UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07443
Name of Registrant: Vanguard Whitehall Funds
Address of Registrant:
P.O. Box 2600
Valley Forge, PA 19482
Name and address of agent for service:
Heidi Stam, Esquire
P.O. Box 876
Valley Forge, PA
Registrant’s telephone number, including area code: (610) 669-1000
Date of fiscal year end: October 31
Date of reporting period: November 1, 2010 – April 30, 2011
Item 1: Reports to Shareholders
 |
| Vanguard Selected Value Fund |
| Semiannual Report |
| April 30, 2011 |
 |
> For the six months ended April 30, 2011, Vanguard Selected Value Fund returned about 18%.
> The fund modestly lagged both the gain of its benchmark index and the average return for mid-capitalization value funds.
> The advisors’ selections in the industrial sector and an underweighting in energy stocks hurt the fund’s performance relative to its benchmark index.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisors’ Report. | 6 |
| Fund Profile. | 9 |
| Performance Summary. | 10 |
| Financial Statements. | 11 |
| About Your Fund’s Expenses. | 21 |
| Trustees Approve Advisory Agreements. | 23 |
| Glossary. | 25 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Jean Maher.
Your Fund’s Total Returns
Six Months Ended April 30, 2011
| Total | |
| Returns | |
| Vanguard Selected Value Fund | 18.05% |
| Russell Midcap Value Index | 18.95 |
| Mid-Cap Value Funds Average | 19.40 |
| Mid-Cap Value Funds Average: Derived from data provided by Lipper Inc. | |
Your Fund’s Performance at a Glance
October 31, 2010 , Through April 30, 2011
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard Selected Value Fund | $17.73 | $20.61 | $0.291 | $0.000 |
1
Chairman’s Letter
Dear Shareholder,
Vanguard Selected Value Fund returned 18.05% for the six months ended April 30, 2011. The fund trailed its benchmark, the Russell Midcap Value Index, as well as the average return for mid-cap value funds.
The fund posted gains across the market, with financial and consumer discretionary holdings adding the most to returns. The fund’s advisors kept a relatively large portion of assets in cash for the six months. This hurt overall performance, since stocks produced such strong results while cash investments returned very little. Security selection in the industrial sector and an underweighting in energy stocks also weighed on returns relative to the index.
I want to note that on May 11, we lowered the minimum investment requirement for most Vanguard funds—including Selected Value—to $3,000. This change reflects our efforts to increase the accessibility of Vanguard funds.
Stock returns were strong around the globe
The headlines were dominated by political upheaval, natural and nuclear disaster, and economic distress, but global stock markets produced outstanding returns for the six months ended April 30. The broad U.S. stock market returned more than 17%. Although rising food and gasoline prices put pressure on consumer budgets, corporate earnings growth remained strong, and the pace of job creation bounced back from extremely depressed levels.
2
For U.S.-based investors, international stock markets produced a smaller but still robust six-month return of 12.44% in U.S. dollars. Almost half of this return reflected exchange-rate gains produced largely by strength in the euro and currencies in emerging economies.
As the economy found its footing, interest rates edged higher
Rising longer-term interest rates put pressure on bond prices, restraining fixed income returns for the six-month period. The broad taxable U.S. bond market had a flat return, while the broad municipal market returned –1.68%. The climb in rates reflected both confidence that the economic recovery would prove self- sustaining and anxiety that higher rates would be necessary to help curb inflation.
Even so, inflation expectations remained subdued, as measured by the difference between the yields of nominal and inflation-protected U.S. Treasury bonds.
The return from short-term money market instruments such as the 3-month U.S. Treasury bill remained near 0%, consistent with the Federal Reserve’s target for short-term rates.
Mid-cap companies outperformed the broad U.S. stock market
Vanguard Selected Value Fund invests in stocks of mid-sized companies that the fund’s advisors view as being significantly undervalued. The fund’s focus on the middle capitalization range put it in the market’s sweet spot during the period, as investors continued to prefer mid-
Market Barometer
| Total Returns | |||
| Periods Ended April 30, 2011 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 17.12% | 18.02% | 3.30% |
| Russell 2000 Index (Small-caps) | 23.73 | 22.20 | 3.89 |
| Dow Jones U.S. Total Stock Market Index | 17.28 | 18.40 | 3.65 |
| MSCI All Country World Index ex USA (International) | 12.44 | 19.73 | 3.55 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index (Broad | |||
| taxable market) | 0.02% | 5.36% | 6.33% |
| Barclays Capital Municipal Bond Index (Broad | |||
| tax-exempt market) | -1.68 | 2.20 | 4.52 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 | 0.15 | 2.02 |
| CPI | |||
| Consumer Price Index | 2.83% | 3.16% | 2.22% |
3
and small-cap stocks over shares of larger companies. Although the fund was a step behind its comparative measures, its return of 18.05% outpaced the 17.28% return of the broad U.S. market for the period.
Strong stock selection in the financial sector added the most to the Selected Value Fund’s half-year return. The fund’s exposure to credit card companies was a strength. Holdings in Capital One Financial (+47%), SLM (+39%), and Discover Financial Services (+25%) together added 2.3 percentage points to the fund’s total return. In addition, the fund benefited from its modest exposure to real estate investment trusts (REITs) during the period.
Consumer discretionary holdings also helped boost Selected Value’s return. In general, the sector benefited from increased consumer spending and strong corporate earnings during the six months. The department store Dillard’s (+89%) and specialty retailer Limited Brands (+55%) were among the fund’s top performers for the period.
In comparison with the benchmark index, the fund suffered from the advisors’ stock selection in the industrial sector.
In particular, the fund’s exposure to the airlines JetBlue (–19%) and Air France (–3%)—neither of which is represented in the index—weighed on results. Airline stocks fell during the period as the price of oil skyrocketed.
Expense Ratios
Your Fund Compared With Its Peer Group
| Peer Group | ||
| Fund | Average | |
| Selected Value Fund | 0.47% | 1.39% |
The fund expense ratio shown is from the prospectus dated February 24, 2011, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2011, the fund’s annualized expense ratio was 0.46%. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2010.
Peer group: Mid-Cap Value Funds.
4
In relative terms, the fund also was hurt by having less exposure than the index to energy stocks—more specifically, oil exploration and production companies. The advisors’ allocation to cash investments was a further drag on performance, as noted earlier.
Volatility is inevitable, so focus on the future
The stock market turned in impressive results for the past six months, and small- and mid-sized companies did even better than their larger counterparts. As investors, we know to expect periods like this—when small- and mid-cap stocks outperform large-caps, or vice versa. And then there are times when one asset class does better than another, as well as times when both stocks and bonds perform exceptionally well, quite poorly, or somewhere in between.
The bottom line is that the financial markets are unpredictable, and there’s no way to be sure what they’ll do next.
At Vanguard, we believe that the best way to deal with the market’s short-term volatility is to ignore it and, instead, focus on the long term. We counsel investors to create an investment plan that includes a mix of stock, bond, and money market funds that is appropriate for their goals and risk tolerance—and to stick with that plan regardless of market conditions.
In February, Vanguard Selected Value Fund celebrated its 15th anniversary. Barrow, Hanley, Mewhinney & Strauss, a firm widely respected for its approach to value investing, has advised the fund since its inception. Although Selected Value got off to a rough start, its performance improved starting in 1999, when Jim Barrow assumed responsibility for the portfolio. Within a few years, Jim was joined by colleague Mark Giambrone. And since 2005, Donald Smith and Richard Greenberg of Donald Smith & Co. have brought their expertise and long experience in “deep” value investing to the service of fund shareholders. The talents of these portfolio managers have helped make the Selected Value Fund an attractive means of investing in seemingly undervalued mid-cap companies, which can be an important component of a well-diversified portfolio.
As always, thank you for entrusting your assets to Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 12, 2011
5
Advisors’ Report
For the six months ended April 30, 2011, Vanguard Selected Value Fund returned 18.05%. Your fund is managed by two independent advisors. This provides exposure to distinct, yet complementary, investment approaches, enhancing the fund’s diversification. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage and amount of fund assets each manages, and a brief description of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal period and of how portfolio positioning reflects this assessment. These comments were prepared on May 16, 2011.
Barrow, Hanley, Mewhinney & Strauss, LLC
Portfolio Managers:
James P. Barrow, Executive Director
Mark Giambrone, Managing Director
Over the past six months the market has been robust, although volatile, with substantial returns. We continue to see a modest increase in economic activity and believe that such an environment can lead to solid earnings improvements and a modest uptrend for stocks. Among our remaining worries are the continued rise in commodity costs and the potential for meaningful inflation. We continue to monitor these factors closely, but believe
Vanguard Selected Value Fund Investment Advisors
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| Barrow, Hanley, Mewhinney & | 72 | 3,187 | Conducts fundamental research on individual stocks |
| Strauss, LLC | exhibiting traditional value characteristics: | ||
| price/earnings and price/book ratios below the market | |||
| average and dividend yields above the market average. | |||
| Donald Smith & Co., Inc. | 24 | 1,058 | Conducts fundamental research on the lowest |
| price-to-tangible-book-value companies. Research | |||
| focuses on underlying quality of book value and assets, | |||
| and on long-term earnings potential. | |||
| Cash Investments | 4 | 193 | These short-term reserves are invested by Vanguard in |
| equity index products to simulate investment in stocks. | |||
| Each advisor may also maintain a modest cash | |||
| position. | |||
6
that the portfolio is well-positioned with quality companies that have good earnings and cash-flow prospects, pay above-average yields, and have below-market valuations.
Compared with the benchmark index, we continue to be overweighted in sectors that have tremendous valuation potential and should offer earnings stability or a meaningful rebound in earnings as the economy improves. These include industrials, consumer discretionary, and health care. Over the past six months, our overweighted exposure to health care boosted return for the first time since the health care reform debate began, and we believe these stocks still contain significant upside potential. It is becoming clearer that draconian outcomes related to reform are not likely, and we think the fundamentals of these businesses deserve a much higher valuation.
Our top-performing sector for the period was financials, where we are slightly underweighted but continue to find selective opportunities. Notable results came from companies that we focused on because of our belief that the consumer credit cycle is improving. These included Capital One Financial, SLM, and Discover Financial.
Our underweighting of the energy sector was the portfolio’s biggest detractor in the period. Commodity prices have been very strong, lifting these stocks significantly. Unfortunately, owing to our focus on earnings and cash flow, there aren’t many mid-capitalization energy names that fit our parameters, and we are likely to maintain the underweighted position. Our overweighting of industrials also hurt performance, as inflation pressures detracted from these companies’ profitability. At present we believe this is a short-term issue.
We continue to de-emphasize other areas in which the current and future economic environment does not seem particularly conducive to valuations or company fundamentals do not match our investment parameters. Therefore, we are underweighted in materials, telecommunication services, consumer staples, and utilities.
Donald Smith & Co., Inc.
Portfolio Managers:
Donald G. Smith, Chief Investment Officer
Richard L. Greenberg, CFA, Senior Vice President
The portfolio at the end of April 2011 continued to meet our criteria for owning a concentrated set of low price-to-tangible-book-value stocks with attractive long-term earnings potential. On average, the stocks we hold currently sell at 96% of tangible book value—meaning the market price of the companies’ concrete assets—and 9.3 times our estimate of “normalized” earnings, which exclude atypical influences. In contrast, the S&P 500 sells at 486% of tangible book value and 15.8 times normalized earnings.
