investor Shares
Admiral Shares
Institutional Shares
Institutional Plus Shares
Institutional Select Shares
ETF Shares
Transition Shares

III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY

      Distribution arrangements for all classes are described below. Distribution arrangements vary by VGI business line depending on the eligibility of the client segments to whom they market. Each Fund retains sole discretion in determining share class availability, and VGI retains discretion in determining whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows:

A. Investor Shares

      Investor Shares generally will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to

1


 

time. It is expected that the minimum investment amount for Investor Shares of a Fund will normally be lower than the amount required for any other class of shares of that Fund. Investor Shares are typically distributed by all VGI business lines.

B. Admiral Shares

      Admiral Shares generally will be available to retail, institutional, and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may include, but are not limited to the following factors: (i) the total amount invested in the Fund; or (ii) any other factors deemed appropriate by a Fund’s Board. Admiral Shares are typically distributed by all VGI business lines.

C. Institutional Shares

      Institutional Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount per account for Institutional Shares will be substantially higher than the amounts required for Investor Shares or Admiral Shares. Institutional Shares are typically distributed by Vanguard’s financial advisory services and institutional business lines.

D. Institutional Plus Shares

      Institutional Plus Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Plus Shares will be substantially higher than the amount required for Institutional Shares. Institutional Plus Shares are typically distributed by VGI’s financial advisory services and institutional business lines.

E. Institutional Select Shares

      Institutional Select Shares generally will be available to institutional investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Select Shares will be the highest among all Fund share classes. Institutional Select Shares are typically distributed by VGI’s institutional business line.

F. ETF Shares

      A Fund will sell ETF Shares to investors that are (or who purchase through) Authorized Participants, and who generally pay for their ETF shares by depositing a prescribed basket consisting predominantly of securities with the Fund. An Authorized Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund’s distributor. Additional eligibility requirements may be specified in

2


 

Schedule B hereto, as such Schedule may be amended from time to time. Investors who are not Authorized Participants may buy and sell ETF shares through various exchanges and market centers. ETF Shares are typically distributed by all VGI business lines.

G. Transition Shares

      Transition Shares generally will be available solely to Funds that operate as Funds-of-Funds and meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. Transition Shares are only internally distributed.

IV. SERVICE ARRANGEMENTS

      Shareholders in all share classes will receive a range of shareholder services provided by VGI. These services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. Each share class will bear its proportionate share of VGI’s cost of providing such services in accordance with Section VI of the Plan.

V.       CONVERSION FEATURES
  A.       Self-Directed Conversions
    1.       Conversion into Investor Shares, Admiral Shares, Institutional
    Shares Institutional Plus Shares, and Institutional Select Shares.
    Shareholders may conduct self-directed conversions from one share class into another share class of the same Fund for which they are eligible. Self-directed conversions may be initiated by the shareholder; however, depending upon the
    particular       share class and the complexity of the shareholder’s accounts, such
    conversions may require the assistance of a VGI representative. Shareholders may convert from one share class into another share class provided that
    following       the conversion the shareholder meets the then applicable eligibility
    requirements for the share class into which they are converting. Any such conversion will occur at the respective net asset values of the share classes next calculated after VGI’s receipt of the shareholder’s request in good order.
    2.       Conversion into ETF Shares. Except as otherwise provided, a
    shareholder may convert Investor Shares, Admiral Shares, or Institutional Shares into ETF Shares of the same Fund (if available), provided that: (i) the share class out of which the shareholder is converting and the ETF Shares declare and distribute dividends on the same schedule; (ii) the shares to be
    converted       are not held through an employee benefit plan; and (iii) following
    the conversion, the shareholder will hold ETF Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after VGI’s receipt of the shareholder’s

3


 

  request in good order. VGI or the Fund may charge an administrative fee to process conversion transactions.
  B.       Automatic Conversions
    1.       Automatic conversion into Admiral Shares. VGI may
    automatically convert Investor Shares into Admiral Shares of the same Fund (if available), provided that following the conversion the shareholder meets the
    eligibility       requirements for Admiral Shares. Any such conversion will occur at
    the respective net asset values of the share classes next calculated after VGI’s conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may not apply to certain financial types of accounts (e.g., accounts held through certain intermediaries, or other accounts as may be excluded by VGI management).
    2.       Automatic conversion into Institutional Shares, Institutional
    Plus Shares, or Institutional Select Shares. VGI may conduct automatic conversions of any share class into either Institutional Shares, Institutional Plus Shares, or Institutional Select Shares in accordance with then-current eligibility requirements.
  C.       Involuntary Conversions and Cash Outs
    1.       Cash Outs. If a shareholder in any class of shares no longer meets
    the eligibility requirements for such shares, the Fund may, if permitted under applicable law, cash out the shareholder’s remaining account balance. Any such cash out will be preceded by written notice to the shareholder and will be subject to the Fund’s normal redemption fees, if any.
    2.       Conversion of Admiral Shares, Institutional Shares, and
    Institutional Plus Shares. If a shareholder no longer meets the eligibility
  requirements       for the share class currently held, the Fund may convert the
  shareholder’s       holdings into the share class for which such shareholder is
  eligible.       Any such conversion will be preceded by written notice to the
  shareholder,       and will occur at the respective net asset values of the share
  classes       without the imposition of any sales load, fee, or other charge.
  3.       Conversions of Transition Shares. When a Fund that issues
  Transition       Shares has completed the relevant portfolio transition, the Fund will
  convert       the Transition Shares to another share class of the same Fund as
  appropriate,       based on the eligibility requirements of such class as specified in
  Schedule       B hereto, as such Schedule may be amended from time to time.
  VI.       EXPENSE ALLOCATION AMONG CLASSES
  A.       Background
  VGI       is a jointly-owned subsidiary of the Funds. VGI provides the Funds, on an

4


 

at-cost basis, virtually all of their corporate management, administrative and distribution services. VGI also may provide investment advisory services on an at-cost basis to the Funds. VGI was established and operates pursuant to a Funds’ Service Agreement between itself and the Funds (the “Agreement”), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission (“Exemptive Orders”). VGI’s direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such Funds in accordance with methods specified in the Agreement or such other methods as may be approved by the Board of Directors of VGI (“VGI Board”) as permitted under the Agreement and by the Fund Board. 1

B.       Class Specific Expenses
  1. Expenses for Account-Based Services. Expenses associated with VGI’s provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows:

      (a) Account maintenance expenses. Expenses associated with the maintenance of investor accounts will be proportionately allocated among each Fund’s share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; and (ii) the percentage of total account transactions performed by VGI for each class.

      (b) Expenses of special servicing arrangements. Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among each eligible Fund’s share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements.

      (c) Literature production and mailing expenses. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among each Fund’s share classes based upon the number of such items produced and mailed for each class.

      2. Other Class Specific Expenses. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class.

1 In accordance with the methods set out in the Agreement and VGI Board and Fund Board approved methods, the expenses that would otherwise have been allocated to each Fund that operates as a Fund-of-Funds are reallocated to the approved share class of the underlying Funds in the Fund-of-Funds’ portfolio on a pro rata basis based on the Fund-of-Fund’s relative net assets invested in the underlying Fund’s share class.

5


 

C.       Fund-Wide Expenses
  1.       Marketing and Distribution Expenses. Each share class will bear
  marketing and distribution expenses proportionate to the marketing and distribution expenses of the business lines that distribute that share class. Retail and institutional businesses expenses will be allocated based on the percentage of client accounts in each share class serviced by the respective
  business.       Financial advisory service expenses will be apportioned based on
  the percentage of assets in each share class.

Expenses associated with each share class will be allocated only among the Funds that have such share class according to the “Vanguard Modified Formula,” with each share class or each Fund treated as if it were a separate Fund. The Vanguard Modified Formula is set forth in the Agreement and in certain of the SEC Exemptive Orders. This allocation

has been deemed an appropriate allocation methodology by each Fund  
Board under paragraph (c)(1)(v) of Rule 18f-3 under the 1940 Act.  

 

      2. Asset Management Expenses. Expenses associated with management of a Fund’s assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund’s share classes on the basis of their relative net assets.

      3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets.

VII. ALLOCATION OF INCOME, GAINS AND LOSSES

      Income, gains and losses will be allocated among each Fund’s share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time.

VIII. VOTING AND OTHER RIGHTS

      Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan.

6


 

IX. AMENDMENTS

      All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of VGI.

Original Board Approval: July 21, 2000
Last Approved by Board: November 30, 2018

7


 

SCHEDULE A to

VANGUARD FUNDS MULTIPLE CLASS PLAN

Note: Transition Shares, when offered by a Fund, are available for a limited period of time and are then converted into another share class. For this reason, Transition Shares are not shown on Schedule A.

Vanguard Fund   Share Classes Authorized  
 
Vanguard Admiral Funds    
·   Treasury Money Market Fund   Investor  
·   S&P 500 Value Index Fund   Institutional, ETF  
·   S&P 500 Growth Index Fund   Institutional, ETF  
·   S&P MidCap 400 Index Fund   Institutional, ETF  
·   S&P MidCap 400 Value Index Fund   Institutional, ETF  
·   S&P MidCap 400 Growth Index Fund   Institutional, ETF  
·   S&P SmallCap 600 Index Fund   Institutional, ETF  
·   S&P SmallCap 600 Value Index Fund   Institutional, ETF  
·   S&P SmallCap 600 Growth Index Fund   Institutional, ETF  
 
Vanguard Bond Index Funds    
·   Short-Term Bond Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, ETF  
·   Intermediate-Term Bond Index Fund   Investor, Admiral, Institutional, Institutional  
    Plus, ETF  
·   Long-Term Bond Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, ETF  
·   Total Bond Market Index Fund   Investor, Admiral, Institutional, Institutional  
    Plus, Institutional Select, ETF  
·   Total Bond Market II Index Fund   Investor, Institutional  
·   Inflation-Protected Securities Fund   Investor, Admiral, Institutional  
 
Vanguard California Tax-Free Funds    
·   Municipal Money Market Fund   Investor  
·   Intermediate-Term Tax-Exempt Fund   Investor, Admiral  
·   Long-Term Tax-Exempt Fund   Investor, Admiral  
 
Vanguard Charlotte Funds    
·   Total International Bond Index Fund   Investor, Admiral, Institutional,  
    Institutional Select, ETF  
·   Global Credit Bond Fund   Investor, Admiral  

 

1


 

Vanguard Fund   Share Classes Authorized  
 
Vanguard Chester Funds    
·   PRIMECAP Fund   Investor, Admiral  
·   Target Retirement Income Fund   Investor  
·   Target Retirement 2010 Fund   Investor  
·   Target Retirement 2015 Fund   Investor  
·   Target Retirement 2020 Fund   Investor  
·   Target Retirement 2025 Fund   Investor  
·   Target Retirement 2030 Fund   Investor  
·   Target Retirement 2035 Fund   Investor  
·   Target Retirement 2040 Fund   Investor  
·   Target Retirement 2045 Fund   Investor  
·   Target Retirement 2050 Fund   Investor  
·   Target Retirement 2055 Fund   Investor  
·   Target Retirement 2060 Fund   Investor  
·   Target Retirement 2065 Fund   Investor  
·   Institutional Target Retirement Income Fund   Institutional  
·   Institutional Target Retirement 2010 Fund   Institutional  
·   Institutional Target Retirement 2015 Fund   Institutional  
·   Institutional Target Retirement 2020 Fund   Institutional  
·   Institutional Target Retirement 2025 Fund   Institutional  
·   Institutional Target Retirement 2030 Fund   Institutional  
·   Institutional Target Retirement 2035 Fund   Institutional  
·   Institutional Target Retirement 2040 Fund   Institutional  
·   Institutional Target Retirement 2045 Fund   Institutional  
·   Institutional Target Retirement 2050 Fund   Institutional  
·   Institutional Target Retirement 2055 Fund   Institutional  
·   Institutional Target Retirement 2060 Fund   Institutional  
·   Institutional Target Retirement 2065 Fund   Institutional  
 
Vanguard Explorer Fund   Investor, Admiral  
 
Vanguard Fenway Funds    
·   Equity Income Fund   Investor, Admiral  
·   Growth Equity Fund   Investor  
·   PRIMECAP Core Fund   Investor  
 
Vanguard Fixed Income Securities Funds    
·   Ultra-Short-Term Bond Fund   Investor, Admiral  
·   Real Estate II Index Fund   Institutional Plus  
·   Short-Term Treasury Fund   Investor, Admiral  
·   Short-Term Federal Fund   Investor, Admiral  
·   Short-Term Investment-Grade Fund   Investor, Admiral, Institutional  
·   Intermediate-Term Treasury Fund   Investor, Admiral  
·   Intermediate-Term Investment-Grade Fund   Investor, Admiral  
·   GNMA Fund   Investor, Admiral  

 

2


 

Vanguard Fund   Share Classes Authorized  
 
·   Long-Term Treasury Fund   Investor, Admiral  
·   Long-Term Investment-Grade Fund   Investor, Admiral  
·   High-Yield Corporate Fund   Investor, Admiral  
 
Vanguard Horizon Funds    
·   Capital Opportunity Fund   Investor, Admiral  
·   Global Equity Fund   Investor  
·   Strategic Equity Fund   Investor  
·   Strategic Small-Cap Equity Fund   Investor  
 
Vanguard Index Funds    
·   500 Index Fund   Investor, Admiral, Institutional Select, ETF  
·   Extended Market Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, Institutional Select, ETF  
·   Growth Index Fund   Investor, Admiral, Institutional, ETF  
·   Large-Cap Index Fund   Investor, Admiral, Institutional, ETF  
·   Mid-Cap Growth Index Fund   Investor, Admiral, ETF  
·   Mid-Cap Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, ETF  
·   Mid-Cap Value Index Fund   Investor, Admiral, ETF  
·   Small-Cap Growth Index Fund   Investor, Admiral, Institutional, ETF  
·   Small-Cap Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, ETF  
·   Small-Cap Value Index Fund   Investor, Admiral, Institutional, ETF  
·   Total Stock Market Index Fund   Investor, Admiral, Institutional, Institutional  
    Plus, Institutional Select, ETF  
·   Value Index Fund   Investor, Admiral, Institutional, ETF  
 
Vanguard Institutional Index Funds    
·   Institutional Index Fund   Institutional, Institutional Plus  
·   Institutional Total Stock Market Index Fund   Institutional, Institutional Plus  
 
Vanguard International Equity Index Funds    
·   Emerging Markets Stock Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus  
  FTSE Emerging Markets ETF   ETF  
·   European Stock Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus  
  FTSE Europe ETF   ETF  
·   FTSE All-World ex US Index Fund   Investor, Admiral, Institutional, Institutional  
    Plus, ETF  
·   Pacific Stock Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus  
  FTSE Pacific ETF   ETF  
·   Total World Stock Index Fund   Investor, Admiral, Institutional, ETF  
·   FTSE All World ex-US Small-Cap Index Fund   Investor, Admiral, Institutional, ETF  
·   Global ex-U.S. Real Estate Index Fund   Investor, Admiral, Institutional, ETF  

 

3


 

Vanguard Fund   Share Classes Authorized  
 
Vanguard Malvern Funds    
·   Capital Value Fund   Investor  
·   Short-Term Inflation-Protected Securities    
  Index Fund   Investor, Admiral, Institutional, ETF  
·   U.S. Value Fund   Investor  
·   Institutional Short-Term Bond Fund   Institutional Plus  
·   Institutional Intermediate-Term Bond Fund   Institutional Plus  
·   Core Bond Fund   Investor, Admiral  
·   Emerging Markets Bond Fund   Investor, Admiral  
 
Vanguard Massachusetts Tax-Exempt Funds    
·   Massachusetts Tax-Exempt Fund   Investor  
 
Vanguard Money Market Funds    
·   Prime Money Market Fund   Investor, Admiral  
·   Federal Money Market Fund   Investor  
 
Vanguard Montgomery Funds    
·   Market Neutral Fund   Investor, Institutional  
 
Vanguard Municipal Bond Funds    
·   Municipal Money Market Fund   Investor  
·   Short-Term Tax-Exempt Fund   Investor, Admiral  
·   Limited-Term Tax-Exempt Fund   Investor, Admiral  
·   Intermediate-Term Tax-Exempt Fund   Investor, Admiral  
·   Long-Term Tax-Exempt Fund   Investor, Admiral  
·   High-Yield Tax-Exempt Fund   Investor, Admiral  
·   Tax-Exempt Bond Index Fund   Investor, Admiral, ETF  
 
Vanguard New Jersey Tax-Free Funds    
·   Municipal Money Market Fund   Investor  
·   Long-Term Tax-Exempt Fund   Investor, Admiral  
 
Vanguard New York Tax-Free Funds    
·   Municipal Money Market Fund   Investor  
·   Long-Term Tax-Exempt Fund   Investor, Admiral  
 
Vanguard Ohio Tax-Free Funds    
·   Long-Term Tax-Exempt Fund   Investor  
 
Vanguard Pennsylvania Tax-Free Funds    
·   Municipal Money Market Fund   Investor  
·   Long-Term Tax-Exempt Fund   Investor, Admiral  

 

4


 

Vanguard Fund   Share Classes Authorized  
 
Vanguard Quantitative Funds    
·   Growth and Income Fund   Investor, Admiral  
 
Vanguard Scottsdale Funds    
·   Short-Term Treasury Index Fund   Institutional, Admiral, ETF  
·   Intermediate-Term Treasury Index Fund   Institutional, Admiral, ETF  
·   Long-Term Treasury Index Fund   Institutional, Admiral, ETF  
·   Short-Term Corporate Bond Index Fund   Institutional, Admiral, ETF  
·   Intermediate-Term Corporate Bond Index Fund   Institutional, Admiral, ETF  
·   Long-Term Corporate Bond Index Fund   Institutional, Admiral, ETF  
·   Mortgage-Backed Securities Index Fund   Institutional, Admiral, ETF  
·   Explorer Value Fund   Investor  
·   Russell 1000 Index Fund   Institutional, ETF  
·   Russell 1000 Value Index Fund   Institutional, ETF  
·   Russell 1000 Growth Index Fund   Institutional, ETF  
·   Russell 2000 Index Fund   Institutional, ETF  
·   Russell 2000 Value Index Fund   Institutional, ETF  
·   Russell 2000 Growth Index Fund   Institutional, ETF  
·   Russell 3000 Index Fund   Institutional, ETF  
·   Total Corporate Bond ETF   ETF  
·   Total World Bond ETF   ETF  
 
Vanguard Specialized Funds    
·   Energy Fund   Investor, Admiral  
·   Global Capital Cycles Fund   Investor  
·   Health Care Fund   Investor, Admiral  
·   Dividend Growth Fund   Investor  
·   Real Estate Index Fund   Investor, Admiral, Institutional, ETF  
·   Dividend Appreciation Index Fund   Investor, Admiral, ETF  
 
Vanguard STAR Funds    
·   LifeStrategy Conservative Growth Fund   Investor  
·   LifeStrategy Growth Fund   Investor  
·   LifeStrategy Income Fund   Investor  
·   LifeStrategy Moderate Growth Fund   Investor  
·   STAR Fund   Investor  
·   Total International Stock Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus, Institutional Select,  
    ETF  
Vanguard Tax-Managed Funds    
·   Tax-Managed Balanced Fund   Admiral  
·   Tax-Managed Capital Appreciation Fund   Admiral, Institutional  
·   Developed Markets Index Fund   Investor, Admiral, Institutional,  
    Institutional Plus  
  FTSE Developed Markets ETF   ETF  
·   Tax-Managed Small-Cap Fund   Admiral, Institutional  

 

5


 

Vanguard Fund   Share Classes Authorized  
 
Vanguard Trustees’ Equity Fund    
·   International Value Fund   Investor  
·   Diversified Equity Fund   Investor  
·   Emerging Markets Select Stock Fund   Investor  
·   Alternative Strategies Fund   Investor  
 
Vanguard Valley Forge Funds    
·   Balanced Index Fund   Investor, Admiral, Institutional  
·   Managed Payout Fund   Investor  
 
Vanguard Variable Insurance Funds    
·   Balanced Portfolio   Investor  
·   Conservative Allocation Portfolio   Investor  
·   Diversified Value Portfolio   Investor  
·   Equity Income Portfolio   Investor  
·   Equity Index Portfolio   Investor  
·   Growth Portfolio   Investor  
·   Global Bond Index Portfolio   Investor  
·   Total Bond Market Index Portfolio   Investor  
·   High Yield Bond Portfolio   Investor  
·   International Portfolio   Investor  
·   Mid-Cap Index Portfolio   Investor  
·   Moderate Allocation Portfolio   Investor  
·   Money Market Portfolio   Investor  
·   Real Estate Index Portfolio   Investor  
·   Short-Term Investment Grade Portfolio   Investor  
·   Small Company Growth Portfolio   Investor  
·   Capital Growth Portfolio   Investor  
·   Total International Stock Market Index Portfolio   Investor  
·   Total Stock Market Index Portfolio   Investor  
 
Vanguard Wellesley Income Fund   Investor, Admiral  
 
Vanguard Wellington Fund    
·   U.S. Liquidity Factor ETF   ETF  
·   U.S. Minimum Volatility ETF   ETF  
·   U.S. Momentum Factor ETF   ETF  
·   U.S. Multifactor ETF   ETF  
·   U.S. Multifactor Fund   Admiral  
·   U.S. Quality Factor ETF   ETF  
·   U.S. Value Factor ETF   ETF  
·   Wellington Fund   Investor, Admiral  

 

6


 

Vanguard Fund

Share Classes Authorized

Vanguard Whitehall Funds

Vanguard Windsor Funds
· Windsor Fund
· Windsor II Fund

Vanguard World Fund

Original Board Approval: July 21, 2000 Last Updated: April 8, 2019

Investor Investor Investor

Investor, Admiral, ETF

Investor, Admiral, Institutional, ETF Investor, Admiral Investor, Admiral, ETF Investor, Admiral, ETF

Investor, Admiral
Investor, Admiral

Institutional, Institutional Plus, ETF Investor, Admiral, Institutional Investor, Admiral Investor, Admiral Investor, Admiral Institutional, ETF Institutional, ETF Institutional, ETF

Investor, Admiral Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF Admiral, ETF ETF

ETF

7


 

SCHEDULE B
to
VANGUARD FUNDS MULTIPLE CLASS
PLAN

VGI has policies and procedures designed to ensure consistency and compliance with the offering of multiple classes of shares within this Multiple Class Plan’s eligibility requirements. 2 These policies are reviewed and monitored on an ongoing basis in conjunction with VGI’s Compliance Department.

Investor Shares - Eligibility Requirements

Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000 ($50,000 for Vanguard Treasury Money Market Fund). Personal Advisor Services clients, clients investing through financial intermediaries, and institutional clients may hold Investor Shares without restriction in Funds that do not offer Admiral Shares. A Vanguard Fund may, from time to time, establish higher or lower minimum amounts for Investor Shares. Each Fund and VGI also reserve the right to establish higher or lower minimum amounts for certain investors or a group of investors.

Financial intermediaries that serve as mutual fund supermarkets may only invest in Investor Shares of Funds in which Investor Shares are available and may not invest in other share classes of such Funds. Mutual fund supermarket means a program or platform offered by a financial intermediary through which such intermediary’s retail clients may purchase and sell mutual funds offered by a variety of independent fund families on a self-directed basis without advice or recommendation from a financial advisor or broker. This definition may be changed or amended at any time and without prior notice as may be determined in the discretion of VGI management. Nothing in the definition of mutual fund supermarket should be construed to prohibit Vanguard Brokerage Services from offering the Funds’ other share classes to its eligible clients.

Admiral Shares – Eligibility Requirements

Admiral Shares generally are intended for clients who meet the required minimum initial investment and ongoing account balance of $3,000 for retail clients in index Funds and $50,000 for retail clients in actively-managed Funds. Personal Advisor Services clients, clients investing through financial intermediaries and institutional clients may hold Admiral Shares of both index and actively-managed Funds without restriction. Funds may, from time to time, establish higher or lower minimum amounts for Admiral Shares, and each Fund and VGI reserve the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following rule:

2 The eligibility of a Fund that operates as a Fund-of-Funds to invest in a particular share class of an underlying Fund is determined by VGI and the Fund Board.

3 Admiral Share classes of all Funds are available to 403(b) plan participants in Vanguard’s Retail 403(b) business, which is serviced by The Newport Group.


 

Institutional Shares – Eligibility Requirements

Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, each Fund and VGI also reserve the right to establish higher or lower minimum amounts for certain investors or a group of investors.

Institutional Share class eligibility also is subject to the following special rules: 4

  • Retail clients . Retail clients may hold Institutional Shares by aggregating up to 3 accounts held by
      the       same client (same tax I.D. number) in a single Fund.
  • Financial intermediary clients . Financial intermediaries generally may hold Institutional Shares for
      the       benefit of their underlying clients provided that:
      (1)       each underlying investor individually meets the investment minimum amount described above;
      and      
      (2)       the financial intermediary agrees to monitor ongoing compliance of the underlying investor
      accounts       with the investment minimum amount; or
      (3)       an arrangement is established between VGI and the financial intermediary to allow VGI to
      monitor       compliance with the eligibility requirements.
      Home       office model portfolios offered on wealth management platforms administered by financial
      intermediaries       5 may offer Institutional Shares, provided:
      (1)       the financial intermediary in aggregate at the firm level, excluding custody assets, has total assets of at least $25 billion invested in Vanguard; and
      (2)       the financial intermediary in aggregate at the firm level, excluding custody assets, meets the investment minimum of Institutional Shares for the Fund.
      A       home office model portfolio must meet the following criteria:
      (1)       the allocations and Funds used in the model portfolios on the platform are set and selected by the
      financial       intermediary ( i.e. , the firm itself);
      (2)       the allocations and Funds used in the model portfolios on the platform are not subject to change
      by       individual financial advisors; and
      (3)       an arrangement is established between VGI and the financial intermediary to allow VGI to
      monitor       compliance with the eligibility requirements.
  • Institutional clients . An institutional client may hold Institutional Shares if the total amount
      aggregated       among all accounts held by such a client (including accounts held through financial
      intermediaries)       and invested in the Fund is at least $5 million (or such higher minimum required by
      the       individual Fund). Such an institutional client must disclose to VGI on behalf of its accounts the
      following:       (1) that the client acts as a common-decision maker 6 for each account; and (2) the total
      balance       in each account in the Fund.

    4 The following special rules also apply to Vanguard Prime Money Market Fund – Admiral Shares. 5 For purposes of this Schedule B, this is not intended to include robo advisors.

    6 For purposes of this Schedule B, a common-decision maker includes, but is not limited to, a corporate entity that controls multiple pools of assets invested in a Fund. For example, a corporate entity that acts as a plan sponsor for a retirement plan may have one or more investment committees or boards of trustees overseeing both the retirement plan account as well as other accounts invested in the Fund. In this case, the corporate entity would be considered a common-decision maker for each account where there is a common membership across each investment committee or governing body making investment decisions for each account. Common-decision makers do not include financial intermediaries.