7
Our large cash position in a sharply rising market served as a drag on performance during the six months. Also detracting were the stocks of two airlines—Air France and JetBlue—whose profitability has been affected by higher fuel costs. Some of the more defensive industries, such as utilities and insurance, lagged the market. Our top performers included Tesoro (+109.3%), which benefited from the rising profitability of its oil refining operations, and the retailer Dillard’s, which reported better-than-expected earnings and continued its aggressive stock buyback program.
We eliminated positions in Flextronics and Semiconductor Manufacturing, and we scaled back in Dillard’s, Pinnacle West, Tesoro and Domtar; most of these were sold after substantial appreciation. We increased positions in Air France-KLM, Yamana Gold, Constellation Energy, GenOn, Ingram Micro, JetBlue, Montpelier Re, and Unum. A small new position was initiated in XL Group.
Our four largest industry weightings are in insurance, technology, utilities, and airlines. On average, the insurance stocks we hold sell at about 80% of tangible book value. It appears that recent catastrophes (e.g., Japan’s disasters and the New Zealand earthquake) may lead to rising insurance rates. Most of these companies have been wisely buying back stock at discounts to book value. In technology, we own shares of Micron and Ingram Micro, companies with superior balance sheets that will allow them to grow, weather any industry downturn, or buy back stock; they will be beneficiaries of the continued strong demand for new technology products.
The portfolio’s utility stocks are generally more defensive in nature. At the end of April, one of these companies, Constellation Energy, agreed to an attractive merger with Exelon. Finally, the airline companies should benefit from lower capacity, a stronger pricing environment, and more ancillary revenues, such as baggage fees. Any abatement in the oil price increase could serve as a catalyst for strong appreciation in stocks.
8
Selected Value Fund
Fund Profile
As of April 30, 2011
| Portfolio Characteristics | |||
| Russell | DJ | ||
| Midcap | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Number of Stocks | 64 | 536 | 3,817 |
| Median Market Cap | $8.4B | $7.8B | $31.8B |
| Price/Earnings Ratio | 14.9x | 19.2x | 17.7x |
| Price/Book Ratio | 1.5x | 1.7x | 2.4x |
| Return on Equity | 12.0% | 10.6% | 18.9% |
| Earnings Growth Rate | -2.3% | 0.2% | 5.9% |
| Dividend Yield | 2.1% | 1.9% | 1.7% |
| Foreign Holdings | 5.8% | 0.0% | 0.0% |
| Turnover Rate | |||
| (Annualized) | 33% | — | — |
| Ticker Symbol | VASVX | — | — |
| Expense Ratio1 | 0.47% | — | — |
| 30-Day SEC Yield | 1.40% | — | — |
| Short-Term Reserves | 7.0% | — | — |
| Sector Diversification (% of equity exposure) | |||
| Russell | DJ | ||
| Midcap | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Consumer | |||
| Discretionary | 13.5% | 10.9% | 11.8% |
| Consumer Staples | 3.6 | 6.7 | 9.4 |
| Energy | 7.6 | 11.9 | 11.6 |
| Financials | 26.5 | 29.3 | 15.8 |
| Health Care | 8.2 | 5.5 | 11.1 |
| Industrials | 14.1 | 10.5 | 11.6 |
| Information | |||
| Technology | 11.3 | 6.1 | 18.5 |
| Materials | 4.8 | 5.3 | 4.5 |
| Telecommunication | |||
| Services | 0.1 | 1.9 | 2.6 |
| Utilities | 10.3 | 11.9 | 3.1 |
| Volatility Measures | ||
| Russell | DJ | |
| Midcap | U.S. Total | |
| Value | Market | |
| Index | Index | |
| R-Squared | 0.96 | 0.96 |
| Beta | 0.84 | 1.02 |
| These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | ||
| Ten Largest Holdings (% of total net assets) | ||
| Capital One Financial | ||
| Corp. | Consumer Finance | 2.3% |
| Discover Financial | ||
| Services | Consumer Finance | 2.2 |
| Murphy Oil Corp. | Integrated Oil & | |
| Gas | 2.2 | |
| Yamana Gold Inc. | Gold | 2.1 |
| Coventry Health Care | Managed Health | |
| Inc. | Care | 2.1 |
| Constellation Energy | Independent Power | |
| Group Inc. | Producers & Energy | |
| Traders | 2.1 | |
| Willis Group Holdings plc | Insurance Brokers | 2.1 |
| Goodrich Corp. | Aerospace & | |
| Defense | 2.1 | |
| Seadrill Ltd. | Oil & Gas Drilling | 2.0 |
| Hanesbrands Inc. | Apparel, | |
| Accessories & | ||
| Luxury Goods | 2.0 | |
| Top Ten | 21.2% | |
| The holdings listed exclude any temporary cash investments and equity index products. | ||
Investment Focus
1 The expense ratio shown is from the prospectus dated February 24, 2011, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2011, the annualized expense ratio was 0.46%.
9
Selected Value Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): October 31, 2000, Through April 30, 2011
Average Annual Total Returns: Periods Ended March 31, 2011
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| Selected Value Fund | 2/15/1996 | 18.46% | 5.36% | 8.91% |
Vanguard fund returns do not reflect the 1% fee on redemptions of shares held for less than one year.
See Financial Highlights for dividend and capital gains information.
10
Selected Value Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2011
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Common Stocks (89.5%)1 | |||
| Consumer Discretionary (12.3%) | |||
| * | Hanesbrands Inc. | 2,694,900 | 87,611 |
| Stanley Black & | |||
| Decker Inc. | 1,196,600 | 86,933 | |
| International Game | |||
| Technology | 4,724,300 | 83,573 | |
| Newell Rubbermaid Inc. | 3,854,400 | 73,465 | |
| Limited Brands Inc. | 1,617,300 | 66,568 | |
| * | Royal Caribbean | ||
| Cruises Ltd. | 1,482,800 | 59,045 | |
| Dillard’s Inc. Class A | 1,154,527 | 55,440 | |
| Service Corp. International | 2,627,000 | 30,920 | |
| 543,555 | |||
| Consumer Staples (2.9%) | |||
| Lorillard Inc. | 633,800 | 67,500 | |
| Reynolds American Inc. | 1,678,000 | 62,270 | |
| 129,770 | |||
| Energy (6.6%) | |||
| Murphy Oil Corp. | 1,231,800 | 95,440 | |
| ^ | Seadrill Ltd. | 2,467,900 | 87,981 |
| Spectra Energy Corp. | 1,664,900 | 48,349 | |
| * | Tesoro Corp. | 1,437,184 | 38,976 |
| ^ | Overseas Shipholding | ||
| Group Inc. | 472,900 | 13,175 | |
| Noble Corp. | 174,597 | 7,509 | |
| 291,430 | |||
| Financials (24.2%) | |||
| Capital One | |||
| Financial Corp. | 1,845,300 | 100,993 | |
| Discover Financial | |||
| Services | 3,914,600 | 97,239 | |
| Willis Group Holdings plc | 2,242,900 | 92,677 | |
| * | SLM Corp. | 5,239,600 | 86,925 |
| PNC Financial Services | |||
| Group Inc. | 1,362,812 | 84,958 | |
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Fifth Third Bancorp | 6,025,500 | 79,958 | |
| CNA Financial Corp. | 2,513,182 | 78,009 | |
| Ameriprise Financial Inc. | 1,106,400 | 68,663 | |
| XL Group plc Class A | 2,656,100 | 64,862 | |
| Essex Property Trust Inc. | 470,900 | 63,798 | |
| New York Community | |||
| Bancorp Inc. | 3,111,300 | 51,648 | |
| Everest Re Group Ltd. | 506,817 | 46,181 | |
| Annaly Capital | |||
| Management Inc. | 2,320,500 | 41,398 | |
| Unum Group | 1,401,490 | 37,111 | |
| Chubb Corp. | 509,100 | 33,188 | |
| Axis Capital Holdings Ltd. | 774,300 | 27,379 | |
| American National | |||
| Insurance Co. | 164,858 | 13,040 | |
| Montpelier Re | |||
| Holdings Ltd. | 416,863 | 7,541 | |
| 1,075,568 | |||
| Health Care (7.2%) | |||
| * | Coventry Health Care Inc. | 2,899,200 | 93,557 |
| Omnicare Inc. | 2,648,200 | 83,207 | |
| Cardinal Health Inc. | 1,679,100 | 73,360 | |
| CIGNA Corp. | 1,510,700 | 70,746 | |
| 320,870 | |||
| Industrials (12.7%) | |||
| Goodrich Corp. | 1,048,400 | 92,647 | |
| Eaton Corp. | 1,552,200 | 83,089 | |
| * | Air France-KLM ADR | 4,286,564 | 75,851 |
| Masco Corp. | 4,647,800 | 62,374 | |
| L-3 Communications | |||
| Holdings Inc. | 759,300 | 60,888 | |
| ITT Corp. | 972,000 | 56,172 | |
| SPX Corp. | 571,000 | 49,363 | |
| Dun & Bradstreet Corp. | 529,500 | 43,514 | |
| * | JetBlue Airways Corp. | 7,389,729 | 41,826 |
| 565,724 | |||
11
Selected Value Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Information Technology (9.8%) | |||
| * | Micron Technology Inc. | 7,729,916 | 87,271 |
| Molex Inc. | 3,062,300 | 82,682 | |
| * | Ingram Micro Inc. | 4,190,311 | 78,485 |
| Xerox Corp. | 6,548,400 | 66,073 | |
| Western Union Co. | 2,826,600 | 60,065 | |
| Computer Sciences Corp. | 1,177,700 | 60,039 | |
| 434,615 | |||
| Materials (4.3%) | |||
| Yamana Gold Inc. | 7,494,300 | 95,253 | |
| Sealed Air Corp. | 3,324,000 | 85,660 | |
| Domtar Corp. | 112,570 | 10,471 | |
| 191,384 | |||
| Utilities (9.5%) | |||
| Constellation Energy | |||
| Group Inc. | 2,568,237 | 93,535 | |
| CenterPoint Energy Inc. | 3,839,300 | 71,411 | |
| MDU Resources | |||
| Group Inc. | 2,962,300 | 70,769 | |
| Pinnacle West | |||
| Capital Corp. | 1,513,505 | 65,671 | |
| Xcel Energy Inc. | 2,535,300 | 61,684 | |
| Oneok Inc. | 505,100 | 35,327 | |
| * | GenOn Energy Inc. | 3,553,218 | 13,964 |
| NV Energy Inc. | 668,340 | 10,152 | |
| 422,513 | |||
| Total Common Stocks | |||
| (Cost $2,970,814) | 3,975,429 | ||
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Temporary Cash Investments (12.0%)1 | |||
| Money Market Fund (11.6%) | |||
| 2,3 | Vanguard Market Liquidity | ||
| Fund, 0.179% | 515,955,127 | 515,955 | |
| Face | |||
| Amount | |||
| ($000) | |||
| U.S. Government and Agency Obligations (0.4%) | |||
| 4,5 | Federal Home Loan | ||
| Bank Discount Notes, | |||
| 0.150%, 5/25/11 | 10,000 | 9,999 | |
| 4,5 | Federal Home Loan | ||
| Bank Discount Notes, | |||
| 0.110%, 6/17/11 | 3,000 | 3,000 | |
| 4,5 | Freddie Mac Discount | ||
| Notes, 0.281%, 6/21/11 | 2,500 | 2,500 | |
| 15,499 | |||
| Total Temporary Cash Investments | |||
| (Cost $531,453) | 531,454 | ||
| Total Investments (101.5%) | |||
| (Cost $3,502,267) | 4,506,883 | ||
| Other Assets and Liabilities (-1.5%) | |||
| Other Assets | 8,014 | ||
| Liabilities3 | (76,192) | ||
| (68,178) | |||
| Net Assets (100%) | |||
| Applicable to 215,401,913 outstanding | |||
| $.001 par value shares of beneficial | |||
| interest (unlimited authorization) | 4,438,705 | ||
| Net Asset Value Per Share | $20.61 | ||
12
Selected Value Fund
At April 30, 2011, net assets consisted of:
| Amount | |
| ($000) | |
| Paid-in Capital | 3,727,088 |
| Undistributed Net Investment Income | 9,075 |
| Accumulated Net Realized Losses | (311,549) |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 1,004,616 |
| Futures Contracts | 9,475 |
| Net Assets | 4,438,705 |
See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $25,543,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to future investments, the fund’s effective common stock and temporary cash investment positions represent 93.8% and 7.7%, respectively, of net assets.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
3 Includes $25,865,000 of collateral received for securities on loan.
4 The issuer operates under a congressional charter; its securities are not backed by the full faith and credit of the U.S. government.
5 Securities with a value of $12,749,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
13
Selected Value Fund
Statement of Operations
| Six Months Ended | |
| April 30, 2011 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 44,674 |
| Interest2 | 510 |
| Security Lending | 90 |
| Total Income | 45,274 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 4,563 |
| Performance Adjustment | 905 |
| The Vanguard Group—Note C | |
| Management and Administrative | 3,313 |
| Marketing and Distribution | 457 |
| Custodian Fees | 24 |
| Shareholders’ Reports | 25 |
| Trustees’ Fees and Expenses | 3 |
| Total Expenses | 9,290 |
| Expenses Paid Indirectly | (172) |
| Net Expenses | 9,118 |
| Net Investment Income | 36,156 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold | 142,536 |
| Futures Contracts | 16,859 |
| Realized Net Gain (Loss) | 159,395 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities | 464,512 |
| Futures Contracts | 5,480 |
| Change in Unrealized Appreciation (Depreciation) | 469,992 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 665,543 |
1 Dividends are net of foreign withholding taxes of $36,000.
2 Interest income from an affiliated company of the fund was $488,000.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Selected Value Fund
Statement of Changes in Net Assets
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2011 | 2010 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 36,156 | 50,597 |
| Realized Net Gain (Loss) | 159,395 | (26,512) |
| Change in Unrealized Appreciation (Depreciation) | 469,992 | 604,494 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 665,543 | 628,579 |
| Distributions | ||
| Net Investment Income | (60,410) | (46,869) |
| Realized Capital Gain | — | — |
| Total Distributions | (60,410) | (46,869) |
| Capital Share Transactions | ||
| Issued | 408,929 | 628,925 |
| Issued in Lieu of Cash Distributions | 54,298 | 41,576 |
| Redeemed1 | (268,887) | (464,396) |
| Net Increase (Decrease) from Capital Share Transactions | 194,340 | 206,105 |
| Total Increase (Decrease) | 799,473 | 787,815 |
| Net Assets | ||
| Beginning of Period | 3,639,232 | 2,851,417 |
| End of Period2 | 4,438,705 | 3,639,232 |
1 Net of redemption fees for fiscal 2011 and 2010 of $155,000 and $459,000, respectively.
2 Net Assets—End of Period includes undistributed net investment income of $9,075,000 and $33,329,000.
See accompanying Notes, which are an integral part of the Financial Statements.
15
Selected Value Fund
Financial Highlights
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 |
| Net Asset Value, Beginning of Period | $17.73 | $14.78 | $12.48 | $22.11 | $21.38 | $18.99 |
| Investment Operations | ||||||
| Net Investment Income | .171 | .250 | .254 | .3901 | .400 | .350 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 3.000 | 2.941 | 2.463 | (8.100) | 1.700 | 3.180 |
| Total from Investment Operations | 3.171 | 3.191 | 2.717 | (7.710) | 2.100 | 3.530 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.291) | (.241) | (.417) | (.370) | (.320) | (.290) |
| Distributions from Realized Capital Gains | — | — | — | (1.550) | (1.050) | (.850) |
| Total Distributions | (.291) | (.241) | (.417) | (1.920) | (1.370) | (1.140) |
| Net Asset Value, End of Period | $20.61 | $17.73 | $14.78 | $12.48 | $22.11 | $21.38 |
| Total Return2 | 18.05% | 21.75% | 22.77% | -37.79% | 10.15% | 19.38% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $4,439 | $3,639 | $2,851 | $2,422 | $4,991 | $4,326 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets3 | 0.46% | 0.47% | 0.52% | 0.38% | 0.42% | 0.45% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 1.80% | 1.52% | 1.93% | 2.21% | 1.74% | 1.75% |
| Portfolio Turnover Rate | 33% | 22% | 30% | 23% | 33% | 37% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.05%, 0.05%, (0.03%), (0.02%), and (0.05%).
See accompanying Notes, which are an integral part of the Financial Statements.
16
Selected Value Fund
Notes to Financial Statements
Vanguard Selected Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2007–2010), and for the period ended April 30, 2011, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
5. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents fees charged to borrowers plus income earned on investing cash collateral, less expenses associated with the loan.
17
Selected Value Fund
6. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on redemptions of capital shares are credited to paid-in capital.
B. Barrow, Hanley, Mewhinney & Strauss, LLC, and Donald Smith & Co., Inc., each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Barrow, Hanley, Mewhinney & Strauss, LLC, is subject to quarterly adjustments based on performance for the preceding three years relative to the Russell Midcap Value Index. The basic fee of Donald Smith & Co., Inc., is subject to quarterly adjustments based on performance for the preceding five years relative to the MSCI Investable Market 2500 Index.
The Vanguard Group manages the cash reserves of the fund on an at-cost basis.
For the six months ended April 30, 2011, the aggregate investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets, before an increase of $905,000 (0.04%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2011, the fund had contributed capital of $695,000 to Vanguard (included in Other Assets), representing 0.02% of the fund’s net assets and 0.28% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses For the six months ended April 30, 2011, these arrangements reduced the fund’s expenses by $172,000 (an annual rate of 0.01% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
18
Selected Value Fund
The following table summarizes the fund’s investments as of April 30, 2011, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 3,975,429 | — | — |
| Temporary Cash Investments | 515,955 | 15,499 | — |
| Futures Contracts—Assets1 | 670 | — | — |
| Total | 4,492,054 | 15,499 | — |
| 1 Represents variation margin on the last day of the reporting period. | |||
F. At April 30, 2011, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
| ($000) | ||||
| Aggregate | ||||
| Number of | Settlement | Unrealized | ||
| Long (Short) | Value | Appreciation | ||
| Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
| S&P 500 Index | June 2011 | 486 | 165,204 | 8,750 |
| E-mini S&P 500 Index | June 2011 | 363 | 24,679 | 725 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2010, the fund had available capital loss carryforwards totaling $466,345,000 to offset future net capital gains of $194,512,000 through October 31, 2016, $249,339,000 through October 31, 2017, and $22,494,000 through October 31, 2018. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2011; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
19
Selected Value Fund
At April 30, 2011, the cost of investment securities for tax purposes was $3,502,267,000. Net unrealized appreciation of investment securities for tax purposes was $1,004,616,000, consisting of unrealized gains of $1,086,303,000 on securities that had risen in value since their purchase and $81,687,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the six months ended April 30, 2011, the fund purchased $704,478,000 of investment securities and sold $592,410,000 of investment securities, other than temporary cash investments.
I. Capital shares issued and redeemed were:
| Six Months Ended | Year Ended | |
| April 30, 2011 | October 31, 2010 | |
| Shares | Shares | |
| (000) | (000) | |
| Issued | 21,279 | 37,789 |
| Issued in Lieu of Cash Distributions | 2,899 | 2,571 |
| Redeemed | (14,032) | (28,069) |
| Net Increase (Decrease) in Shares Outstanding | 10,146 | 12,291 |
J. In preparing the financial statements as of April 30, 2011, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
20
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
21
Six Months Ended April 30, 2011
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Selected Value Fund | 10/31/2010 | 4/30/2011 | Period |
| Based on Actual Fund Return | $1,000.00 | $1,180.50 | $2.49 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.51 | 2.31 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.46%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
22
Trustees Approve Advisory Agreements
The board of trustees of Vanguard Selected Value Fund has renewed the fund’s investment advisory agreements with Barrow, Hanley, Mewhinney & Strauss, LLC, and Donald Smith & Co., Inc. The board determined that the retention of the advisors was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the agreements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board considered the quality of the fund’s investment management over both the short and long term, and took into account the organizational depth and stability of each advisor. The board noted the following:
Barrow, Hanley, Mewhinney & Strauss, LLC. Founded in 1979, Barrow Hanley is known for its commitment to value investing. A subsidiary of Old Mutual Asset Managers, Barrow Hanley remains independently managed. Using a combination of in-depth fundamental research and valuation forecasts, Barrow Hanley seeks stocks offering strong fundamentals and price appreciation potential, with below-average price/earnings ratios and price/book-value ratios and above-average current yields. The firm has advised the fund since its inception in 1996.
Donald Smith & Co., Inc. Founded in 1983, Donald Smith is a deep-value-oriented firm that manages large-, mid-, and small-cap value portfolios and employs a strictly bottom-up approach. The portfolio managers invest in out-of-favor companies selling at discounts to tangible book value. Donald Smith looks for companies in the bottom decile of price/tangible-book ratios that have a positive outlook for earnings potential over the next two to four years. The firm has managed a portion of the fund since 2005.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory agreements.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of a relevant benchmark and peer group. The board concluded that each advisor has carried out the fund’s investment strategy in disciplined fashion, and that performance results have allowed the fund to remain competitive versus its benchmark and peer-funds average. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the advisory fee rate.
The board did not consider profitability of Barrow Hanley and Donald Smith in determining whether to approve the advisory fees, because the firms are independent of Vanguard and the advisory fees are the result of arm’s-length negotiations.
23
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules for the advisors. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.
The board will consider whether to renew the advisory agreements again after a one-year period.
24
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.
Foreign Holdings. The percentage of a fund represented by stocks or depositary receipts of companies based outside the United States.