     

    Trust/Fund

    Vanguard Institutional Total Stock Market Index Trust Vanguard Institutional Total Stock Market Index Trust Vanguard Institutional Total Bond Market Index Trust Vanguard Institutional Total International Stock Market Index Trust Vanguard Institutional 500 Index Trust Vanguard Institutional 500 Index Trust Vanguard Institutional Extended Market Index Trust

    Vanguard Employee Benefit Index Fund

    Vanguard Employee Benefit Index Fund

    Vanguard Russell 1000 Growth Index Trust Vanguard Russell 1000 Value Index Trust Vanguard Russell 2000 Growth Index Trust Vanguard Russell 2000 Value Index Trust Vanguard Target Retirement Trust

    Corresponding Fund

    Vanguard Total Stock Market Index Fund Vanguard Institutional Total Stock Market Index Fund Vanguard Total Bond Market Index Fund Vanguard Total International Stock Market Index Fund Vanguard Institutional Index Fund Vanguard 500 Index Fund Vanguard Extended Market Index Fund

    Vanguard Institutional Index Fund

    Vanguard 500 Index Fund

    Vanguard Russell 1000 Growth Index Fund Vanguard Russell 1000 Value Index Fund Vanguard Russell 2000 Growth Index Fund Vanguard Russell 2000 Value Index Fund Vanguard Institutional Target Retirement Fund (full suite)

     


     

    Institutional Plus Shares - Eligibility Requirements

    Institutional Plus Shares generally require a minimum initial investment and ongoing account balance of $100,000,000. However, each Fund and VGI also reserve the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Plus Share class eligibility also is subject to the following special rules:

    Trust/Fund

    Vanguard Institutional Total Stock Market Index Trust Vanguard Institutional Total Stock Market Index Trust Vanguard Institutional Total Bond Market Index Trust Vanguard Institutional Total International Stock Market Index Trust Vanguard Institutional 500 Index Trust Vanguard Institutional 500 Index Trust Vanguard Institutional Extended Market Index Trust

    Vanguard Employee Benefit Index Fund

    Corresponding Fund

    Vanguard Total Stock Market Index Fund Vanguard Institutional Total Stock Market Index Fund Vanguard Total Bond Market Index Fund Vanguard Total International Stock Market Index Fund Vanguard Institutional Index Fund Vanguard 500 Index Fund Vanguard Extended Market Index Fund

    Vanguard Institutional Index Fund

     


     

    Vanguard Employee Benefit Index Fund

    Vanguard Russell 1000 Growth Index Trust Vanguard Russell 1000 Value Index Trust Vanguard Russell 2000 Growth Index Trust Vanguard Russell 2000 Value Index Trust Vanguard Target Retirement Trust

    Vanguard 500 Index Fund

    Vanguard Russell 1000 Growth Index Fund Vanguard Russell 1000 Value Index Fund Vanguard Russell 2000 Growth Index Fund Vanguard Russell 2000 Value Index Fund Vanguard Institutional Target Retirement Fund (full suite)

     

  • Financial intermediary clients. Financial intermediaries generally may hold Institutional Plus Shares
      for       the benefit of their underlying clients provided that:
      (1)       each underlying investor individually meets the investment minimum amount described above;
      and      
      (2)       the financial intermediary agrees to monitor ongoing compliance of the underlyinginvestor
      accounts       with the investment minimum amount; or
      (3)       an arrangement is established between VGI and the financial intermediary to allow VGI to
      monitor       compliance with the eligibility requirements.
      Home       office model portfolios offered on wealth management platforms administered by financial
      intermediaries       may offer Institutional Plus Shares, provided:
      (1)       the financial intermediary in aggregate at the firm level, excluding custody assets, has total assets of at least $25 billion invested in Vanguard; and
      (2)       the financial intermediary in aggregate at the firm level, excluding custody assets, meets the investment minimum of Institutional Plus Shares for the Fund.
      A       home office model portfolio must meet the following criteria:
      (1)       the allocations and Funds used in the model portfolios on the platform are set and selected by the
      financial       intermediary ( i.e. , the firm itself);
      (2)       the allocations and Funds used in the model portfolios on the platform are not subject to change
      by       individual financial advisors; and
      (3)       an arrangement is established between VGI and the financial intermediary to allow VGI to
      monitor       compliance with the eligibility requirements.
  • Accumulation Period - Accounts funded through regular contributions (e.g., employer sponsored
      participant       contribution plans), whose assets are expected to quickly achieve eligibility levels, may
      qualify       for Institutional Plus Shares upon account creation, rather than undergoing the conversion
      process       shortly after account set-up if VGI management determines that the account will become
      eligible       for Institutional Plus Shares within a limited period of time (generally 90 days). The
      accumulation       period eligibility is subject to the discretion of VGI management.

     

    Institutional Select Shares - Eligibility Requirements

    Institutional Select Shares generally require a minimum initial investment and ongoing account balance of $3,000,000,000. However, each Fund and VGI also reserve the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Select Share class eligibility also is subject to the following special rules:

  • Institutional clients . An institutional client may hold Institutional Select Shares if the total amount
      aggregated       among all accounts held by such client (including accounts held through financial
      intermediaries)       and invested in the Fund is at least $3 billion (or such higher or lower minimum
      required       by the individual Fund). Such an institutional client must disclose to VGI on behalf of its
      accounts       the following: (1) the client acts as a common-decision maker for each account; and (2) the
      total       balance in each account in the Fund.
  • Financial intermediary clients. Financial intermediaries generally may hold InstitutionalSelect
      Shares       for the benefit of their underlying clients provided that:
      (1)       each underlying investor individually meets the investment minimum amount described above;
      and      
      (2)       the financial intermediary agrees to monitor ongoing compliance of the underlyinginvestor
      accounts       with the investment minimum amount; or
      (3)       an arrangement is established between VGI and the financial intermediary to allow VGI to
      monitor       compliance with the eligibility requirements.
  • Accumulation Period - Accounts funded through regular contributions (e.g. employer sponsored
      participant       contribution plans), whose assets are expected to quickly achieve eligibility levels, may
      qualify       for Institutional Select Shares upon account creation, rather than undergoing the conversion
      process       shortly after account set-up, if VGI management determines that the account will become
      eligible       for Institutional Select Shares within a limited period of time (generally 90 days). The
      accumulation       period eligibility is subject to the discretion of VGI management.
  • Investment by VGI collective investment trusts with a similar mandate. A VGI collective
      investment       trust exempt from regulation under the Investment Company Act and that seeks to
      achieve       its investment objective by investing in an underlying Fund with an index-based mandate
      may       hold Institutional Select Shares of an underlying Fund with a similar index-based mandate
      whether       or not its investment meets the minimum investment threshold specified above.

    ETF Shares – Eligibility Requirements

    The eligibility requirements for ETF Shares will be set forth in the Fund’s registration statement. To be eligible to purchase ETF Shares directly from a Fund, an investor must be (or must purchase through) an Authorized Participant, as defined in Paragraph III.F of the Multiple Class Plan. Investors purchasing ETF Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of ETF Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant Fund’s prospectus. The value of a Fund’s Creation Unit will vary with the net asset value of the


     

    Fund’s ETF Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket consisting predominantly of securities with the Fund.

    Transition Shares – Eligibility Requirements

    Transition Shares will be offered only to Funds that operate as a Fund-of-Funds and only by an underlying Fund (i) that is receiving assets in kind from one or more Funds and (ii) that will “transition” those in-kind assets by selling some or all of them and using the proceeds to purchase different assets. There is no minimum investment amount for Transition Shares.

    Original Board Approval: July 21, 2000 Last Approved by Board: November 30, 2018


    Code of Ethics

    Do the right thing



     

    Table of Contents    
    Message from our CEO    
    The Code of Ethics at a Glance   2  
    Section 1. Background   4  
    Section 2. Standards of Conduct   4  
    2.1. Conflicts of Interest    

     

    (a)       When can conflicts of interest arise?
    (b)       What types of conflicts of interest must I avoid?
    (c)       Which conflicts of interest do I need to disclose?
    (d)       When and how do I disclose conflicts of interest?
    Section 3. Outside Business Activities   6  
    3.1 Outside Business Activity Requirements    

     

    (a)       Am I prohibited from engaging in any outside business activities?
    (b)       Am I required to obtain preclearance for any outside business activities?
    (c)       What outside business activities do not require preclearance?
    (d)       When and how do I preclear an outside business activity?
    Section 4. Gift and Entertainment Policy   10  
    Section 5. Anti-Bribery Policy   10  
    Section 6. Antitrust and Competition Policy .   12  
    Section 7. Duty of Confidentiality   12  
    Section 8. Personal Trading and Reporting Requirements .   12  
    8.1 General Trading Prohibitions and Reporting Requirements    
    (a) What are the general trading prohibitions?    
    (b) Am I required to maintain Securities in a brokerage account at Vanguard?    
    (c) What am I required to report?    

     

    8.2 Additional Trading and Reporting Requirements for Investment Persons . 15

    (a)       Which Securities trades am I required to preclear?
    (b)       How do I obtain preclearance?
    (c)       How long is my preclearance approval valid?
    (d)       Am I required to obtain preclearance before investing in a Private Placement?
    (e)       Are there Securities transactions that I do not need to preclear?
    (f)       Am I subject to restrictions on my personal trading in Covered Securities?
    (g)       Am I prohibited from engaging in certain Securities transactions?
    (h)       What happens if I make a “short-term trade” in a Vanguard Fund?
    (i)       Are there any additional reporting requirements that apply to me?

     

    Table of Contents (continued)

    8.3 Additional Trading Prohibitions and Reporting Requirements for Fund Access Persons 20 (a) Which Securities trades am I required to preclear?

    (b) How do I obtain preclearance?

    (c) How long is my preclearance approval valid?

    (d) Am I required to obtain preclearance before investing in a Private Placement? (e) Are there Securities transactions that I do not need to preclear?

    (f) Am I subject to restrictions on my personal trading in Covered Securities? (g) Am I prohibited from engaging in any Securities transactions?

    (h) What happens if I make a “short-term trade” in a Vanguard Fund? (i) Are there any additional reporting requirements that apply to me?

    8.4 Additional Trading Prohibitions and Reporting Requirements for VAI Access Persons . 24 (a) Am I required to preclear Security trades?

    (b) Am I required to obtain preclearance before investing in a Private Placement? (c) Am I prohibited from engaging in any Securities transactions?

    (d) What happens if I make a “short-term trade” in a Vanguard Fund? (e) Are there any additional reporting requirements that apply to me?

    8.5 Additional Trading Prohibitions for Non-U.S. Crew Members . 26

    (a)       What are the additional trading prohibitions?
    (b)       What are the Vanguard Fund reporting requirements in Australia?
    (c)       What are the additional trading restrictions for Japan?
    (d)       What additional information is required to be reported for accounts where I have Investment Discretion?
    Section 9. Certification Requirements   28  
    9.1 What am I required to certify initially?    
    9.2 What am I required to certify annually?    
    Section 10. Penalties and Sanctions   28  
    10.1 How are violations administered by Compliance?    
    10.2 How is an appropriate sanction determined?    
    10.3 How is the materiality of a violation determined?    
    10.4 What are my obligations to report a violation?    
    Section 11. Waivers   29  
    Appendix A. Definitions   31  
    Appendix B. Independent Directors and Trustees   36  

     


     


    Do the right thing

    At Vanguard, the trust of our clients is our greatest asset. And that trust can only be preserved if each one of us does the right thing on behalf of Vanguard and our clients.

    Our Code of Ethics is built on our commitment to maintaining the highest standards of ethical behavior and fiduciary responsibility. Our actions, decisions, and interests should never compete with the interests of Vanguard or our clients.

    All crew members are responsible for understanding and complying with our Code of Ethics. Please know and follow the policies that apply to you, and be accountable for your actions. If you are a manager, help your crew to understand and comply with the Code of Ethics through your words and your actions.

    Use the Code of Ethics as your guide when faced with challenging decisions or circumstances. But remember, the Code of Ethics is a document. It cannot anticipate every situation. Ultimately, we rely on your sense of personal integrity to protect and enhance Vanguard’s reputation. Never underestimate the importance of your own ethical conduct in our mission to treat investors fairly and give them the best chance to succeed.


    Mortimer J. Buckley
    President and Chief Executive Officer


     

    The Code of Ethics at a Glance

    Below are some of the general requirements of the Code of Ethics which may impact you the most. These descriptions are for guidance only. Please consult the applicable provisions of the Code of Ethics for detailed requirements.

    1. Clients’ Interests Come First

    You must serve the interests of Vanguard Clients ahead of your own personal interests.

    2. Conflicts of Interest

    Your actions, decisions, and interests should not compete or conflict with Vanguard or Vanguard Clients’ interests. You must report any potential conflicts of interest to Compliance.

    3. Business Activities Outside of Vanguard

    You may engage in outside business activities that do not conflict with Vanguard’s interests; however, you must obtain approval from Compliance for certain outside business activities.

    4. Gifts and Entertainment

    When doing business with Vanguard Clients, vendors, potential Vanguard Clients, and others, you must abide by limitations on giving and receiving gifts and business entertainment. Under the Gift and Entertainment Policy, you must report certain gifts and entertainment to Compliance.

    5. Anti-Bribery

    You are prohibited from engaging or participating in any form of bribery or corruption.

    6. Antitrust and Competition

    You are prohibited from engaging in activity that could have an anticompetitive effect on the price of goods, services, securities, or other trading conditions in the global marketplace in which we operate.

    7. Insider Trading

    You are prohibited from buying or selling any Security while in the possession of material nonpublic information about the issuer of the Security.

    8. Personal Trading Activities

    You are required to abide by the Code of Ethics requirements related to holding, reporting, and trading Securities for personal benefit. Personal trading restrictions and reporting requirements vary depending on the rules of the country you are working in and whether you are an Access Person or a Non-Access Person.

    9. Certification Requirements

    On an annual basis, you must acknowledge that you understand the Code of Ethics and will comply with its provisions.

    2


     

    Clients’ Interests
    Come First

    You must serve the
    interests of Vanguard
    Clients ahead of your
    own personal interests.


     

    Section 1. Background

    The Code of Ethics (“Code”) has been approved and adopted by the board of directors of The Vanguard Group, Inc. (“Vanguard”), the boards of trustees of each of the Vanguard Funds, and the boards of directors of each of Vanguard’s Affiliates, as applicable. Unless stated otherwise, the Code applies to all Crew Members and Contingent Workers. The Code also contains provisions applicable to Independent Directors and Trustees (Appendix B).

    Section 2. Standards of Conduct

    Vanguard consistently seeks to earn and maintain the trust and loyalty of our clients by adhering to the highest standards of ethical behavior and fiduciary responsibility. You must adhere at all times to the spirit, and not just the letter, of the Code. Any transaction or activity that violates either of the standards of conduct described below is prohibited, regardless of whether it meets technical rules found elsewhere in the Code. Accordingly, you must conduct yourself in accordance with applicable law and regulations, and the following standards of conduct:

    Vanguard Clients’ interests come first. You must at all times place the interests of Vanguard Clients first. In particular, you must avoid serving your own personal interests ahead of the interests of Vanguard Clients.

    Conflicts of interest must be avoided . Your actions, decisions, and interests cannot compete or conflict with Vanguard’s interests or the interests of Vanguard Clients. You must ensure that you do not have a conflict with your duties for Vanguard and that you do not use Vanguard’s name, property, facilities, confidential information, relationships, or other assets for personal benefit or for outside work or other endeavors.

    Vanguard Affiliates or your specific department may have additional policies regarding conflicts of interest that you must also follow.

    2.1 Conflicts of Interest

    A conflict of interest is defined as any situation where financial or other personal factors can compromise independence, objectivity, or professional judgment. A conflict of interest exists when these factors compete, or give the appearance of competing, with your duty to serve the interests of Vanguard and Vanguard Clients.

    2.1(a) When can conflicts of interest arise?

    Even the perception of a conflict could negatively affect Vanguard and harm our reputation. It’s important to understand the following conflict situations:

    Actual conflict of interest. A situation where your personal interests directly conflict with your duties, responsibilities, or the terms of your assignment at Vanguard.

    Perceived conflict of interest. A situation where it appears that your personal interests inappropriately influence the performance of your duties, responsibilities, or the terms of your assignment at Vanguard - whether founded or not.

    Potential conflict of interest. A situation that could arise in the future where your personal interests would affect your duties, responsibilities, or the terms of your assignment at Vanguard.

    Depending on your role or the terms of your assignment at Vanguard, the potential for conflict may also arise where an Immediate Family Member is employed by, or associated with, a company with which Vanguard has or is looking to establish a relationship.

    Example:Your spouse is employed as a trader at a brokerage firm that executes Vanguard Fund trades - if you are a phone associate, a conflict may not exist; however, if you hold a position in the Investment Management Group or Fund Financial Services, a potential conflict may exist.

    4


     


    Your actions, decisions, and
    interests should not compete
    or conflict with Vanguard or
    Vanguard Clients’ interests.
    You must report any potential
    conflicts of interest to
    Compliance.


     

    2.1(b) What types of conflicts of interest must I avoid?

    You need to avoid situations where a conflict of interest could arise, including:

    Any business interest that competes, directly or indirectly, with the interests of Vanguard or Vanguard Clients while working on Vanguard matters.

    Any situation where you would benefit, directly or indirectly, from Vanguard’s dealings with others.

    2.1(c) Which conflicts of interest do I need to disclose?

    You are required to disclose the following information: Any situation that may present the potential for a conflict of interest with Vanguard’s business or the interests of Vanguard Clients.

    Any employment arrangements or positions (e.g., board member) of an Immediate Family Member that may present the potential for conflict with Vanguard and its activities (e.g., relationships with potential or existing vendors or financial institutions, including banks, with whom Vanguard conducts business).

    2.1(d) When and how do I disclose conflicts of interest?

    Report any conflicts – whether actual, perceived, or potential – to Compliance as soon as they arise. Contact Compliance if you encounter a conflict that is not explicitly addressed by our policies, or is potentially significant to a business area or across divisions.

    Certain Vanguard Affiliates or departments may have additional policies regarding conflicts of interest. Crew Members and Contingent Workers in those departments must also follow those policies. If in doubt about whether you are subject to additional departmental or Vanguard Affiliate policies, please check with your Vanguard manager or Compliance.

    Contingent Workers must also consult with their employer if an actual, perceived, or potential conflict arises.

    MCO Resource – To disclose conflicts of interest, complete a Conflicts of Interest Disclosure Form via MCO.

    Section 3. Outside Business Activities

    You are permitted to engage in certain outside business activities (permanent, part-time, or one-time assignment) during your personal time. However, those activities must not adversely affect Vanguard or present a conflict of interest. Your job at Vanguard must come first over other business opportunities, nonprofit activities, or a second job. Be mindful of conflicts, obtain any necessary approvals, and be aware that you may be required to discontinue an activity if a conflict exists.

    While Contingent Workers are exempt from the requirements of Section 3, those Contingent Workers who hold a FINRA license are required to comply with the FINRA Licensing Policy on CrewNet.

    In addition to the requirements and restrictions in this section, the following supplemental policies may apply to Crew Members: Senior Executive Covered Activity Policy

    (officers and Crew Members in roles designated as M6/P6/S6 or higher).

    Managing Director Outside Business Activity Policy.

    If there is a conflict between a requirement in the Code and a more restrictive requirement in one of these supplemental policies, the more restrictive requirement outlined in the Senior Executive Covered Activity Policy or the Managing Director Outside Business Activity Policy will govern.

    Web Resource – If you are FINRA licensed, you are also required to comply with the FINRA Licensing Policy on CrewNet.

    6


     


    You may engage in outside business activities that do not conflict with Vanguard’s interests; however, you must obtain approval from Compliance for certain outside business activities.


     

    3.1 Outside Business Activity Requirements 3.1(a) Am I prohibited from engaging in any outside business activities?

    Yes. The following activities are generally prohibited: Holding a second job with any company or organization whose activities could create a conflict of interest with your employment at Vanguard. This includes, but is not limited to, selling Securities, term insurance, or fixed or variable annuities; providing investment advice or financial planning or registering as an independent investment advisor; or engaging in any business activity similar to your job at Vanguard.

    Working, including serving as a director, officer, or in an advisory capacity, for any business or enterprise that competes with Vanguard.

    Working for any organization that could benefit from your knowledge of confidential Vanguard information, such as new Vanguard products, services, or technology.

    Serving on the board of a publicly traded company (or on the board of a company reasonably expected to become a public company).

    Using Vanguard time, equipment, services, or property or enlisting Crew Members for the benefit of the outside business activity.

    Allowing your activities, or the time you spend on them, to interfere with the performance of your job.

    Accepting a business opportunity from someone who does, or seeks to do, business with Vanguard if the person made the offer because of your position at Vanguard.

    Selling interests, soliciting investors or referring participants to a Private Securities Transaction. Certain elected or appointed political positions.

    3.1(b) Am I required to obtain preclearance for any outside business activities?

    Yes. You are required to obtain prior written approval for the following outside business activities: Compensated positions held outside of Vanguard, including positions with a nonprofit

    or charitable organization.

    All entrepreneurial activities, including home and family businesses and independent consulting.

    Volunteer positions that involve reviewing, recommending or approving Securities for an organization. This includes, but is not limited to, serving on the finance or investment committee of a nonprofit organization, or serving as treasurer for a homeowners association or on a school board.

    Any activity where your role is similar or closely related to your responsibilities at Vanguard.

    Any government position, whether paid or unpaid, elected or appointed (e.g., an elected official or member, director, officer, or employee of a government agency, authority, advisory board or other board, such as a public school or library board).

    Any official position with any federal, state, or local government authority, or service as a board member or in any representative capacity for any civic, public interest, or regional business interest organization. Example: You are the executive director of a local chamber of commerce or on the board of a wildlife protection organization.

    Any board position, whether compensated or non-compensated, including advisory positions.

    This includes, but is not limited to, positions on boards of nonprofit organizations, charitable foundations, universities, hospitals, and civic, religious, or fraternal organizations.

    Any position on a panel or committee of an index provider.

    Acting as a real estate agent or conducting any mortgage related activities.

    Any teaching positions where the subject matter relates to Vanguard business that is not in the course of your duties for Vanguard.

    Crypto Mining for Digital Currencies, Digital Utility Tokens, or Digital Security Tokens.

    Engaging in an equity or a debt-based Crowdfunding project or venture.

    8


     

    Gifts and
    Entertainment

    When doing business
    with Vanguard Clients,
    vendors, potential
    Vanguard Clients, and
    others, you must abide
    by limitations on giving
    and receiving gifts and
    business entertainment.
    Under the Gift and
    Entertainment Policy, you
    must report certain gifts
    and entertainment to
    Compliance.

    Anti-Bribery

    You are prohibited from engaging or participating in any form of bribery or corruption.


     

    3.1(c) What outside business activities do not require preclearance?

    You are not required to obtain written approval for the following activities:

    Compensated positions in a retail business - for example, positions in retail or department stores or in the food service industry.

    Ownership of a second home, rental property, or investment property, provided that the property does not do business with Vanguard.

    Selling items on online auction sites, so long as it is not operated as a business.

    Unpaid positions with holding companies, trusts, or non-operating entities that hold your or your family’s real estate or other Investments, provided the Securities would not otherwise require approval if held directly.

    3.1(d) When and how do I preclear an outside business activity?

    Other than those outside business activities described in Section 3.1(c), you are required to obtain approval for outside business activities:

    If you are already participating in an activity upon joining Vanguard.

    Before accepting any new activity.

    If there are any changes to a previously reported activity.

    In certain situations, you may receive a follow-up form from Compliance requiring you to obtain approval from a Vanguard Officer or Managing Director.

    Note: Vanguard Officers may not accept or participate in any outside business activities unless they have received written approval from a Vanguard Managing Director or the Chief Executive Officer in addition to receiving written approval from Compliance.

    MCO Resource – To seek approval, you must complete the Outside Business Activities Form via MCO.

    Section 4. Gift and Entertainment Policy

    You are subject to Vanguard’s Gift and Entertainment Policy, which is considered an integral part of the Code. There are restrictions on the extent to which gifts or entertainment may be received from or provided to any third party.

    Web Resource – Refer to the Gift and Entertainment Policy on the Code of Ethics Resource page on CrewNet for information and guidelines.

    Section 5. Anti-Bribery Policy

    You are subject to Vanguard’s Anti-Bribery Policy, which prohibits bribery and corruption in all forms. You must not offer, give, or receive anything of value for the purpose of improperly obtaining business, retaining business or securing an improper advantage for Vanguard.

    Web Resource – Refer to the Anti-Bribery Policy on the Code of Ethics Resource page on CrewNet for information and guidelines.

    10


     


    You are prohibited from engaging
    in activity that could have an
    anticompetitive effect on the price
    of goods, services, securities, or
    other trading conditions in the global
    marketplace in which we operate.


     

    Section 6. Antitrust and Competition Policy

    You are subject to Vanguard’s Antitrust and Competition Policy, which prohibits you from engaging in activity that could have an anticompetitive effect on the price of goods, services and/or securities or other trading conditions in the global marketplace in which we operate.

    Web Resource – Refer to the Antitrust and Competition Policy on the Code of Ethics Resource page on CrewNet for information and guidelines.

    Section 7. Duty of Confidentiality

    You must keep confidential any nonpublic information you may have obtained while working at Vanguard or while on assignment at Vanguard. This information includes, but is not limited to information about:

    The Vanguard Funds (e.g., recent or impending Securities transactions, activities of the funds’ advisors, offerings of new funds, changes to fund minimums or other provisions in the prospectus, or closings of funds).

    Current or prospective Vanguard Clients (e.g., their personal information, Investments, or account transactions).

    Other Crew Members, Contingent Workers, or Independent Directors and Trustees (e.g., their pay, benefits, position level, and performance ratings).

    Vanguard business activities (e.g., new services, products, technology, or business initiatives).

    You must not disclose confidential information to any other person unless it is necessary for the performance of your duties for Vanguard, there is a business purpose for doing so, and such disclosure is authorized by Vanguard.

    Contingent Workers may also be subject to a non-disclosure agreement and/or a service or supply agreement with specific confidentiality

    provisions. In addition to the requirements of the Code, you must act at all times in accordance with the specific confidentiality provisions in such agreements. Contact your employer for more information.

    Section 8. Personal Trading Activities

    You must avoid taking personal advantage of your knowledge of Securities activity in Vanguard Funds or Vanguard Client accounts. The Code includes specific restrictions on personal investing, but cannot anticipate every fact pattern or situation. You should adhere at all times to the spirit, and not just the letter, of the Code. There are additional trading prohibitions and reporting requirements if you are designated as either an Investment Person (Section 8.2), Fund Access Person (Section 8.3), or VAI Access Person (Section 8.4).