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 measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
25
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 179 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
| Interested Trustee1 | and President (2006–2008) of Rohm and Haas Co. |
| (chemicals); Director of Tyco International, Ltd. | |
| F. William McNabb III | (diversified manufacturing and services) and Hewlett- |
| Born 1957. Trustee Since July 2009. Chairman of the | Packard Co. (electronic computer manufacturing); |
| Board. Principal Occupation(s) During the Past Five | Senior Advisor at New Mountain Capital; Trustee |
| Years: Chairman of the Board of The Vanguard Group, | of The Conference Board; Member of the Board of |
| Inc., and of each of the investment companies served | Managers of Delphi Automotive LLP (automotive |
| by The Vanguard Group, since January 2010; Director | components). |
| of The Vanguard Group since 2008; Chief Executive | |
| Officer and President of The Vanguard Group and of | Amy Gutmann |
| each of the investment companies served by The | Born 1949. Trustee Since June 2006. Principal |
| Vanguard Group since 2008; Director of Vanguard | Occupation(s) During the Past Five Years: President |
| Marketing Corporation; Managing Director of The | of the University of Pennsylvania; Christopher H. |
| Vanguard Group (1995–2008). | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| appointments at the Annenberg School for Commu- | |
| Independent Trustees | nication and the Graduate School of Education |
| of the University of Pennsylvania; Director of | |
| Emerson U. Fullwood | Carnegie Corporation of New York, Schuylkill River |
| Born 1948. Trustee Since January 2008. Principal | Development Corporation, and Greater Philadelphia |
| Occupation(s) During the Past Five Years: Executive | Chamber of Commerce; Trustee of the National |
| Chief Staff and Marketing Officer for North America | Constitution Center; Chair of the Presidential |
| and Corporate Vice President (retired 2008) of Xerox | Commission for the Study of Bioethical Issues. |
| Corporation (document management products and | |
| services); Executive in Residence and 2010 | JoAnn Heffernan Heisen |
| Distinguished Minett Professor at the Rochester | Born 1950. Trustee Since July 1998. Principal |
| Institute of Technology; Director of SPX Corporation | Occupation(s) During the Past Five Years: Corporate |
| (multi-industry manufacturing), the United Way of | Vice President and Chief Global Diversity Officer |
| Rochester, Amerigroup Corporation (managed health | (retired 2008) and Member of the Executive |
| care), the University of Rochester Medical Center, | Committee (1997–2008) of Johnson & Johnson |
| Monroe Community College Foundation, and North | (pharmaceuticals/consumer products); Director of |
| Carolina A&T University. | Skytop Lodge Corporation (hotels), the University |
| Medical Center at Princeton, the Robert Wood | |
| Rajiv L. Gupta | Johnson Foundation, and the Center for Work Life |
| Born 1945. Trustee Since December 2001.2 | Policy; Member of the Advisory Board of the |
| Principal Occupation(s) During the Past Five Years: | Maxwell School of Citizenship and Public Affairs |
| Chairman and Chief Executive Officer (retired 2009) | at Syracuse University. |
| F. Joseph Loughrey | Thomas J. Higgins | |
| Born 1949. Trustee Since October 2009. Principal | Born 1957. Chief Financial Officer Since September | |
| Occupation(s) During the Past Five Years: President | 2008. Principal Occupation(s) During the Past Five | |
| and Chief Operating Officer (retired 2009) and Vice | Years: Principal of The Vanguard Group, Inc.; Chief | |
| Chairman of the Board (2008–2009) of Cummins Inc. | Financial Officer of each of the investment companies | |
| (industrial machinery); Director of SKF AB (industrial | served by The Vanguard Group since 2008; Treasurer | |
| machinery), Hillenbrand, Inc. (specialized consumer | of each of the investment companies served by The | |
| services), the Lumina Foundation for Education, and | Vanguard Group (1998–2008). | |
| Oxfam America; Chairman of the Advisory Council | ||
| for the College of Arts and Letters and Member | Kathryn J. Hyatt | |
| of the Advisory Board to the Kellogg Institute for | Born 1955. Treasurer Since November 2008. Principal | |
| International Studies at the University of Notre Dame. | Occupation(s) During the Past Five Years: Principal | |
| of The Vanguard Group, Inc.; Treasurer of each of | ||
| André F. Perold | the investment companies served by The Vanguard | |
| Born 1952. Trustee Since December 2004. Principal | Group since 2008; Assistant Treasurer of each of the | |
| Occupation(s) During the Past Five Years: George | investment companies served by The Vanguard Group | |
| Gund Professor of Finance and Banking at the Harvard | (1988–2008). | |
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Heidi Stam | |
| Born 1956. Secretary Since July 2005. Principal | ||
| Alfred M. Rankin, Jr. | Occupation(s) During the Past Five Years: Managing | |
| Born 1941. Trustee Since January 1993. Principal | Director of The Vanguard Group, Inc., since 2006; | |
| Occupation(s) During the Past Five Years: Chairman, | General Counsel of The Vanguard Group since 2005; | |
| President, and Chief Executive Officer of NACCO | Secretary of The Vanguard Group and of each of the | |
| Industries, Inc. (forklift trucks/housewares/lignite); | investment companies served by The Vanguard Group | |
| Director of Goodrich Corporation (industrial products/ | since 2005; Director and Senior Vice President of | |
| aircraft systems and services) and the National | Vanguard Marketing Corporation since 2005; | |
| Association of Manufacturers; Chairman of the | Principal of The Vanguard Group (1997–2006). | |
| Federal Reserve Bank of Cleveland; Vice Chairman | ||
| of University Hospitals of Cleveland; President of | ||
| the Board of The Cleveland Museum of Art. | Vanguard Senior Management Team | |
| Peter F. Volanakis | R. Gregory Barton | Michael S. Miller |
| Born 1955. Trustee Since July 2009. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: President | Kathleen C. Gubanich | Glenn W. Reed |
| and Chief Operating Officer (retired 2010) of Corning | Paul A. Heller | George U. Sauter |
| Incorporated (communications equipment); Director of | Martha G. King | |
| Corning Incorporated (2000–2010) and Dow Corning | ||
| (2001–2010); Overseer of the Amos Tuck School of | ||
| Business Administration at Dartmouth College. | Chairman Emeritus and Senior Advisor | |
| John J. Brennan | ||
| Executive Officers | Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | ||
| Glenn Booraem | ||
| Born 1967. Controller Since July 2010. Principal | ||
| Occupation(s) During the Past Five Years: Principal | Founder | |
| of The Vanguard Group, Inc.; Controller of each of | ||
| the investment companies served by The Vanguard | John C. Bogle | |
| Group since 2010; Assistant Controller of each of | Chairman and Chief Executive Officer, 1974–1996 | |
| the investment companies served by The Vanguard | ||
| Group (2001–2010). | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
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| Q9342 062011 | |
 |
| Vanguard Mid-Cap Growth Fund |
| Semiannual Report |
| April 30, 2011 |
 |
> Vanguard Mid-Cap Growth Fund returned about 21% for the six months ended April 30, 2011.
> The fund’s return trailed that of its benchmark and the average return of mid-cap growth funds.
> Holdings in the consumer staples and health care arenas were among the fund’s strongest performers. Consumer discretionary and financial stocks hindered the fund’s relative performance.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisors’ Report. | 6 |
| Fund Profile. | 10 |
| Performance Summary. | 11 |
| Financial Statements. | 12 |
| About Your Fund’s Expenses. | 21 |
| Trustees Approve Advisory Agreements. | 23 |
| Glossary. | 25 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Jean Maher.
Your Fund’s Total Returns
Six Months Ended April 30, 2011
| Total | |
| Returns | |
| Vanguard Mid-Cap Growth Fund | 21.39% |
| Russell Midcap Growth Index | 22.62 |
| Mid-Cap Growth Funds Average | 22.76 |
| Mid-Cap Growth Funds Average: Derived from data provided by Lipper Inc. | |
Your Fund’s Performance at a Glance
October 31, 2010 , Through April 30, 2011
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard Mid-Cap Growth Fund | $17.54 | $21.27 | $0.020 | $0.000 |
1
Chairman’s Letter
Dear Shareholder,
Vanguard Mid-Cap Growth Fund returned about 21% for the six months ended April 30, 2011. Despite the strong performance, the fund’s return trailed that of its benchmark, the Russell Midcap Growth Index, and the average return of its peer funds.
The fund’s mid-capitalization holdings continued to find favor with investors, who tended to prefer mid- and small-cap stocks to the shares of larger companies during the period. The fund also continued to benefit from its focus on growth, as growth stocks in general outdistanced their value counterparts.
For the six-month period, the fund’s consumer staples and health care selections were among the best performers. However, consumer discretionary and financial holdings lagged their counterparts in the index, hindering the fund’s relative performance.
Please note that on May 11, Vanguard lowered the minimum investment requirement for the Investor Shares of most Vanguard funds, including Mid-Cap Growth, to $3,000. This change reflects our efforts to simplify our approach to offering Investor Shares and to increase the accessibility of Vanguard funds.
2
Strong returns around the globe
The headlines were dominated by political upheaval, natural and nuclear disaster, and economic distress, but global stock markets produced outstanding returns for the six months ended April 30. The broad U.S. stock market returned more than 17%. Although rising food and gasoline prices put pressure on consumer budgets, corporate earnings growth remained strong and the pace of new job creation bounced back from extremely depressed levels.
For U.S.-based investors, international stock markets produced a smaller but still robust six-month return of 12.44% in U.S. dollars. Almost half of this return reflected exchange-rate gains produced largely by strength in the euro and currencies in emerging economies.
As the economy found its footing, rates edged higher
Rising longer-term interest rates put pressure on bond prices, which led to modest bond market returns for the six-month period. The broad taxable U.S. bond market returned about 0%. The broad municipal market returned –1.68%. The rise in rates reflected both confidence that the economic recovery would prove self-sustaining and thus nudge rates higher, and nervousness that higher rates would be necessary to provide some protection from inflation. Even so, inflation expectations remained subdued, as measured by the difference between the yields of inflation-protected and nominal U.S. Treasury bonds.
Market Barometer
| Total Returns | |||
| Periods Ended April 30, 2011 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 17.12% | 18.02% | 3.30% |
| Russell 2000 Index (Small-caps) | 23.73 | 22.20 | 3.89 |
| Dow Jones U.S. Total Stock Market Index | 17.28 | 18.40 | 3.65 |
| MSCI All Country World Index ex USA (International) | 12.44 | 19.73 | 3.55 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index (Broad | |||
| taxable market) | 0.02% | 5.36% | 6.33% |
| Barclays Capital Municipal Bond Index (Broad | |||
| tax-exempt market) | -1.68 | 2.20 | 4.52 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 | 0.15 | 2.02 |
| CPI | |||
| Consumer Price Index | 2.83% | 3.16% | 2.22% |
3
The return on short-term money market instruments such as the 3-month U.S. Treasury bill remained near 0%, consistent with the Federal Reserve Board’s target for short-term rates.
Consumer staples and health care were the best relative performers
The Mid-Cap Growth Fund’s two advisors seek to identify midsized companies with the best prospects for strong growth. Holdings in all but one of the fund’s sectors posted positive returns for the period, with eight in double digits.
The fund has been focused on four sectors—information technology, consumer discretionary, industrials, and health care—which have made up roughly three-quarters of its assets. Of those four, the fund’s best performer during the period was health care (+28%).
But the fund’s leading performer among all industries was the relatively small consumer staples sector (+57%), where one holding in particular—Green Mountain Coffee Roasters—more than doubled in value and provided the largest boost to the fund from any single stock. The stock soared after the company announced a partnership with Starbucks, in which the coffee giant will produce coffee and tea products that are compatible with Green Mountain’s Keurig Single Cup Brewing Systems.
Expense Ratios
Your Fund Compared With Its Peer Group
| Peer Group | ||
| Fund | Average | |
| Mid-Cap Growth Fund | 0.51% | 1.44% |
Peer group: Mid-Cap Growth Funds.
4
Information technology (+20%), the fund’s largest sector, provided the most substantial contribution to the fund’s performance, with the advisors’ selections keeping pace with the overall performance of IT stocks in the mid-cap growth space.
As energy prices rose, energy companies enjoyed rising profits, attracting more investors. Energy was the strongest-performing sector among mid-cap growth stocks, but the fund’s energy holdings (+38%) lagged the overall sector by 2 percentage points.
The fund’s second-largest sector, consumer discretionary (+17%), turned in a respectable performance but lagged its counterpart in the index (+23%) and proved to be the most significant drag on the fund’s relative showing. Financial companies (+9%) also rose, but their return was about half that of the financial stocks in the benchmark.
The only sector in the fund that didn’t post a gain was telecommunication services (–2%), which has only a small weighting in the fund and had a minimal impact on returns.
You can find more information about the performance of the fund’s holdings in the Advisors’ Report that follows this letter.
Recent positive trends should be viewed in a larger context
While the Mid-Cap Growth Fund’s results over the past two years have been strongly positive, it’s important to remind ourselves that stock investing involves some downdrafts along with the rising currents. Of course, the ups and downs have been particularly striking in recent years. Whether the market continues upward from here, retreat from its recent highs, or meanders somewhere in between, we always encourage our clients to remember that stocks have tended to reward investors who stick with them over the long term, through bull and bear markets alike.
Vanguard Mid-Cap Growth Fund, with its wide mix of midsized, growth-oriented companies and its low costs, can play a helpful role in building a broadly diversified portfolio of stock, bond, and short-term investments designed for the long term.
Thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 11, 2011
5
Advisors’ Report
During the six months ended April 30, 2011, Vanguard Mid-Cap Growth Fund returned about 21%. Your fund is managed by two independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct, yet complementary, investment approaches. It’s not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal period and of how portfolio positioning reflects this assessment. These comments were prepared on May 18, 2011.
Vanguard Mid-Cap Growth Fund Investment Advisors
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| William Blair & Company, L.L.C. | 49 | 962 | Uses a fundamental investment approach in pursuit of |
| superior long-term investment results from | |||
| growth-oriented companies with leadership positions | |||
| and strong market presence. | |||
| Chartwell Investment Partners, | 47 | 940 | Uses a bottom-up, fundamental, research-driven |
| L.P. | stock-selection strategy focusing on companies with | ||
| sustainable growth, strong management teams, | |||
| competitive positions, and outstanding product and | |||
| service offerings. These companies should continually | |||
| demonstrate growth in earnings per share. | |||
| Cash Investments | 4 | 79 | These short-term reserves are invested by Vanguard in |
| equity index products to simulate investment in stocks. | |||
| Each advisor may also maintain a modest cash | |||
| position. | |||
6
Chartwell Investment Partners, L.P.
Portfolio Managers:
Edward N. Antoian, CFA, CPA, Managing Partner
John A. Heffern, Managing Partner and Senior Portfolio Manager
The global macroeconomic outlook, corporate revenue growth, and profit margins are key factors in the current investment environment. Natural disasters and geopolitical conflict have added volatility to an already cloudy picture. There is uncertainty over the looming transition from fiscal and monetary ease to austerity and restraint. We like this environment for its potential to separate winners from laggards, but we are alert to developing pressures on profit margins. Many companies can, for now, easily beat their performance from comparable recent periods that were less generous, but will grapple with pressure to spend more money to protect market share and support long-term growth. We think some management teams are unclear about their own plans for the year, which is causing some surprises with earnings results and forecasts. Accordingly, our portfolio decisions steadfastly reflect our bias toward quality leadership, defensible margins, and a pattern of successfully executing growth-oriented business plans.
Our portfolio benefited most from our choices among industrial stocks, consumer staples stocks, and REITs. Industrial machinery companies such as Gardner Denver performed well, for example, aided by the economic rebound. Ulta Salon Cosmetics & Fragrance, a beauty products retailer, experienced strong growth, meaningful margin expansion, and accelerating same store sales within a consumer sector that is still grappling with concerns related to uneven employment trends and increasing input costs.
CB Richard Ellis Group, a commercial real estate broker, experienced further improvement in its major businesses and strength in investment sales, which have benefited from improved conditions for capital markets and financing. Lastly, Patterson-UTI Energy, a provider of onshore contract drilling and pressure pumping services, outperformed on the strength of impressive revenue growth driven by higher-pressure pumping equipment and services as well as appealing operating margins.
Holdings in the financial and consumer discretionary sectors detracted from performance. Assured Guaranty Ltd. is a Bermuda-based financial guarantor that has been challenged by its sensitivity to the mortgage and municipal credit markets and saw its credit rating downgraded by
7
Standard & Poor’s during the period. Performance was also hurt by investments in certain businesses, including apparel firms (notably Warnaco Group); hotels, resorts, and cruise lines (Starwood Hotels & Resorts Worldwide and Royal Caribbean Cruises); and restaurants (Darden Restaurants), all of which were under pressure from higher commodity prices in their supply chains.
Elsewhere, United Rentals, a provider of rental equipment, reported disappointing margin results to start what should still be a strong year for demand and pricing in this industry and for this company. Lastly, SBA Communications Corp., which operates wireless towers in the United States and Puerto Rico, declined over concerns about the potential impact of carrier consolidation on revenue growth.
William Blair & Company, L.L.C.
Portfolio Managers:
Robert C. Lanphier, Principal
David Ricci, CFA, Principal
Over the last six months, the U.S. equity market continued to climb the proverbial wall of worry, producing remarkable returns after shrugging off several macroeconomic and geopolitical shocks.
The current calendar year started much the same as 2010 ended. Investors have been able to look past the tragic events caused by the Japanese earthquake, renewed sovereign debt concerns in Europe, inflation in energy prices caused mainly by unrest and eventual military conflict in the Middle East and North Africa, intense state and federal government budget debates, and further deterioration in the U.S. housing market. Instead, the market focused on several positive domestic fundamental trends: strong corporate earnings growth reported in the first quarter in which the majority of companies beat earnings expectations, budding advances in employment trends as suggested in several government reports and surveys, better-than-expected retail sales and personal income data, and continued strong reports on industrial production.
Our portfolio benefited from a bias toward smaller companies and from favorable stock selections, including Green Mountain Coffee Roasters, which was the single largest contributor to performance. Stock selection within health care, information technology, and industrials also contributed to the performance, including Illumina, Atheros Communications, and Gardner Denver, respectively. On the other hand, relative performance over the six-month period was hurt by stock selection in
8
consumer discretionary and financials and the omission of some strong energy stocks that are included in the benchmark. O’Reilly Automotive and WMS Industries in the consumer discretionary sector and Greenhill & Company in financials were the main detractors.
Looking forward, our outlook remains relatively unchanged from six months ago. Given valuations that are near long-term averages and solid corporate fundamentals overall, we believe the market outlook remains balanced. That said, as we have mentioned in recent quarters, we believe the market will increasingly differentiate between companies that are generating organic top-line growth and those that have increased earnings primarily by cutting costs. In such an environment, our portfolio should benefit from our attempt to find solid, quality growth companies that “control their own destiny” to a greater degree and are less dependent on overall economic growth. We continue to find good ideas across sectors, and are confident that our portfolio consists of great companies that have solid competitive positions and whose stocks are at attractive valuations considering the growth and consistency of their businesses.
9
Mid-Cap Growth Fund
Fund Profile
As of April 30, 2011
| Portfolio Characteristics | |||
| Russell | DJ | ||
| Midcap | U.S. Total | ||
| Growth | Market | ||
| Fund | Index | Index | |
| Number of Stocks | 116 | 492 | 3,817 |
| Median Market Cap | $6.1B | $8.6B | $31.8B |
| Price/Earnings Ratio | 30.3x | 23.9x | 17.7x |
| Price/Book Ratio | 4.0x | 4.1x | 2.4x |
| Return on Equity | 16.6% | 19.2% | 18.9% |
| Earnings Growth Rate 10.2% | 9.1% | 5.9% | |
| Dividend Yield | 0.4% | 0.8% | 1.7% |
| Foreign Holdings | 0.0% | 0.0% | 0.0% |
| Turnover Rate | |||
| (Annualized) | 134% | — | — |
| Ticker Symbol | VMGRX | — | — |
| Expense Ratio1 | 0.51% | — | — |
| 30-Day SEC Yield | 0.00% | — | — |
| Short-Term Reserves | 1.6% | — | — |
| Sector Diversification (% of equity exposure) | |||
| Russell | DJ | ||
| Midcap | U.S. Total | ||
| Growth | Market | ||
| Fund | Index | Index | |
| Consumer | |||
| Discretionary | 19.4% | 20.0% | 11.8% |
| Consumer Staples | 4.1 | 5.3 | 9.4 |
| Energy | 6.4 | 6.2 | 11.6 |
| Financials | 8.0 | 7.1 | 15.8 |
| Health Care | 14.8 | 13.6 | 11.1 |
| Industrials | 16.0 | 15.9 | 11.6 |
| Information | |||
| Technology | 25.1 | 22.9 | 18.5 |
| Materials | 4.8 | 7.0 | 4.5 |
| Telecommunication | |||
| Services | 1.2 | 1.7 | 2.6 |
| Utilities | 0.2 | 0.3 | 3.1 |
| Volatility Measures | ||
| Russell | DJ | |
| Midcap | U.S. Total | |
| Growth | Market | |
| Index | Index | |
| R-Squared | 0.97 | 0.93 |
| Beta | 0.88 | 1.00 |
| These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | ||
| Ten Largest Holdings (% of total net assets) | ||
| Airgas Inc. | Industrial Gases | 2.4% |
| Polycom Inc. | Communications | |
| Equipment | 2.2 | |
| Green Mountain Coffee | Packaged Foods & | |
| Roasters Inc. | Meats | 2.0 |
| Cerner Corp. | Health Care | |
| Technology | 1.8 | |
| Gardner Denver Inc. | Industrial | |
| Machinery | 1.7 | |
| Affiliated Managers | Asset Management | |
| Group Inc. | & Custody Banks | 1.6 |
| CarMax Inc. | Automotive Retail | 1.6 |
| Interpublic Group of Cos | ||
| Inc. | Advertising | 1.6 |
| Fastenal Co. | Trading Companies | |
| & Distributors | 1.5 | |
| Newfield Exploration Co. | Oil & Gas | |
| Exploration & | ||
| Production | 1.4 | |
| Top Ten | 17.8% | |
| The holdings listed exclude any temporary cash investments and equity index products. | ||
Investment Focus
1 The expense ratio shown is from the prospectus dated February 24, 2011, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2011, the annualized expense ratio was 0.52%.
10
Mid-Cap Growth Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): October 31, 2000, Through April 30, 2011
Average Annual Total Returns: Periods Ended March 31, 2011
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| Mid-Cap Growth Fund | 12/31/1997 | 27.31% | 5.38% | 5.79% |
See Financial Highlights for dividend and capital gains information.