    Regardless of your designation, Compliance has the authority, with appropriate notice to you, to apply any or all of the trading restrictions within the Code.

    8.1 GeneralTrading Prohibitions and Reporting Requirements

    The requirements of this Section 8.1(a) apply to all persons subject to the Code. The requirements of Section 8.1(c) apply to all Crew Members and Contingent Workers deemed Associated Persons.

    8.1(a) What are the general trading prohibitions?

    Engaging in conduct that is deceitful, fraudulent, or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of a Security by a Vanguard Fund or Vanguard Client account.

    Intentionally, recklessly, or negligently circulating false information or rumors that may affect the securities markets or may be perceived as market manipulation.

    Trading on knowledge of Vanguard Fund activities. Taking personal advantage of knowledge of recent, impending, or planned

    12


     


    You are prohibited from buying or selling any Security while in the possession of material nonpublic information about the issuer of the Security.


     

    Securities activities of the Vanguard Funds or their investment advisors. You are prohibited from purchasing or selling - directly or indirectly -any Security or Related Security when you know that the Security is being purchased or sold, or considered for purchase or sale, by a Vanguard Fund (with the exception of an index fund). These prohibitions apply to all Securities in which you have acquired or will acquire Beneficial Ownership.

    Vanguard InsiderTrading Policies. You are subject to the Insider Trading Policy and/or any similar policy of the Vanguard Affiliate for which you work. Each of these policies are considered an integral part of the Code. Each policy prohibits you from buying or selling any Security while in possession of material, nonpublic information about the issuer of the Security. The policies prohibit you from communicating any nonpublic information about any Security or issuer of Securities to third parties.

    Vanguard FundTrading. When purchasing, exchanging, or redeeming shares of a Vanguard Fund, you and your Immediate Family Members must adhere to the policies and standards set forth in the fund’s prospectus, or offering document, including policies on market-timing and frequent trading.

    Initial Coin Offerings. You are prohibited from participating in an Initial Coin Offering.

    Web Resource – Refer to your local Insider Trading Policy on the Code of Ethics Resource page on CrewNet for further information.

    8.1(b) Am I required to maintain Securities in a brokerage account at Vanguard?

    U.S. Crew Members: Yes. You and your Immediate Family Members are required to maintain all Reportable Securities within a Vanguard Brokerage Account. You may hold Vanguard Funds, other than Vanguard ETFs, outside of Vanguard. Employer-sponsored retirement accounts (e.g., 401(k) and 403(b)), 529 Plans, and Compliance-approved accounts are exempt from this requirement (e.g., Managed Account). Vanguard ETFs must be held within a Vanguard Brokerage Account.

    Non-U.S. Crew Members: No. You and your Immediate Family Members are not required to maintain Reportable Securities within a Vanguard Brokerage Account.

    U.S. and Non-U.S. Contingent Workers: No. You and your Immediate Family Members are not required to maintain Reportable Securities within a Vanguard Brokerage Account.

    Web Resource – Refer to the U.S. Crew -Securities to be Held at Vanguard document, which can be accessed from the Code of Ethics Resource page on CrewNet.

    8.1(c) What am I required to report?

    The requirements of this Section apply to all Crew Members and Contingent Workers deemed Associated Persons.

    Initial Holdings Report – Within ten calendar days of joining Vanguard, you must disclose all Covered Accounts and all Reportable Securities held by you or an Immediate Family Member. This includes Brokerage Accounts held at Vanguard, as well as those held at another financial institution. This information must be current as of 45 calendar days before joining Vanguard.

    MCO Resource – You will receive an Initial Certification to complete which will include a section to disclose Covered Accounts and all Reportable Securities via MCO.

    In addition, you must notify Compliance if you or an Immediate Family Member has subsequently opened, or intends to open, a Covered Account with a financial institution (e.g., broker, dealer, advisor, or any other professional money manager), has acquired holdings in Reportable Securities, or if a preexisting Covered Account (including a Vanguard Brokerage Account) becomes associated with you (such as through marriage or inheritance).

    MCO Resource – Disclose new Covered Accounts and Reportable Securities via MCO.

    14


     

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Non-Access Persons
    document, which can be
    accessed from the Code
    of Ethics Resource page
    on CrewNet.

    Duplicate statements and transaction confirmations – You must disclose transactions in Reportable Securities made by you and your Immediate Family Members. For any disclosed Vanguard Brokerage Accounts, Compliance will receive transaction confirmations automatically. For each approved Covered Account and any holdings of Reportable Securities held outside of Vanguard, it is your responsibility to ensure duplicate statements and transaction confirmations are delivered to Compliance. If the sponsor of your Covered Account is not able to send statements and daily transaction confirmations (electronic or paper) directly to Vanguard, you will be required to submit copies through MCO immediately after you receive them, unless you receive an exemption from this requirement from Compliance. You do not need to report an account or submit transaction confirmations or statements if the account does not have the ability to hold Securities (e.g., a traditional checking account).

    Contingent Workers deemed Associated Persons are required to comply with and are subject to the Securities Account Reporting Obligations on CrewNet.

    8.2 AdditionalTrading and Reporting Requirements for Investment Persons

    The requirements of this Section 8.2 are in addition to the requirements of Section 8.1 and apply to all transactions or holdings in which an Investment Person has, or will acquire, Beneficial Ownership of Securities. To see if you are designated as an Investment Person, reference the Investment Persons Departments list on CrewNet. Note: this designation could apply to Crew Members or Contingent Workers.

    8.2(a) Which Securities trades am I required to preclear?

    You must obtain, for yourself and on behalf of your Immediate Family Members, preclearance for any transaction in a Covered Security and in a Vanguard ETF.

    By seeking preclearance, you will be deemed to be advising Compliance that you:

    Do not possess any material, nonpublic information relating to the security.

    Do not use knowledge of any proposed trade or investment program relating to the Vanguard Funds for personal benefit.

    Believe the proposed trade is available to any market participant on the same terms.

    Non-U.S. Investment Persons may be subject to additional restrictions. See Section 8.5.

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Investment Persons
    document, which can be
    accessed from the Code
    of Ethics Resource page
    on CrewNet.

    8.2(b) How do I obtain preclearance?

    You must receive preclearance through the MCO system or from an authorized member of Compliance. Transactions in Covered Securities and Vanguard ETFs may not be executed before you receive approval.

    Same day limit orders are permitted; however, good ‘til canceled orders (such as limit orders that stay open over the course of multiple trading days until a security reaches a specified market price) are not permitted.

    Attempting to gain approval after the transaction has occurred is not permitted. Completing a personal trade before receiving approval or after the approval window expires constitutes a violation

    15


     

    of the Code. See Section 10 for more information regarding the sanctions that may be imposed as a result of a violation.

    MCO Resource – Preclearance must be obtained via MCO. Once the required information is submitted, your preclearance request will be approved or denied immediately.

    8.2(c) How long is my preclearance approval valid?

    U.S. : Preclearance approval will expire at the end of the trading day on which it is issued (e.g., if you receive approval for a trade on Monday, it is effective until the market closes on that Monday). Preclearance for limit orders is good for transactions on the same day that approval is granted only. If you receive approval for a limit order, it must be executed or expire at the close of regular trading on the same business day for which approval was granted. If you wish to execute the limit order after the close of regular trading on the day you received approval, you must submit a new preclearance request for the day you wish to execute the trade.

    Non-U.S.: If you receive approval, transactions must be executed no later than the end of trading on the next business day after the preclearance is granted. If the transaction is not placed within that time, you must submit a new request for approval before placing the transaction. If you preclear a limit order, that limit order must either be executed or expire at the end of the next business day. If you want to execute the order after the next business day period expires, you must resubmit your preclearance request.

    8.2(d) Am I required to obtain preclearance before investing in a Private Placement?

    Yes. You cannot invest in securities offered to potential investors in a Private Placement or other limited investment offering without first obtaining preclearance from Compliance. You must provide documentation describing the investment (e.g., offering memorandum, subscription documents, etc.) so as to enable Compliance to conduct a thorough review of the investment. Approval

    may be granted after a review of the facts and circumstances, including whether:

    An investment in the securities is likely to result in future conflicts with Vanguard Client accounts.

    You are being offered the opportunity due to your employment at, or association with, Vanguard.

    If you receive approval to purchase Securities in a Private Placement, you must inform Compliance if that Security goes to public offer or is pending listing on an exchange.

    MCO Resource – To seek preclearance of a Private Placement, complete the Outside Business Activities Form via MCO.

    8.2(e) Are there Securities transactions that I do not need to preclear?

    Yes. You are not required to obtain preclearance for the following:

    Purchases or sales of Vanguard Funds. Note: The purchase or sale of Vanguard ETFs require preclearance.

    Purchases or sales where the person requesting preclearance has no direct or indirect influence or control over the Covered Security (e.g., you have a trust in your name but you are not the trustee who places the transaction, provided you have granted Investment Discretion to the trustee and there has been no prior communication between you and the trustee regarding the transaction).

    Corporate actions in Covered Securities such as stock dividends, stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions.

    Purchases or sales made as a part of an Automatic Investment Program.

    Purchases made upon the exercise of Rights by an issuer in proportion to all holders of a class of its Securities, to the extent such Rights were acquired for such issuer.

    Acquisitions of Covered Securities through gifts or bequests.

    16


     

    Personal Trading Activities

    You are required to abide by the Code of Ethics requirements related to holding, reporting, and trading Securities for personal benefit. Personal trading restrictions and reporting requirements vary depending on the rules of the country you are working in and whether you are an Access Person or a Non-Access Person.



     

    8.2(f) Am I subject to restrictions on my personal trading in Covered Securities?

    Yes. You may be subject to certain restrictions if you purchase or sell a Covered Security within seven days before or after a Vanguard Fund purchases or sells the same Covered Security or a Related Security (the “blackout period”).

    If you purchase a Covered Security within seven days before a Vanguard Fund purchases the same Covered Security or a Related Security, you may be required to hold the Covered Security for 6 months before being permitted to sell the Covered Security for a profit.

    If you sell a Covered Security within seven days before a Vanguard Fund sells the same Covered Security or a Related Security, you may be required to disgorge any profits earned from your sale of the Covered Security (exclusive of commissions) at a price higher than what the Vanguard Fund received for selling the Covered Security or a Related Security.

    In general, you will not receive preclearance to purchase a Covered Security within seven days after a Vanguard Fund trades the same Covered Security or a Related Security. If you execute the transaction without receiving preclearance, you will have violated this Code and must immediately sell the Covered Security and disgorge all profits received from the sale to Vanguard (exclusive of commissions).

    In general, you will not receive preclearance to sell a Covered Security within seven days after a Vanguard Fund trades the same Covered Security or a Related Security. If you execute the transaction without receiving preclearance, you will have violated the Code and must disgorge the difference (exclusive of commissions) between the sale price you received and the Vanguard Fund’s sale price (as long as your sales price is higher), multiplied by the number of shares you sold.

    In addition to these restrictions, local law may dictate the extent to which any gains must be relinquished.

    Quick Guide: For
    example on the above
    trade scenarios, refer
    to Code of Ethics Q&A,
    which can be accessed
    from the Code of
    Ethics Resource page
    on CrewNet.

    Compliance may exempt from these restrictions trades during blackout periods that coincide with trading by certain Vanguard Funds (e.g., index funds).

    Compliance may waive the blackout period as it applies to the sale of a Covered Security if the Chief Compliance Officer determines its application creates a significant hardship to you (e.g., you need cash for a home purchase or to cover a major medical expense) and, in the opinion of the Chief Compliance Officer, satisfies the requirements for a waiver in Section 11.

    Web Resource – Refer to the Hardship Waiver Request Form on the Code of Ethics Resource page on CrewNet.

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Investment Persons
    document, which can be
    accessed from the Code
    of Ethics Resource page
    on CrewNet.

    8.2(g) Am I prohibited from engaging in certain Securities transactions?

    Yes. You are prohibited from engaging in the following Securities transactions:

    Futures and Options. You are prohibited from entering into, acquiring, or selling any Futures contract (including single stock futures) or any

    18


     

    Option on any Covered Security (including Options on ETFs).

    Initial Public Offerings and Secondary Offerings. You are prohibited from acquiring Securities in an Initial Public Offering or Secondary Offering.

    Short-Selling. You are prohibited from selling short any Security that you do not own or from otherwise engaging in Short-Selling activities.

    Short-TermTrading. You are prohibited from purchasing and then selling any Covered Security or a Vanguard ETF at a profit, as well as selling and then repurchasing a Covered Security or a Vanguard ETF at a lower price within 60 calendar days. Gains are calculated based on last in, first out method for purposes of this restriction. If you realize profits on short-term trades, you will be required to relinquish the profits. In addition, the trade will be recorded as a violation of the Code.

    Spread Bets. You are prohibited from participating in Spread Betting on Securities, indexes, interest rates, currencies, or commodities.

    8.2(h) What happens if I make a “short-term trade” in a Vanguard Fund?

    Compliance will monitor trading in Vanguard Funds, other than Vanguard ETFs, and will review situations where Vanguard Fund shares are redeemed within 30 calendar days of purchase (a “short-term trade”). You may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action if Compliance determines the short-term trade was detrimental to a Vanguard Fund or a Vanguard Client or that there is a history of frequent trading by you or your Immediate Family Members. For purposes of this paragraph:

    A redemption includes a redemption by any means, including an exchange out of a Vanguard Fund.