11
Mid-Cap Growth Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2011
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Common Stocks (94.9%)1 | |||
| Consumer Discretionary (18.5%) | |||
| * | CarMax Inc. | 926,000 | 32,132 |
| Interpublic Group | |||
| of Cos. Inc. | 2,703,800 | 31,770 | |
| * | O’Reilly Automotive Inc. | 382,200 | 22,573 |
| * | priceline.com Inc. | 39,450 | 21,580 |
| Gentex Corp. | 675,000 | 21,161 | |
| * | Dick’s Sporting Goods Inc. | 483,525 | 19,791 |
| Starwood Hotels & | |||
| Resorts Worldwide Inc. | 293,360 | 17,475 | |
| * | Bed Bath & Beyond Inc. | 264,200 | 14,827 |
| Wyndham Worldwide | |||
| Corp. | 426,900 | 14,775 | |
| Nordstrom Inc. | 303,675 | 14,440 | |
| Ross Stores Inc. | 191,050 | 14,079 | |
| * | Penn National Gaming Inc. | 347,220 | 13,892 |
| Darden Restaurants Inc. | 289,685 | 13,607 | |
| Tractor Supply Co. | 208,475 | 12,898 | |
| Harman International | |||
| Industries Inc. | 241,548 | 11,722 | |
| Coach Inc. | 194,160 | 11,613 | |
| Tiffany & Co. | 165,945 | 11,523 | |
| DeVry Inc. | 179,300 | 9,485 | |
| * | Ulta Salon Cosmetics | ||
| & Fragrance Inc. | 176,975 | 9,413 | |
| * | Warnaco Group Inc. | 144,040 | 9,270 |
| Scripps Networks | |||
| Interactive Inc. Class A | 160,800 | 8,268 | |
| * | DSW Inc. Class A | 150,851 | 7,162 |
| * | WMS Industries Inc. | 208,400 | 6,836 |
| * | Chipotle Mexican Grill Inc. | ||
| Class A | 18,200 | 4,856 | |
| * | Discovery | ||
| Communications Inc. | 116,200 | 4,585 | |
| * | Discovery | ||
| Communications Inc. | |||
| Class A | 101,600 | 4,497 | |
| Family Dollar Stores Inc. | 53,762 | 2,914 | |
| 367,144 | |||
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Consumer Staples (3.9%) | |||
| * | Green Mountain Coffee | ||
| Roasters Inc. | 601,345 | 40,266 | |
| Mead Johnson Nutrition Co. | 211,900 | 14,172 | |
| McCormick & Co. Inc. | 277,700 | 13,640 | |
| Church & Dwight Co. Inc. | 111,700 | 9,213 | |
| 77,291 | |||
| Energy (6.0%) | |||
| * | Newfield Exploration Co. | 396,000 | 28,037 |
| * | Whiting Petroleum Corp. | 275,535 | 19,150 |
| Patterson-UTI Energy Inc. | 483,900 | 15,054 | |
| * | Denbury Resources Inc. | 657,500 | 14,840 |
| * | Oil States International Inc. | 177,600 | 14,742 |
| * | Cameron International Corp. | 216,400 | 11,409 |
| Range Resources Corp. | 152,900 | 8,631 | |
| * | Southwestern Energy Co. | 169,400 | 7,430 |
| 119,293 | |||
| Exchange-Traded Fund (0.4%) | |||
| 2 | Vanguard Mid-Cap ETF | 82,700 | 6,842 |
| Financials (7.2%) | |||
| * | Affiliated Managers | ||
| Group Inc. | 299,565 | 32,676 | |
| * | IntercontinentalExchange | ||
| Inc. | 196,825 | 23,688 | |
| * | CB Richard Ellis Group Inc. | ||
| Class A | 693,400 | 18,521 | |
| Invesco Ltd. | 621,300 | 15,452 | |
| TD Ameritrade Holding | |||
| Corp. | 615,700 | 13,262 | |
| Discover Financial Services | 399,839 | 9,932 | |
| Webster Financial Corp. | 439,217 | 9,452 | |
| Fifth Third Bancorp | 707,050 | 9,382 | |
| Marsh & McLennan | |||
| Cos. Inc. | 304,775 | 9,229 | |
| 141,594 | |||
| Health Care (14.1%) | |||
| * | Cerner Corp. | 303,092 | 36,426 |
| * | Agilent Technologies Inc. | 544,425 | 27,172 |
| * | IDEXX Laboratories Inc. | 254,355 | 20,712 |
12
Mid-Cap Growth Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| * | HMS Holdings Corp. | 258,000 | 20,307 |
| * | Watson Pharmaceuticals | ||
| Inc. | 317,325 | 19,680 | |
| * | Illumina Inc. | 260,730 | 18,507 |
| * | Bruker Corp. | 896,845 | 17,704 |
| * | Medco Health Solutions | ||
| Inc. | 278,025 | 16,495 | |
| Perrigo Co. | 175,100 | 15,822 | |
| * | Mettler-Toledo | ||
| International Inc. | 78,350 | 14,683 | |
| AmerisourceBergen Corp. | |||
| Class A | 315,800 | 12,834 | |
| * | Catalyst Health Solutions | ||
| Inc. | 204,800 | 12,198 | |
| * | CareFusion Corp. | 367,882 | 10,805 |
| * | DaVita Inc. | 107,300 | 9,452 |
| * | ResMed Inc. | 259,529 | 8,276 |
| * | Mylan Inc. | 313,025 | 7,801 |
| * | United Therapeutics Corp. | 102,225 | 6,845 |
| Universal Health Services | |||
| Inc. Class B | 63,825 | 3,496 | |
| 279,215 | |||
| Industrials (15.2%) | |||
| Gardner Denver Inc. | 391,775 | 33,853 | |
| Fastenal Co. | 437,807 | 29,372 | |
| * | United Rentals Inc. | 898,225 | 26,426 |
| Rockwell Automation Inc. | 287,000 | 25,006 | |
| * | TransDigm Group Inc. | 263,800 | 21,975 |
| Goodrich Corp. | 209,600 | 18,522 | |
| Manpower Inc. | 227,200 | 15,052 | |
| Robert Half International | |||
| Inc. | 496,070 | 15,046 | |
| MSC Industrial Direct Co. | |||
| Class A | 208,900 | 14,955 | |
| * | Stericycle Inc. | 162,290 | 14,814 |
| AMETEK Inc. | 314,175 | 14,465 | |
| * | Babcock & Wilcox Co. | 434,062 | 13,634 |
| * | Jacobs Engineering | ||
| Group Inc. | 266,000 | 13,196 | |
| JB Hunt Transport | |||
| Services Inc. | 262,375 | 12,510 | |
| CH Robinson | |||
| Worldwide Inc. | 143,200 | 11,482 | |
| Expeditors International | |||
| of Washington Inc. | 211,100 | 11,456 | |
| Dover Corp. | 133,800 | 9,104 | |
| 300,868 | |||
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Information Technology (24.0%) | |||
| * | Polycom Inc. | 735,300 | 43,993 |
| * | Informatica Corp. | 454,220 | 25,441 |
| * | Silicon Laboratories Inc. | 540,285 | 23,546 |
| FLIR Systems Inc. | 667,200 | 23,499 | |
| * | Trimble Navigation Ltd. | 477,421 | 22,362 |
| Solera Holdings Inc. | 364,941 | 20,072 | |
| VeriSign Inc. | 506,000 | 18,702 | |
| * | VeriFone Systems Inc. | 311,585 | 17,081 |
| * | SAVVIS Inc. | 425,225 | 16,737 |
| * | Cavium Networks Inc. | 346,200 | 16,348 |
| * | Citrix Systems Inc. | 189,900 | 16,016 |
| * | MICROS Systems Inc. | 305,597 | 15,897 |
| * | Concur Technologies Inc. | 271,657 | 15,721 |
| Avago Technologies Ltd. | 459,025 | 15,359 | |
| * | Genpact Ltd. | 938,300 | 15,097 |
| * | Cypress Semiconductor | ||
| Corp. | 668,150 | 14,539 | |
| * | ON Semiconductor Corp. | 1,363,475 | 14,330 |
| * | Parametric Technology | ||
| Corp. | 583,250 | 14,155 | |
| * | Gartner Inc. | 317,827 | 13,638 |
| * | FleetCor Technologies Inc. | 360,785 | 13,533 |
| TE Connectivity Ltd. | 373,800 | 13,401 | |
| Amphenol Corp. Class A | 233,500 | 13,055 | |
| * | Salesforce.com Inc. | 92,575 | 12,831 |
| * | Skyworks Solutions Inc. | 367,725 | 11,569 |
| * | Taleo Corp. Class A | 314,510 | 11,407 |
| * | Dolby Laboratories Inc. | ||
| Class A | 202,200 | 10,122 | |
| * | QLIK Technologies Inc. | 309,175 | 9,912 |
| Anixter International Inc. | 122,790 | 9,226 | |
| * | Cognizant Technology | ||
| Solutions Corp. Class A | 105,705 | 8,763 | |
| 476,352 | |||
| Materials (4.4%) | |||
| Airgas Inc. | 694,545 | 48,236 | |
| Ecolab Inc. | 393,310 | 20,751 | |
| * | Rockwood Holdings Inc. | 327,025 | 18,556 |
| 87,543 | |||
| Telecommunication Services (1.2%) | |||
| * | SBA Communications | ||
| Corp. Class A | 604,646 | 23,357 | |
| Total Common Stocks | |||
| (Cost $1,394,226) | 1,879,499 | ||
13
Mid-Cap Growth Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Temporary Cash Investments (5.1%)1 | |||
| Money Market Fund (4.7%) | |||
| 3 | Vanguard Market | ||
| Liquidity Fund, 0.179% | 94,011,114 | 94,011 | |
| Face | |||
| Amount | |||
| ($000) | |||
| U.S. Government and Agency Obligations (0.4%) | |||
| 4,5 | Fannie Mae | ||
| Discount Notes, | |||
| 0.235%, 6/15/11 | 1,500 | 1,500 | |
| 4,5 | Federal Home Loan Bank | ||
| Discount Notes, | |||
| 0.210%, 6/3/11 | 1,000 | 1,000 | |
| 4,5 | Freddie Mac | ||
| Discount Notes, | |||
| 0.271%, 6/7/11 | 1,000 | 1,000 | |
| 4 | Freddie Mac | ||
| Discount Notes, | |||
| 0.230%, 6/20/11 | 2,000 | 2,000 | |
| 4,5 | Freddie Mac | ||
| Discount Notes, | |||
| 0.281%, 6/21/11 | 2,500 | 2,499 | |
| 7,999 | |||
| Total Temporary Cash Investments | |||
| (Cost $101,999) | 102,010 | ||
| Total Investments (100.0%) | |||
| (Cost $1,496,225) | 1,981,509 | ||
| Other Assets and Liabilities (0.0%) | |||
| Other Assets | 26,796 | ||
| Liabilities | (27,084) | ||
| (288) | |||
| Net Assets (100%) | |||
| Applicable to 93,138,791 outstanding | |||
| $.001 par value shares of beneficial | |||
| interest (unlimited authorization) | 1,981,221 | ||
| Net Asset Value Per Share | $21.27 | ||
| At April 30, 2011, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 1,513,652 |
| Overdistributed Net Investment Income | (1,622) |
| Accumulated Net Realized Losses | (19,974) |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 485,284 |
| Futures Contracts | 3,881 |
| Net Assets | 1,981,221 |
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 98.4% and 1.6%, respectively, of net assets.
2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
4 The issuer operates under a congressional charter; its securities are not backed by the full faith and credit of the U.S. government.
5 Securities with a value of $5,999,000 have been segregated as initial margin for open futures contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Mid-Cap Growth Fund
Statement of Operations
| Six Months Ended | |
| April 30, 2011 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 6,281 |
| Interest1 | 86 |
| Security Lending | 33 |
| Total Income | 6,400 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 1,987 |
| Performance Adjustment | 14 |
| The Vanguard Group—Note C | |
| Management and Administrative | 2,293 |
| Marketing and Distribution | 217 |
| Custodian Fees | 23 |
| Shareholders’ Reports | 15 |
| Trustees’ Fees and Expenses | 2 |
| Total Expenses | 4,551 |
| Expenses Paid Indirectly | (88) |
| Net Expenses | 4,463 |
| Net Investment Income | 1,937 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold1 | 191,565 |
| Futures Contracts | 9,093 |
| Realized Net Gain (Loss) | 200,658 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities | 136,133 |
| Futures Contracts | 1,053 |
| Change in Unrealized Appreciation (Depreciation) | 137,186 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 339,781 |
1 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $73,000, $78,000, and $0, respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
15
Mid-Cap Growth Fund
Statement of Changes in Net Assets
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2011 | 2010 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 1,937 | 63 |
| Realized Net Gain (Loss) | 200,658 | 144,225 |
| Change in Unrealized Appreciation (Depreciation) | 137,186 | 181,054 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 339,781 | 325,342 |
| Distributions | ||
| Net Investment Income | (1,806) | (1,593) |
| Realized Capital Gain | — | — |
| Total Distributions | (1,806) | (1,593) |
| Capital Share Transactions | ||
| Issued | 328,578 | 315,543 |
| Issued in Lieu of Cash Distributions | 1,759 | 1,550 |
| Redeemed | (248,851) | (307,588) |
| Net Increase (Decrease) from Capital Share Transactions | 81,486 | 9,505 |
| Total Increase (Decrease) | 419,461 | 333,254 |
| Net Assets | ||
| Beginning of Period | 1,561,760 | 1,228,506 |
| End of Period1 | 1,981,221 | 1,561,760 |
| 1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($1,622,000) and ($1,753,000). | ||
See accompanying Notes, which are an integral part of the Financial Statements.
16
Mid-Cap Growth Fund
Financial Highlights
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 |
| Net Asset Value, Beginning of Period | $17.54 | $13.86 | $11.82 | $20.90 | $19.12 | $16.58 |
| Investment Operations | ||||||
| Net Investment Income | .0231 | .001 | .0212 | .035 | .044 | .055 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 3.727 | 3.697 | 2.059 | (8.024) | 4.455 | 2.490 |
| Total from Investment Operations | 3.750 | 3.698 | 2.080 | (7.989) | 4.499 | 2.545 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.020) | (.018) | (.040) | (.045) | (.044) | (.005) |
| Distributions from Realized Capital Gains | — | — | — | (1.046) | (2.675) | — |
| Total Distributions | (.020) | (.018) | (.040) | (1.091) | (2.719) | (.005) |
| Net Asset Value, End of Period | $21.27 | $17.54 | $13.86 | $11.82 | $20.90 | $19.12 |
| Total Return3 | 21.39% | 26.70% | 17.70% | -40.02% | 26.39% | 15.35% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $1,981 | $1,562 | $1,229 | $881 | $1,289 | $793 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets4 | 0.52% | 0.51% | 0.60% | 0.55% | 0.56% | 0.50% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 0.11%1 | 0.00% | 0.16%2 | 0.20% | 0.27% | 0.26% |
| Portfolio Turnover Rate | 134% | 88% | 125% | 85% | 70% | 159% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 Net investment income per share and the ratio of net investment income to average net assets include $0.02 and 0.11%, respectively, resulting from a special dividend from VeriSign Inc. in December 2010.
2 Net investment income per share and the ratio of net investment income to average net assets include $0.02 and 0.19%, respectively, resulting from a special dividend from TransDigm Group Inc. in October 2009.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.00%, (0.01%), 0.02%, 0.03%, 0.03%, and (0.04%).
See accompanying Notes, which are an integral part of the Financial Statements.
17
Mid-Cap Growth Fund
Notes to Financial Statements
Vanguard Mid-Cap Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2007–2010), and for the period ended April 30, 2011, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
5. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents fees charged to borrowers plus income earned on investing cash collateral, less expenses associated with the loan.
6. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
18
Mid-Cap Growth Fund
B. William Blair & Company, L.L.C., and Chartwell Investment Partners, L.P., each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee for William Blair & Company, L.L.C., is subject to quarterly adjustments based on performance since July 31, 2006, relative to the Russell Midcap Growth Index. The basic fee for Chartwell Investment Partners, L.P., is subject to quarterly adjustments based on performance for the preceding three years relative to the Russell Midcap Growth Index.
The Vanguard Group manages the cash reserves of the fund on an at-cost basis.
For the six months ended April 30, 2011, the aggregate investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets, before an increase of $14,000 (0.00%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2011, the fund had contributed capital of $305,000 to Vanguard (included in Other Assets), representing 0.02% of the fund’s net assets and 0.12% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended April 30, 2011, these arrangements reduced the fund’s expenses by $88,000 (an annual rate of 0.01% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
The following table summarizes the fund’s investments as of April 30, 2011, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 1,879,499 | — | — |
| Temporary Cash Investments | 94,011 | 7,999 | — |
| Futures Contracts—Assets1 | 284 | — | — |
| Total | 1,973,794 | 7,999 | — |
| 1 Represents variation margin on the last day of the reporting period. | |||
19
Mid-Cap Growth Fund
F. At April 30, 2011, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
| ($000) | ||||
| Aggregate | ||||
| Number of | Settlement | Unrealized | ||
| Long (Short) | Value | Appreciation | ||
| Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
| E-mini S&P MidCap Index | June 2011 | 360 | 36,486 | 1,672 |
| S&P MidCap 400 Index | June 2011 | 37 | 18,750 | 1,509 |
| E-mini Russell 2000 Index | June 2011 | 170 | 14,686 | 700 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2010, the fund had available capital loss carryforwards totaling $217,146,000 to offset future net capital gains of $57,252,000 through October 31, 2016, and $159,894,000 through October 31, 2017. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2011; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2011, the cost of investment securities for tax purposes was $1,496,225,000. Net unrealized appreciation of investment securities for tax purposes was $485,284,000, consisting of unrealized gains of $489,390,000 on securities that had risen in value since their purchase and $4,106,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the six months ended April 30, 2011, the fund purchased $1,209,663,000 of investment securities and sold $1,125,480,000 of investment securities, other than temporary cash investments.
I. Capital shares issued and redeemed were:
| Six Months Ended | Year Ended | |
| April 30, 2011 | October 31, 2010 | |
| Shares | Shares | |
| (000) | (000) | |
| Issued | 16,980 | 20,103 |
| Issued in Lieu of Cash Distributions | 93 | 104 |
| Redeemed | (12,961) | (19,798) |
| Net Increase (Decrease) in Shares Outstanding | 4,112 | 409 |
J. In preparing the financial statements as of April 30, 2011, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
20
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
21
Six Months Ended April 30, 2011
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Mid-Cap Growth Fund | 10/31/2010 | 4/30/2011 | Period |
| Based on Actual Fund Return | $1,000.00 | $1,213.94 | $2.85 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.22 | 2.61 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.52%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
22
Trustees Approve Advisory Agreements
The board of trustees of Vanguard Mid-Cap Growth Fund has renewed the fund’s investment advisory agreements with Chartwell Investment Partners, L.P., and William Blair & Co., L.L.C. The board determined that the retention of the advisors was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the agreements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board considered the quality of the fund’s investment management, and took into account the organizational depth and stability of each advisor. The board noted the following:
Chartwell Investment Partners, L.P. Founded in 1997, Chartwell has expertise in small- and mid-cap equity management. The firm employs a fundamental bottom-up strategy in seeking companies with superior growth potential that are trading at reasonable valuations. The firm uses a team approach to managing assets. The team invests in companies that have demonstrated strong earnings-per-share growth and have achieved strong competitive positions while serving a meaningful customer base. The team will invest opportunistically when stocks are attractively valued, yet it will concentrate holdings in those companies best positioned for rapid growth, all with an intermediate-term time horizon in mind. Chartwell has advised a portion of the fund since 2006.
William Blair & Company, L.L.C. Founded in 1935, William Blair & Company is an independently owned, full-service investment firm based in Chicago. The firm’s investment process relies on thorough, in-depth fundamental analysis. Based on this process, the advisor invests in companies that it believes are of high quality and have sustainable, above-average growth. In selecting stocks, the advisor considers a company’s leadership position within the market it serves, the quality of its products or services, its return on equity, its accounting policies, and the quality of the management team. The firm has advised a portion of the fund since 2006.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory agreements.
Investment performance
The board considered the fund’s performance since 2006 (when the advisors began managing the fund), including any periods of outperformance or underperformance of a relevant benchmark and peer group. The board concluded that each advisor has carried out the fund’s investment strategy in disciplined fashion, and that performance results have allowed the fund to remain competitive versus its benchmark and its peers. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the advisory fee rate.
23
The board did not consider profitability of Chartwell and William Blair & Company in determining whether to approve the advisory fees, because the firms are independent of Vanguard and the advisory fees are the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules for the advisors. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.
The board will consider whether to renew the advisory agreements again after a one-year period.
24
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.
Foreign Holdings. The percentage of a fund represented by stocks or depositary receipts of companies based outside the United States.