    This policy does not cover purchases and redemptions/sales (i) into or out of Vanguard money market funds, Vanguard short-term bond funds, or (ii) through an Automatic Investment Program.

    Nothing in this section is intended to replace, nullify, or modify any requirements imposed by a Vanguard Fund.

    Note: This section applies to transactions in Vanguard Funds other than Vanguard ETFs (e.g., Vanguard mutual funds). As noted above, Investment Persons are prohibited from purchasing and then selling any Vanguard ETF at a profit, as well as selling and then repurchasing a Vanguard ETF at a lower price within 60 calendar days

    8.2(i) Are there any additional reporting requirements that apply to me?

    In addition to the standard reporting requirements set forth in Section 8.1(c), you must also disclose the following:

    Covered Accounts where you exercise Investment Discretion.

    Accounts, 529 college savings plans and annuity or insurance products holding Vanguard Funds.

    The information must be updated in MCO no later than ten calendar days after you become an Investment Person or joining Vanguard.

    QuarterlyTransactions Report – Within 30 days of quarter end, you must certify that all transactions effected in Covered Securities during the quarter have been recorded accurately in MCO. If there are no transactions in Covered Securities the report should state “None.” You will not be required to certify if Compliance receives automated or duplicate confirmations and statements. Note: Compliance receives duplicate confirms and statements for all Vanguard accounts.

    Annual Holdings Report – Within 30 calendar days of receipt, you must certify that all Covered Accounts and Reportable Securities are recorded accurately in MCO.

    If you are an Investment Person of Vanguard Investments Hong Kong, Limited (VIHK), the holdings disclosure requirement is semi-annual, including the provision of statements.

    19


     

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Investment Persons,
    which can be accessed
    from the Code of Ethics
    Resource page on
    CrewNet.

    MCO Resource – Verify and disclose all Covered Accounts and holdings in Reportable Securities via MCO

    8.3 AdditionalTrading Prohibitions and Reporting Requirements for Fund Access Persons

    The requirements of this Section 8.3 are in addition to the requirements of Section 8.1 and apply to all transactions or holdings in which a Fund Access Person has, or will acquire, Beneficial Ownership of Securities. To see if you are designated as a Fund Access Person, reference the Fund Access Persons Departments list on CrewNet. Note: this designation could apply to Crew Members or Contingent Workers.

    8.3(a) Which Securities trades am I required to preclear?

    You must obtain, for yourself and on behalf of your Immediate Family Members, preclearance for any transaction in a Covered Security.

    By seeking preclearance, you will be deemed to be advising Compliance that you:

    Do not possess any material, nonpublic information relating to the security.

    Do not use knowledge of any proposed trade or investment program relating to the Vanguard Funds for personal benefit.

    Believe the proposed trade is available to any market participant on the same terms.

    Non-U.S. Fund Access Persons may be subject to additional restrictions. See Section 8.5(a).

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Fund Access
    Persons document,
    which can be accessed
    from the Code of Ethics
    Resource page on
    CrewNet.

    8.3(b) How do I obtain preclearance?

    You must receive preclearance through the MCO system or by contacting Compliance. Transactions in Covered Securities may not be executed before you receive approval.

    Same day limit orders are permitted; however, good ‘til canceled orders (such as limit orders that stay open over the course of multiple trading days until a security reaches a specified market price) are not permitted.

    Attempting to gain approval after the transaction has occurred is not permitted. Completing a personal trade before receiving approval or after the approval window expires constitutes a violation of the Code. See Section 10 for more information regarding the sanctions that may be imposed as a result of a violation.

    MCO Resource – Preclearance must be obtained via MCO. Once the required information is submitted, your preclearance request will be approved or denied immediately.

    8.3(c) How long is my preclearance approval valid?

    U.S. : Preclearance approval will expire at the end of the trading day on which it is issued (e.g., if you receive approval for a trade on Monday, it is effective until the market closes on that Monday). Preclearance for limit orders is good for transactions on the same day that approval is granted only. If you receive approval for a limit

    20


     

    order, it must be executed or expire at the close of regular trading on the same business day for which approval was granted. If you wish to execute the limit order after the close of regular trading on the day you received approval, you must submit a new preclearance request for the day you wish to execute the trade.

    Non-U.S.: If you receive approval, transactions must be executed no later than the end of trading on the next business day after the preclearance is granted. If the transaction is not placed within that time, you must submit a new request for approval before placing the transaction. If you preclear a limit order, that limit order must either be executed or expire at the end of the next business day. If you want to execute the order after the next business day period expires, you must resubmit your preclearance request.

    8.3(d) Am I required to obtain preclearance before investing in a Private Placement?

    Yes. You cannot invest in securities offered to potential investors in a Private Placement or other limited investment offering without first obtaining preclearance from Compliance. You must provide documentation describing the investment (e.g., offering memorandum, subscription documents, etc.) so as to enable Compliance to conduct a thorough review of the investment. Approval may be granted after a review of the facts and circumstances, including whether:

    An investment in the securities is likely to  
    result in future conflicts with Vanguard Client  
    accounts.  
    You are being offered the opportunity due  
    to your employment at, or association with,  
    Vanguard.  

     

    If you receive approval to purchase Securities in a Private Placement, you must inform Compliance if that Security goes to public offer or is pending listing on an exchange.

    MCO Resource – To seek preclearance of a Private Placement, complete the Outside Business Activities Form via MCO.

    8.3(e) Are there Securities transactions that I do not need to preclear?

    Yes. You are not required to obtain preclearance for the following:

    Purchases or sales of Vanguard Funds.  
    Purchases or sales where the person  
    requesting preclearance has no direct or  
    indirect influence or control over the account  
    (e.g., you have a trust in your name but you  
    are not the trustee who places the transaction,  
    provided you have granted Investment  
    Discretion to the trustee and there has been  
    no prior communication between you and the  
    trustee regarding the transaction).  
    Corporate actions in Covered Securities such  
    as stock dividends, stock splits, mergers,  
    consolidations, spin-offs, or other similar  
    corporate reorganizations or distributions.  
    Purchases or sales made as a part of an  
    Automatic Investment Program.  
    Purchases made upon the exercise of Rights by  
    an issuer in proportion to all holders of a class  
    of its Securities, to the extent, such Rights  
    were acquired for such issuer.  
    Acquisitions of Covered Securities through gifts  
    or bequests.  

     

    8.3(f) Am I subject to restrictions on my personal trading in Covered Securities?

    Yes. You may be subject to certain restrictions if you purchase or sell a Covered Security within seven days before or after a Vanguard Fund purchases or sells the same Covered Security or a Related Security (the “blackout period”).

    If you purchase a Covered Security within seven days before a Vanguard Fund purchases the same Covered Security or a Related Security, you may be required to hold the Covered Security for 6 months before being permitted to sell the Covered Security for a profit.

    If you sell a Covered Security within seven days before a Vanguard Fund sells the same Covered Security or a Related Security, you may be required to disgorge any profits earned from your sale of the

    21


     

    Covered Security (exclusive of commissions) at a price higher than what the Vanguard Fund received for selling the Covered Security or a Related Security.

    In general, you will not receive preclearance to purchase a Covered Security within seven days after a Vanguard Fund trades the same Covered Security or a Related Security. If you execute the transaction without receiving preclearance, you will have violated this Code and must immediately sell the Covered Security and disgorge all profits received from the sale to Vanguard (exclusive of commissions).

    In general, you will not receive preclearance to sell a Covered Security within seven days after a Vanguard Fund trades the same Covered Security or a Related Security. If you execute the transaction without receiving preclearance, you will have violated the Code and must disgorge the difference (exclusive of commissions) between the sale price you received and the Vanguard Fund’s sale price (as long as your sales price is higher), multiplied by the number of shares you sold.

    Quick Guide: For
    example on the above
    trade scenarios, refer
    to Code of Ethics Q&A,
    which can be accessed
    from the Code of Ethics
    Resource page on
    CrewNet.

    In addition to these restrictions, local law may dictate the extent to which any gains must be relinquished.

    Compliance may exempt from these restrictions certain trades during blackout periods that coincide with trading by certain Vanguard Funds (e.g., index funds).

    The blackout period will not apply to a Fund Access Person’s sale of any stock for which the market capitalization exceeds US$5 billion, provided that

    the total value of any sales of the Security by the Fund Access Person do not exceed US$10,000 in any 30-day rolling period. Sales of securities with market capitalizations below US$5 billion, or that exceed US$10,000 in any 30-day rolling period, will continue to be subject to the blackout periods unless Compliance grants a waiver.

    Compliance may waive the blackout period as it applies to the sale of a Covered Security if the Chief Compliance Officer determines its application creates a significant hardship to you (e.g., you need cash for a home purchase or to cover a major medical expense) and, in the opinion of the Chief Compliance Officer, satisfies the requirements for a waiver in Section 11.

    Web Resource – Refer to the Hardship Waiver Request Form on the Code of Ethics Resource page on CrewNet.

    8.3(g) Am I prohibited from engaging in any Securities transactions?

    Yes. You are prohibited from engaging in the following Securities transactions:

    Futures and Options. You are prohibited from  
    entering into, acquiring, or selling any Futures  
    contract (including single stock futures) or any  
    Option on any Security (including Options on  
    ETFs).  
    Initial Public Offerings and Secondary  

     

    Offerings. You are prohibited from acquiring Securities in an Initial Public Offering or Secondary Offering.

    Short-Selling. You are prohibited from selling  
    short any Security that you do not own or from  
    otherwise engaging in Short-Selling activities.  
    Short-TermTrading. You are prohibited from  
    purchasing and then selling any Covered  
    Security at a profit, as well as selling and  
    then repurchasing a Covered Security at a  
    lower price within 60 calendar days. Gains are  
    calculated based on last in, first out method  
    for purposes of this restriction. If you realize  
    profits on short-term trades, you will be  

     

    22


     

    required to relinquish the profits. In addition, the trade will be recorded as a violation of the Code. Example: You are not permitted to sell a security at $12 that you purchased within the prior 60 days for $10. Similarly, you are not permitted to purchase a security at $10 that you sold within the prior 60 days for $12.

    Spread Bets. You are prohibited from  
    participating in Spread Betting on Securities,  
    indexes, interest rates, currencies, or  
    commodities.  

     

    8.3(h) What happens if I make a “short-term trade” in a Vanguard Fund?

    Compliance will monitor trading in Vanguard Funds, other than Vanguard ETFs, and will review situations where Vanguard Fund shares are redeemed within 30 calendar days of purchase (a “short-term trade”). You may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action if Compliance determines the short-term trade was detrimental to a Vanguard Fund or a Vanguard Client or that there is a history of frequent trading by you or your Immediate Family Members. For purposes of this paragraph:

    A redemption includes a redemption by any  
    means, including an exchange out of a Vanguard  
    Fund.  
    This policy does not cover purchases and  
    redemptions/sales (i) into or out of Vanguard  
    money market funds, Vanguard short-term bond  
    funds, or (ii) through an Automatic Investment  
    Program.  

     

    Nothing in this section is intended to replace, nullify, or modify any requirements imposed by a Vanguard Fund.

    Note: This section applies to transactions in Vanguard Funds other than Vanguard ETFs (e.g., Vanguard mutual funds).

    8.3(i) Are there any additional reporting requirements that apply to me?

    In addition to the standard reporting requirements set forth in Section 8.1(c), you must also disclose the following:

    Covered Accounts where you exercise  
    Investment Discretion.  
    Accounts, 529 college savings plans and annuity  
    or insurance products holding Vanguard Funds.  

     

    The information must be updated in MCO no later than ten calendar days after you become a Fund Access Person or joining Vanguard.

    QuarterlyTransactions Report – Within 30 days of quarter end, you must certify that all transactions effected in Covered Securities during the quarter have been recorded accurately in MCO. If there are no transactions in Covered Securities the report should state “None.” You will not be required to certify if Compliance receives automated or duplicate confirmations and statements. Note: Compliance receives duplicate confirms and statements for all Vanguard accounts.

    Annual Holdings Report – Within 30 calendar days of receipt, you must certify that all Covered Accounts and Reportable Securities are recorded accurately in MCO.

    If you are an Investment Person of Vanguard Investments Hong Kong, Limited (VIHK), the holdings disclosure requirement is semi-annual, including the provision of statements.

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for Fund Access Persons,
    which can be accessed
    from the Code of Ethics
    Resource page on
    CrewNet.

    MCO Resource – Verify and disclose all Covered Accounts and holdings in Reportable Securities via MCO.

    23


     

    8.4 AdditionalTrading Prohibitions and Reporting Requirements for VAI Access Persons

    The requirements of this Section 8.4 are in addition to the requirements of Section 8.1 and apply to all transactions or holdings in which a VAI Access Person has, or will acquire, Beneficial Ownership of Securities. To see if you are designated as a VAI Access Person, reference the VAI Access Person Departments list on CrewNet. Note: this designation could apply to Crew Members or Contingent Workers.

    8.4(a) Am I required to preclear Security trades?

    No. You are not required to preclear transactions in Covered Securities for you and your Immediate Family members.

    Quick Guide: Refer
    to the Trading and
    Reporting Requirements
    for VAI Access Persons,
    which can be accessed
    from the Code of Ethics
    Resource page on
    CrewNet.

    8.4(b) Am I required to obtain preclearance before investing in a Private Placement?

    Yes. You cannot invest in securities offered to potential investors in a Private Placement or other limited investment offering without first obtaining preclearance from Compliance. You must provide documentation describing the investment (e.g., offering memorandum, subscription documents, etc.) so as to enable Compliance to conduct a thorough review of the investment. Approval may be granted after a review of the facts and circumstances, including whether:

    An investment in the securities is likely to result in future conflicts with Vanguard Client accounts.

    You are being offered the opportunity due to your employment at, or association with, Vanguard.

     

    If you receive approval to purchase Securities in a Private Placement, you must inform Compliance if that Security goes to public offer or is pending listing on an exchange.

    MCO Resource – To seek preclearance of a Private Placement complete the Outside Business Activities Form via MCO.

    8.4(c) Am I prohibited from engaging in any Securities transactions?

    Yes. You are subject to the following restrictions with respect to any transaction in which you will acquire any direct or indirect Beneficial Ownership:

    Initial Public Offerings and Secondary  
    Offerings. You are prohibited from acquiring  
    Securities in an Initial Public Offering or  
    Secondary Offering.  
    Short-Selling. You are prohibited from selling  
    short any Security that you do not own or from  
    otherwise engaging in Short-Selling activities.  
    Short-TermTrading. You are prohibited from  
    purchasing and then selling any Covered  
    Security at a profit, as well as selling and then  
    repurchasing a Covered Security at a lower  
    price within 60 calendar days. A last-in-first-out  
    accounting methodology will be applied to a  
    series of Security purchases when applying  
    this holding rule. If you realize profits on short-  
    term trades, you will be required to relinquish  
    the profits to The Vanguard Group Foundation  
    (exclusive of commissions). In addition, the  
    trade will be recorded as a violation of the  
    Code.  
    Short-term trading on options. You may hold  
    options on a Covered Security until you exercise  
    the options or the options expire. However, you  
    may not otherwise close any open positions  
    within 60 calendar days. If you realize profits  
    on such short-term trades, you must relinquish  
    such profits to The Vanguard Group Foundation  
    (exclusive of commissions). For example:  
    you would not be permitted to sell a Covered  
    Security at $12 that you purchased within the  
    prior 60 days for $10. Similarly, you would not  
    be permitted to purchase a Covered Security at  
    $10 that you had sold within the prior 60 days  

     

    24


     

    for $12. Note: These types of transactions can have unintended consequences. For example, your call option could be assigned, causing the underlying Security to be called away within sixty (60) calendar days following the purchase of the Covered Security and will be recorded as a violation of the Code.

    8.4(d) What happens if I make a “short-term trade” in a Vanguard Fund?

    Compliance will monitor trading in Vanguard Funds, other than Vanguard ETFs, and will review situations where Vanguard Fund shares are redeemed within 30 calendar days of purchase (a “short-term trade”). You may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action if Compliance determines the short-term trade was detrimental to a Vanguard Fund or a Vanguard Client or that there is a history of frequent trading by the you or your Immediate Family Members. For purposes of this paragraph:

        A redemption includes a redemption by any  
     

    means, including an exchange out of a Vanguard Fund.

        This policy does not cover purchases and  
     

    redemptions/sales (i) into or out of Vanguard money market funds, Vanguard short-term bond funds, or (ii) through an Automatic Investment Program.

     

    Nothing in this section is intended to replace, nullify, or modify any requirements imposed by a Vanguard Fund.

    Note:This section applies to transactions in Vanguard Funds other than Vanguard ETFs (e.g., Vanguard mutual funds).

    8.4(e) Are there any additional reporting requirements that apply to me?

    In addition to the standard reporting requirements set forth in Section 8.1(c), you must also disclose the following:

    Covered Accounts where you exercise Investment Discretion.

    Accounts, 529 college savings plans and annuity or insurance products holding Vanguard Funds.

     

    The information must be updated in MCO no later than ten calendar days after you become a VAI Access Person or joining Vanguard.

    QuarterlyTransactions Report – Within 30 days of quarter end, you must certify that all transactions effected in Covered Securities during the quarter have been recorded accurately in MCO. If there are no transactions in Covered Securities the report should state “None.” You will not be required to certify if Compliance receives automated or duplicate confirmations and statements. Note: Compliance receives duplicate confirms and statements for all Vanguard accounts.

    Annual Holdings Report – Within 30 calendar days of receipt, you must certify that all Covered Accounts and Reportable Securities are recorded accurately in MCO.

    Quick Guide: Refer to
    the Trading and Reporting
    Requirements for VAI
    Access Persons, which
    can be accessed from the
    Code of Ethics Resource
    page on CrewNet.

    MCO Resource - Verify and disclose all Covered Accounts and holdings in Reportable Securities via MCO.

    25


     

    8.5 AdditionalTrading Prohibitions for Non-U.S. Crew Members

    The requirements of this Section 8.5 are in addition to the requirements of Section 8.1 as well as the requirements of Section 8.2, 8.3, or 8.4, as applicable.

    8.5 (a) What are the additional trading prohibitions?

    There are additional trading requirements and restrictions for Crew Members in Australia as well as for Crew Members and Contingent Workers in Japan.

    8.5(b) What are the Vanguard Fund reporting requirements in Australia?

    You and your Immediate Family Members will be required to disclose Vanguard Fund accounts in MCO but are not required to report transactions in Vanguard Funds to the local Compliance Department. For monitoring purposes, the local Compliance Department will access their records via the transfer agency system maintained at VIA, as required.

    Note:Trades in Vanguard ETFs are required to be reported, as these records are not held by VIA.

    8.5(c) What are the additional trading restrictions for Japan?

    Crew Members and Contingent Workers including their Immediate Family Members are prohibited from activities including, but not limited to engaging in margin transactions, Securities-related derivatives transactions, and specified OTC derivatives transactions on their own account.

    8.5(d) What additional information is required to be reported for accounts with third party Investment Discretion?

    If you or your Immediate Family Member have an arrangement in place with a third party to manage Securities on a discretionary basis, you must provide a copy of the Discretionary Agreement

    Approval request to Compliance in advance of effecting any transactions subject to the agreement.

    Web Resource – Request and complete a Discretionary Agreement Approval Request Form.

    26


     

    Certification

    Requirements

    On an annual
    basis, you must
    acknowledge that
    you understand the
    Code of Ethics and
    will comply with its
    provisions.


     

    Section 9. Certification Requirements

    9.1 What am I required to certify initially?

    Initial Certification – Within 10 calendar days after joining Vanguard, you must certify to Compliance that you have read, understand, and will comply with all applicable requirements of the Code and Code-related policies.

    9.2 What am I required to certify annually?

    Annual Certification – Within 30 calendar days of receipt, you must certify that you have read, understand, and have and will continue to comply with all applicable requirements of the Code and Code-related policies.

    Section 10. Penalties and Sanctions

    Any violations and potential violations of the Code will be investigated by Compliance or, if necessary, the Global Code of Ethics Committee. Once it has been determined that there was a violation, you will be subject to sanctions, as described below. Compliance will utilize a rolling 24-month period when evaluating whether to sanction a violation. The terms of the Disciplinary Action Policy will also apply.

    For violations involving a Contingent Worker, Compliance will consult with a local Human Resource contact (outside the U.S.) or Crew Relations Specialist (inside the U.S.) and the appropriate employer regarding disciplinary action.

    10.1 How are violations administered by Compliance?

    The sanctions program for non-material violations of the Code (e.g., late certification submissions, missed preclearance of a Covered Security, late in providing account confirms/statements, failure to observe the holding period requirements, etc.) and material violations will generally operate as follows:

    The process for addressing non-material and material violations will include the following:

    First non-material violation in a rolling 24-month period - Letter of Education.

    Compliance will send the applicable Crew Member, his or her direct manager, and Human Resources or Crew Relations a summary of the violation.

     

    Second non-material violation in a rolling 24-month period - Letter of Caution.

    Compliance will send a letter of caution to the Crew Member and his or her direct manager for both parties to sign and return to Compliance. Compliance will have the direct manager add a first written warning to Workday. Compliance also will notify the Chief Compliance Officer, the Crew Member’s direct officer, and Human Resources or Crew Relations.

    Third non-material violation in a rolling 24-month period - Letter of Violation.

    Compliance will report the violation to the Global Code of Ethics Committee, which will impose an appropriate sanction (e.g., final written warning) if warranted.

    Material violation. Compliance will report the material violation to the Global Code of Ethics Committee, which will impose an appropriate sanction (e.g., final written warning, termination, etc.) in its discretion.

     

    10.2 How is an appropriate sanction determined?

    In addition to the foregoing, Compliance may, as authorized by the Chief Compliance Officer and in consultation with the appropriate local Human Resource contact (outside the U.S.) or Crew Relations Specialist (inside the U.S.), impose sanctions for violations of the Code that are considered to be necessary and appropriate under the circumstances and in the best interests of Vanguard and Vanguard Clients.

    As mentioned above, certain violations will be reported to the Global Code of Ethics Committee, which will impose sanctions in its discretion. These

    28


     

    sanctions, subject to local laws, may include, but are not limited to, one or more of the following: personal trading suspension, profit disgorgement, negative adjustment to performance review and compensation, final written warning, termination of employment or referral to civil or criminal authorities, or any other sanction as may be determined by the Global Code of Ethics Committee in its discretion.

    10.3 How is the materiality of a violation determined?

    Compliance and/or the Committee will consider a variety of factors including, but not limited to, whether there was a violation of law, the frequency of violations, the monetary value of the violation in question, violations that impact a Vanguard Client, or violations that are egregious, malicious, or repetitive in nature.

    10.4 What are my obligations to report a violation?

    You are required to immediately report a violation of the Code to the local Compliance Department once you become aware of a violation.

    Section 11. Waivers

    The Chief Compliance Officer may grant exceptions to this Code, including preclearance, other trading restrictions, and certain reporting requirements on a case-by-case basis if it is determined that (1) the proposed conduct involves no opportunity for abuse, (2) the proposed conduct does not conflict with Vanguard’s interests, and (3) not granting an exception would result in an unfair or unjust outcome.

    The Chief Compliance Officer may waive the applicability of the Code for a Contingent Worker if the Code’s requirements are covered through the applicable service provider’s contract with Vanguard.

    29


     

    Appendices

    Appendix A.

    Definitions

    Appendix B.

    Independent Directors and Trustees


     

    Appendix A. Definitions

    The following definitions apply throughout the Code.

    Term   Definition  
     
    Access Person   Any person designated as an Investment Person, Fund Access Person, or VAI Access Person.  
    American Depository   A receipt that represents a specific number of shares of a foreign-based corporation held by a  
    Receipts (ADRs)   U.S. bank and entitles the holder to all dividends and capital gains. Through ADRs, investors can  
      gain exposure to securities of foreign-based companies while investing in the U.S. instead of in  
      foreign markets.  
    Associated Persons   Any person who conducts securities business on behalf of the Vanguard Marketing Corporation  
      (VMC). This includes all FINRA-licensed Contingent Workers, as well as non-licensed Contingent  
      Workers who perform certain operational and administrative functions for VMC.  
    Automatic Investment   A program in which regular periodic purchases (or withdrawals) are made automatically in (or  
    Program   from) Investment accounts, according to a predetermined schedule and allocation. An Automatic  
      Investment Program includes a dividend reinvestment plan.  
    Bankers' Acceptance   A time draft drawn on a commercial bank by a borrower usually in connection with an  
      international commercial transaction. Bankers’ acceptances are usually guaranteed by the bank.  
     
    Beneficial Ownership   The opportunity to directly or indirectly—through any contract, arrangement, understanding,  
      relationship, or otherwise—share at any time in any economic interest or profit derived from an  
      ownership of or a transaction in a Security. You are deemed to have Beneficial Ownership in the  
      following:  
     
        Any Security owned individually by you.  
        Any Security owned by an Immediate Family Member.  
        Any Security owned in joint tenancy, as tenants in common, or in other joint ownership  
        arrangements.  
        Any Security in which an Immediate Family Member has Beneficial Ownership if the Security  
        is held in a Covered Account over which you have decision making authority (for example,  
        you act as a trustee, executor, or guardian or you provide Investment advice).  
        Your interest as a general partner or manager/member in Securities held by a general or  
        limited partnership or limited liability company.  
        Your interest as a member of an investment club or an organization that is formed for the  
        purpose of investing in a pool of monies or Securities.  
        Your ownership of Securities as a trustee of a trust in which either you or an Immediate  
        Family Member has a vested interest in the principal or income of the trust or your  
        ownership of a vested interest in a trust.  
        Securities owned by a corporation which is directly or indirectly controlled by, or under  
        common control with, such person.  
     
    Bond   A debt obligation issued by a corporation, government, or government agency that entails  
      repayment of the principal amount of the obligation at a future date, usually with interest.  
     
    Bribery   The act of making an illegal payment from one party to another, usually in return for a legal or  
      financial favor.  
     
    Brokerage Account   Any account where you can transact in Securities, including Automatic Investment Programs,  
      employee stock purchase programs, and employee stock option programs.  
     
    Certificate of Deposit   An insured, interest-bearing deposit at a bank that requires the depositor to keep the money  
    (CD)   invested for a specified period.  
     
    Closed-End Fund   A fund that offers a fixed number of shares. The fixed number of shares outstanding are offered  
      during an initial subscription period, similar to an initial public offering. After the subscription  
      period is closed, the shares are traded on an exchange between investors, like a stock.  
    Commercial Paper   A promissory note issued by a company in need of short-term financing.  

     

    31


     

    Contingent Workers

    A Contingent Worker is a broad term that refers to any person providing services to Vanguard who Vanguard has not designated as a Crew Member.

    Contingent Workers generally include individuals performing services for or on behalf of Vanguard through staffing firms, consulting firms, service providers, and as independent contractors, other than those who work for an independent organization with expertise in a specific function that is peripheral to Vanguard’s core business (e.g., security, landscaping, and food services).

    Note: Compliance may waive the applicability of the Code for a Contingent Worker if Compliance deems the Code’s requirements are covered through their service provider’s contract with Vanguard.

    Contract for Difference (CFD)

    A contract between two parties, typically described as buyer and seller, stipulating that the seller will pay the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead of the seller.)

    Corporate Action

    A corporate action is any activity by an issuer that can change its shareholders’ ownership. Examples include mergers, stock splits, dividends, Rights issues, etc.

     

    Covered Account

    A Vanguard Fund account, a Brokerage Account, and any other type of account that holds, or is capable of holding, Reportable Securities.

     

    Covered Security

    Any Security, other than (i) Direct Obligations of a Government; (ii) Bankers' Acceptances, Certificates of Deposit (CD), Commercial Paper, and High-Quality Short-Term Debt Instruments, including Repurchase Agreements; (iii) shares issued by Open-End Funds (although for European subsidiaries, this is limited to UCITS schemes, a non-UCITS retail scheme, or another fund subject to supervision under the law of an European Economic Area (EEA) state which is an index fund or which requires an equivalent level of risk spreading in their assets); (iv) life policies; (v) exchange-traded funds and exchange-traded notes, and (vi) Digital Security Tokens.

    Crew Member

    Crowdfunding

    All employees, officers, directors, and trustees of Vanguard or a Vanguard Fund.

    The use of small amounts of capital from a large number of individuals to finance a new business venture. This is an evolving method of raising capital, typically done through the Internet.

     

    Crypto Mining

    The act of running or facilitating any computational process for purposes of receiving compensation in the form of a Digital Currency, Digital Utility Token, or Digital Security Token. Crypto Mining may be done either directly or indirectly. Indirect Crypto Mining involves any investment or participation in a venture that engages in direct Crypto Mining.

    Debenture

    Direct Obligations of a Government

    Digital Currency

    An unsecured debt obligation backed only by the general credit of the borrower.

    A debt that is backed by the full taxing power of any government. These Securities are generally considered to be of the very highest quality.

    A digital asset that: (1) serves solely as a store of value, a medium of exchange, or a unit of account; (2) is not issued or guaranteed by any jurisdiction, central bank, or public authority,; (3) relies on algorithmic techniques to regulate the generation of new units of the digital asset; and (4) has transactions involving the digital asset recorded on a decentralized network or distributed ledger (e.g., blockchain). A Digital Currency is distinguishable from a Digital Security Token or a Digital Utility Token.

    Digital UtilityToken

    A digital asset that (1) provides access to a particular network, product, or service; (2) derives its value primarily from providing access to a particular network, product, or service; and (3) does not function as a Digital Currency or Digital Security Token.

    Digital SecurityToken

    Any digital asset that is not a Digital Currency or Digital Utility Token. In general, a Digital Security Token may: (1) derive its value primarily from, or represent an interest in a separate asset or pool of assets; or (2) represent an interest an enterprise or venture. A Digital Security Token may provide owners or holders with voting rights, rights to distributions, or other rights associated with ownership. Digital Security Tokens are generally held for speculative investment purposes and not to provide holders with access to a particular network, product, or service. Digital Security Tokens, like other investments, are generally not used as a medium of exchange.

    Note: Whether or not an asset is a Digital Security Token depends on specific facts and circumstances. Merely referring to an asset as a Digital Currency or Digital Utility Token does not prevent the asset from being a Digital Security Token. Furthermore, an asset may be a Digital Security Token even if it has some purported utility. Please contact Compliance if you have any questions regarding whether an asset is a Digital Security Token

     

    32


     

    Evidence of Indebtedness

    Exchange-Traded Fund (ETF)

    Written agreements for enforceable obligations to pay money.

    An investment with characteristics of both mutual funds and individual stocks. Many ETFs track an index, a commodity, or a basket of assets. Unlike mutual funds, ETFs can be traded throughout the day. ETFs often have lower expense ratios but must be purchased and sold through a broker, which means you may incur commissions.

    Exchange-Traded Note (ETN)

    A senior, unsecured, unsubordinated debt Security issued by a financial institution, whose returns are based on the performance of an underlying index and backed only by the credit of the issuer. ETNs have a maturity date, but typically pay no periodic coupon interest and offer no principal protection. At maturity an ETN investor receives a cash payment linked to the performance of the corresponding index, less fees.

    Fund Access Person

    Any officer (other than officers designated as an Investment Person), director, or trustee of Vanguard or a Vanguard Fund, excluding Independent Directors and Trustees; or anyone who has access to nonpublic information regarding a Vanguard Fund’s impending purchases or sales of Securities, or nonpublic information regarding the portfolio holdings of any Vanguard Fund.  For anyone not an officer, Compliance designates Fund Access Persons individually or by department number. For a list of Fund Access Person departments, please see the Fund Access Person Departments list on CrewNet.

    Futures/Futures Contract

    A contract to buy or sell specific amounts of a commodity or financial instrument (such as grain, a currency, including foreign currencies and Digital Currencies (e.g., Bitcoin), or an index) for an agreed-upon price at a certain time in the future. Sometimes the arrangements in a contract prescribe that settlements are made through cash payments, rather than the delivery of physical goods or Securities; this is called Contract for Difference.

    High-Quality Short-Term Debt Instrument

    An instrument that has a maturity at issuance of less than 366 days and is rated in one of the two highest ratings categories by a nationally recognized statistical rating organization, or an instrument that is unrated but determined by Vanguard to be of comparable quality.

    Immediate Family Members

    Initial Coin Offering (ICO)

    Your spouse, domestic partner (an unrelated adult with whom you share your home and contribute to each other's support), and minor children

    An initial offer or sale of a Digital Security Token.

    Note: Whether or not an offering is an ICO depends on specific facts and circumstances. Please contact Compliance before participating in an initial offering of a Digital Currency or Digital Utility Token.

    Initial Public Offering (IPO)

    Independent Directors andTrustees

    Investment

    A corporation’s first offering of common stock to the public.

    Any director or trustee who is not an "interested person" of a Vanguard Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940.

    A monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

     

    Investment Contract

    Any contract, transaction, or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.

     

    Investment Discretion

    The authority an individual may exercise, with respect to investment control or trading discretion, on another person's account (e.g., executor, trustee, power of attorney).

     

    Investment Person

    Anyone who, in connection with his or her regular functions or duties, makes or participates in making any recommendations regarding the purchase or sale of Securities by a Vanguard Fund; and anyone designated by Compliance including, but not limited to, those who obtain nonpublic information concerning recommendations made to a Vanguard Fund. Compliance will designate Investment Persons individually or by department number. For a list of Investment Persons departments, please see the Investment Persons Departments list on CrewNet.

    Managed Account

    A Managed Account is an investment account that is owned by an investor and overseen by a hired professional money manager. The investor has no trading discretion on the account.

     

    Managed Services Workers

    A Contingent Worker who provides services to Vanguard and who is employed by an independent organization with expertise in a specific function that is peripheral to Vanguard’s core business (e.g., security, landscaping, and food services).

     

    33


     

    Money Market Fund

    A type of mutual fund that invests in short-term debt securities with the purpose of providing liquidity and interest at a low risk to shareholders. Money market funds generally seek to maintain a stable net asset value of $1.00 per share.

     
     

    MyComplianceOffice (MCO)

    Non-Access Person

    MyComplianceOffice (MCO) is a third-party web based application that allows Crew and Contingent Workers to report and update certain information, as required by the Code.

    Anyone who has not been designated as either an Investment Person, a Fund Access Person, or a Vanguard Advisers, Inc. Access Person.

     

    Note

    A financial security that generally has a longer term than a bill, but a shorter term than a Bond. However, the duration of a note can vary significantly and may not always fall neatly into this categorization. Notes are similar to Bonds in that they are sold at, above, or below face (par) value; make regular interest payments; and have a specified term until maturity.

    Open-End Fund

    Option

    A mutual fund that has an unlimited number of shares available for purchase.

    The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, including foreign currencies and Digital Currencies (e.g., Bitcoin), index, or debt, at a specified price (the strike price) during a specified period or on one particular date.

    Private Placement

    A Security that is not registered or required to be registered under the U.S. federal securities laws. Private Placements are generally sold to a relatively small number of select investors (as opposed to a public issue, in which Securities are made available for sale on the open market) in order to raise capital. Private Placements may include, among others, interests in hedge funds (including limited partnership interests) and shares of private companies. Investors in Private Placements are usually banks, mutual funds, insurance companies, pension funds, edge funds, and high net worth individuals. Private Placements are typically held or maintained outside of Vanguard.

    Private Securities Transaction

    Real Estate Investment Trust (REIT)

    The acquisition, purchase, sale, or disposition of a Private Placement.

    A publicly traded company that invests in real estate and distributes almost all of its taxable income to shareholders. REITs often specialize in a particular kind of property. They can, for example, invest in real estate such as office buildings, shopping centers, or hotels; purchase real estate (an equity REIT); and provide loans to building developers (a mortgage REIT). REITs offer the opportunity for smaller investors to invest in real estate.

    Related Security

    Any Security or instrument that provides economic exposure to the same company or entity— provided, however, that equity instruments will generally not be considered related to fixed income instruments (other than convertible Bonds) and vice versa. For example, all of the following instruments would be related to the common Stock of Company X: Options, Futures, Rights, and Warrants on Company X common Stock; preferred Stock issued by Company X; and Bonds convertible into Company X common Stock. Similarly, different Bonds issued by Company X would be related to one another.

    Reportable Securities

    Repurchase Agreement

    Any Covered Security (as defined above), ETFs, ETNs, and Digital Security Tokens.

    An arrangement by which the seller of an asset agrees, at the time of the sale, to buy back the asset at a specific price and, typically, on a given date (normally the next day).

     

    Rights

    A Security giving stockholders entitlement to purchase new shares issued by the corporation issuer at a predetermined price (normally at a discount to the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire.

    Security

    Any Stock, Bond, money market instrument, Note, evidence of indebtedness, Debenture, Warrant, Option, Right, Investment Contract, ETF, ETN, or any other Investment or interest commonly known as a Security.

    Secondary Offering

    The sale of new or closely held shares by a company that has already made an Initial Public Offering.

     

    34


     

    Short-Selling

    The sale of a Security that the investor does not own to take advantage of an anticipated decline in the price of the Security. To sell short, the investor must borrow the Security from a broker to make delivery to the buyer.

    Spread-Betting

    A way of trading that enables you to profit from movements in a wide range of markets from Shares to currencies, including foreign currencies and Digital Currencies (e.g., Bitcoin), commodities, and interest rates. Spread betting allows you to trade on whether the price quoted for these financial instruments will go up or down.

    Stock

    A Security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

    Undertakings ForThe Collective Investment Of Transferable Securities (UCITS)

    Unit InvestmentTrust (UIT)

    A regulatory framework of the European Commission that creates a harmonized regime throughout Europe for the management and sale of mutual funds. UCITS funds can be registered in Europe and sold to investors worldwide using unified regulatory and investor protection requirements.

    An SEC-registered Investment company that purchases a fixed, unmanaged portfolio of income-producing Securities and then sells shares in the trust to investors, usually in units of at least $1,000.

    Vanguard

    Vanguard Advisers, Inc. (VAI) Access Person

    The Vanguard Group, Inc. (VGI) and any Vanguard Affiliate.

    Any VAI officer, as well as anyone who is involved in making Securities recommendations to VAI clients, or has significant levels of interaction or dealings with VAI clients for the purposes of providing VAI services to clients. Compliance will designate VAI Access Persons individually or by department number. For a list of VAI Access Person departments, please see the VAI Access Person Departments list on CrewNet.

    Vanguard Affiliates

    Vanguard Clients

    Any direct or indirect subsidiary of VGI.

    The clients of VGI, or any of the International Subsidiaries, and investors in the Vanguard Funds, including the Vanguard Funds themselves.

     

    Vanguard ETFs

    Exchange-traded funds (ETFs) sponsored or managed by Vanguard. Vanguard ETFs issue shares that can be bought or sold throughout the day in the secondary market at a market-determined price. A Vanguard ETF may operate as a share class of a Vanguard Fund or as a standalone investment pool.

    Vanguard Funds

    Vanguard mutual funds, Vanguard ETFs, and any other accounts sponsored or managed by Vanguard. This includes, but is not limited to, separately managed accounts and collective trusts.

     

    Vanguard Officers

    Warrant

    Those Vanguard Crew Members at a Principal level position or higher.

    An entitlement to purchase a certain amount of common Stock at a set price (usually higher than the current price) during an extended period of time. Usually issued with a fixed-income security to enhance its marketability, a Warrant can be transferred, traded, or exercised by the holder.

     

    35


     

    Appendix B. Independent Directors and Trustees

    Independent Directors and Trustees are required to report Securities transactions to Compliance only when a transaction is completed within 15 days of a security being purchased or sold by a Vanguard Fund and the Independent Director/Trustee had knowledge (or should have had knowledge) of the transaction.

    Additionally, the following Sections of the Code are applicable to Independent Directors and Trustees:

    Sections

    Section 2 Section 5 Section 6 Section 7 Section 8

    Standards of Conduct (excludes the reporting requirements for conflicts of interest) Anti-Bribery Policy Antitrust and Competition Policy Duty of Confidentiality Personal Trading Activities 8.1(a) (excludes bullet 6)

     

    36


     

    Do the right thing


     


    © 2019 The Vanguard Group, Inc.

    All rights reserved.