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 measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
25
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 179 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
| Interested Trustee1 | and President (2006–2008) of Rohm and Haas Co. |
| (chemicals); Director of Tyco International, Ltd. | |
| F. William McNabb III | (diversified manufacturing and services) and Hewlett- |
| Born 1957. Trustee Since July 2009. Chairman of the | Packard Co. (electronic computer manufacturing); |
| Board. Principal Occupation(s) During the Past Five | Senior Advisor at New Mountain Capital; Trustee |
| Years: Chairman of the Board of The Vanguard Group, | of The Conference Board; Member of the Board of |
| Inc., and of each of the investment companies served | Managers of Delphi Automotive LLP (automotive |
| by The Vanguard Group, since January 2010; Director | components). |
| of The Vanguard Group since 2008; Chief Executive | |
| Officer and President of The Vanguard Group and of | Amy Gutmann |
| each of the investment companies served by The | Born 1949. Trustee Since June 2006. Principal |
| Vanguard Group since 2008; Director of Vanguard | Occupation(s) During the Past Five Years: President |
| Marketing Corporation; Managing Director of The | of the University of Pennsylvania; Christopher H. |
| Vanguard Group (1995–2008). | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| appointments at the Annenberg School for Commu- | |
| Independent Trustees | nication and the Graduate School of Education |
| of the University of Pennsylvania; Director of | |
| Emerson U. Fullwood | Carnegie Corporation of New York, Schuylkill River |
| Born 1948. Trustee Since January 2008. Principal | Development Corporation, and Greater Philadelphia |
| Occupation(s) During the Past Five Years: Executive | Chamber of Commerce; Trustee of the National |
| Chief Staff and Marketing Officer for North America | Constitution Center; Chair of the Presidential |
| and Corporate Vice President (retired 2008) of Xerox | Commission for the Study of Bioethical Issues. |
| Corporation (document management products and | |
| services); Executive in Residence and 2010 | JoAnn Heffernan Heisen |
| Distinguished Minett Professor at the Rochester | Born 1950. Trustee Since July 1998. Principal |
| Institute of Technology; Director of SPX Corporation | Occupation(s) During the Past Five Years: Corporate |
| (multi-industry manufacturing), the United Way of | Vice President and Chief Global Diversity Officer |
| Rochester, Amerigroup Corporation (managed health | (retired 2008) and Member of the Executive |
| care), the University of Rochester Medical Center, | Committee (1997–2008) of Johnson & Johnson |
| Monroe Community College Foundation, and North | (pharmaceuticals/consumer products); Director of |
| Carolina A&T University. | Skytop Lodge Corporation (hotels), the University |
| Medical Center at Princeton, the Robert Wood | |
| Rajiv L. Gupta | Johnson Foundation, and the Center for Work Life |
| Born 1945. Trustee Since December 2001.2 | Policy; Member of the Advisory Board of the |
| Principal Occupation(s) During the Past Five Years: | Maxwell School of Citizenship and Public Affairs |
| Chairman and Chief Executive Officer (retired 2009) | at Syracuse University. |
| F. Joseph Loughrey | Thomas J. Higgins | |
| Born 1949. Trustee Since October 2009. Principal | Born 1957. Chief Financial Officer Since September | |
| Occupation(s) During the Past Five Years: President | 2008. Principal Occupation(s) During the Past Five | |
| and Chief Operating Officer (retired 2009) and Vice | Years: Principal of The Vanguard Group, Inc.; Chief | |
| Chairman of the Board (2008–2009) of Cummins Inc. | Financial Officer of each of the investment companies | |
| (industrial machinery); Director of SKF AB (industrial | served by The Vanguard Group since 2008; Treasurer | |
| machinery), Hillenbrand, Inc. (specialized consumer | of each of the investment companies served by The | |
| services), the Lumina Foundation for Education, and | Vanguard Group (1998–2008). | |
| Oxfam America; Chairman of the Advisory Council | ||
| for the College of Arts and Letters and Member | Kathryn J. Hyatt | |
| of the Advisory Board to the Kellogg Institute for | Born 1955. Treasurer Since November 2008. Principal | |
| International Studies at the University of Notre Dame. | Occupation(s) During the Past Five Years: Principal | |
| of The Vanguard Group, Inc.; Treasurer of each of | ||
| André F. Perold | the investment companies served by The Vanguard | |
| Born 1952. Trustee Since December 2004. Principal | Group since 2008; Assistant Treasurer of each of the | |
| Occupation(s) During the Past Five Years: George | investment companies served by The Vanguard Group | |
| Gund Professor of Finance and Banking at the Harvard | (1988–2008). | |
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Heidi Stam | |
| Born 1956. Secretary Since July 2005. Principal | ||
| Alfred M. Rankin, Jr. | Occupation(s) During the Past Five Years: Managing | |
| Born 1941. Trustee Since January 1993. Principal | Director of The Vanguard Group, Inc., since 2006; | |
| Occupation(s) During the Past Five Years: Chairman, | General Counsel of The Vanguard Group since 2005; | |
| President, and Chief Executive Officer of NACCO | Secretary of The Vanguard Group and of each of the | |
| Industries, Inc. (forklift trucks/housewares/lignite); | investment companies served by The Vanguard Group | |
| Director of Goodrich Corporation (industrial products/ | since 2005; Director and Senior Vice President of | |
| aircraft systems and services) and the National | Vanguard Marketing Corporation since 2005; | |
| Association of Manufacturers; Chairman of the | Principal of The Vanguard Group (1997–2006). | |
| Federal Reserve Bank of Cleveland; Vice Chairman | ||
| of University Hospitals of Cleveland; President of | ||
| the Board of The Cleveland Museum of Art. | Vanguard Senior Management Team | |
| Peter F. Volanakis | R. Gregory Barton | Michael S. Miller |
| Born 1955. Trustee Since July 2009. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: President | Kathleen C. Gubanich | Glenn W. Reed |
| and Chief Operating Officer (retired 2010) of Corning | Paul A. Heller | George U. Sauter |
| Incorporated (communications equipment); Director of | Martha G. King | |
| Corning Incorporated (2000–2010) and Dow Corning | ||
| (2001–2010); Overseer of the Amos Tuck School of | ||
| Business Administration at Dartmouth College. | Chairman Emeritus and Senior Advisor | |
| John J. Brennan | ||
| Executive Officers | Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | ||
| Glenn Booraem | ||
| Born 1967. Controller Since July 2010. Principal | ||
| Occupation(s) During the Past Five Years: Principal | Founder | |
| of The Vanguard Group, Inc.; Controller of each of | ||
| the investment companies served by The Vanguard | John C. Bogle | |
| Group since 2010; Assistant Controller of each of | Chairman and Chief Executive Officer, 1974–1996 | |
| the investment companies served by The Vanguard | ||
| Group (2001–2010). | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
 | |
| P.O. Box 2600 | |
| Valley Forge, PA 19482-2600 |
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| This material may be used in conjunction | |
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| fund only if preceded or accompanied by | |
| the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper Inc. or | |
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| guidelines by visiting vanguard.com/proxyreporting or by | |
| calling Vanguard at 800-662-2739. The guidelines are | |
| also available from the SEC’s website, sec.gov. In | |
| addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 | |
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| You can review and copy information about your fund at | |
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| find out more about this public service, call the SEC at | |
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| © 2011 The Vanguard Group, Inc. | |
| All rights reserved. | |
| Vanguard Marketing Corporation, Distributor. | |
| Q3012 062011 | |
 |
| Vanguard International Explorer™ Fund |
| Semiannual Report |
| April 30, 2011 |
 |
> For the six months ended April 30, 2011, Vanguard International Explorer Fund returned almost 15%, just ahead of the average return of its peer group but behind its benchmark index.
> Unlike last year, returns from the fund’s holdings in developed markets in Europe and the Pacific far outpaced those from emerging markets.
> As commodity prices surged, the fund’s materials holdings—especially metals and mining companies—notched the highest return of the ten industry sectors.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisors’ Report. | 8 |
| Fund Profile. | 12 |
| Performance Summary. | 14 |
| Financial Statements. | 15 |
| About Your Fund’s Expenses. | 32 |
| Glossary. | 34 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Jean Maher.
Your Fund’s Total Returns
Six Months Ended April 30, 2011
| Total | |
| Returns | |
| Vanguard International Explorer Fund | 14.91% |
| S&P EPAC SmallCap Index | 16.75 |
| International Small-Cap Funds Average | 14.71 |
| International Small-Cap Funds Average: Derived from data provided by Lipper Inc. | |
Your Fund’s Performance at a Glance
October 31, 2010 , Through April 30, 2011
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard International Explorer Fund | $15.81 | $17.92 | $0.224 | $0.000 |
1
Chairman’s Letter
Dear Shareholder,
The last six months were eventful for international markets, to say the least. Remarkably—despite repercussions from unprecedented uprisings in the Middle East and North Africa, Japan’s devastating earthquake and tsunami, and Europe’s ongoing sovereign debt concerns—markets outside the United States returned more than 12% overall. International small-company growth stocks performed even better: The Standard & Poor’s Europe Pacific Asia Composite (S&P EPAC) SmallCap Index returned nearly 17%.
Against this backdrop, Vanguard International Explorer Fund returned almost 15%, just ahead of the average return of its international small-cap peers. Compared with its benchmark index, however, some of the advisors’ selections in Europe and in larger emerging markets such as Brazil and China held back results.
Please note that on May 11, Vanguard lowered the minimum investment requirement for most Vanguard funds—including International Explorer—to $3,000. This change reflects our efforts to simplify our approach to fund minimums to increase the accessibility of Vanguard funds.
2
Strong returns around the globe
During the past six months, investors’ fortitude was tested by several unsettling events—including natural and nuclear disaster in the world’s third-largest economy and its far-reaching impact on the production of autos, computer chips, and other products. Still, international stock markets collectively returned more than 12% for U.S.-based investors. Almost half of this return reflected exchange-rate gains produced largely by strength in the euro and currencies in emerging economies. In an unusual move, Europe’s central bank took the lead in raising its benchmark interest rate to try to tame inflation rather than waiting for the Federal Reserve to act first.
In the United States, the broad stock market returned more than 17%. Although rising food and gasoline prices put pressure on consumer budgets, corporate earnings growth remained strong and the pace of new job creation bounced back from extremely depressed levels.
As the economy found its footing, rates edged higher
Rising longer-term interest rates put pressure on bond prices, which led to modest bond market returns for the six-month period. The broad taxable U.S. bond market returned about 0%. The broad municipal market returned –1.68%. The rise in rates reflected both confidence that the economic recovery would prove self-sustaining and thus nudge rates higher,
Market Barometer
| Total Returns | |||
| Periods Ended April 30, 2011 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 17.12% | 18.02% | 3.30% |
| Russell 2000 Index (Small-caps) | 23.73 | 22.20 | 3.89 |
| Dow Jones U.S. Total Stock Market Index | 17.28 | 18.40 | 3.65 |
| MSCI All Country World Index ex USA (International) | 12.44 | 19.73 | 3.55 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index (Broad | |||
| taxable market) | 0.02% | 5.36% | 6.33% |
| Barclays Capital Municipal Bond Index (Broad | |||
| tax-exempt market) | -1.68 | 2.20 | 4.52 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 | 0.15 | 2.02 |
| CPI | |||
| Consumer Price Index | 2.83% | 3.16% | 2.22% |
3
and anxiety that higher rates would be necessary to provide some protection from inflation. Even so, inflation expectations remained subdued, as measured by the difference between the yields of inflation-protected and nominal U.S. Treasury bonds.
The return on short-term money market instruments such as the 3-month U.S. Treasury bill remained near 0%, consistent with the Federal Reserve Board’s target for short-term rates.
Developed markets came out ahead, emerging economies took a back seat
The exceptional returns that propelled emerging markets to the top of the performance charts during the early stages of the global recovery have been coming back down to earth. For the six months ended April 30, emerging markets ceded leadership to Europe’s developed markets—in the international arena in general and in your fund in particular.
Europe, representing nearly 60% of fund assets at the end of April and a similar share of the fund’s return, faced no shortage of challenges. Portugal required a financial bailout, credit-rating agencies downgraded more sovereign debt (including that of Portugal and Spain), and inflation and unemployment rose—Spain has one of the highest unemployment rates in the developed world. (After the end of the period, a major rating agency downgraded Greece’s credit rating amid speculation about the possible need for a second bailout.)
Expense Ratios
Your Fund Compared With Its Peer Group
| Peer Group | ||
| Fund | Average | |
| International Explorer Fund | 0.39% | 1.57% |
The fund expense ratio shown is from the prospectus dated February 24, 2011, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2011, the fund’s annualized expense ratio was 0.43%. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2010.
Peer group: International Small-Cap Funds.
4
Still, Europe returned almost 20% in the S&P EPAC SmallCap Index, and the results for your fund’s European holdings were close behind. Among the larger markets that drive the region’s returns, Germany advanced almost 23%, about double the gains of the United Kingdom and France. For U.S.-based investors, the euro’s rise against the U.S. dollar boosted returns. (For more on currencies, please see the box below.)
| Investment insight |
| A note on foreign currency translation effects |
| When you buy stocks of companies based outside of your home country, you gain |
| exposure to a wider array of economic and market forces, including the dynamics of |
| the foreign exchange markets. |
| The exchange rate of the U.S. dollar versus another currency is the price at which |
| the dollar can be converted into that currency. For example, if the exchange rate of |
| the U.S. dollar versus Britain’s pound sterling is $1.50, it takes 1.5 dollars to purchase |
| 1 pound. If the U.S. dollar weakens—say, to a rate of $2.00—then you’ll need 2 |
| dollars to buy 1 pound. Conversely, if the dollar strengthens to $1.25, it will take |
| fewer dollars to buy a pound. |
| The price of one currency relative to another is determined by supply and demand |
| factors—including interest rates, the strength of the two economies, and geopolitical |
| risks. In the long run, the portfolio effects of exchange-rate movements tend to |
| balance out. But a rise or fall in the dollar’s value versus other currencies can |
| influence short-term returns. Exchange-rate changes also affect the purchasing |
| power of each new dollar you invest in foreign stocks, just as they affect the prices |
| of foreign goods. And they can have a less immediately visible impact on a |
| company’s profits, ultimately driving its stock price. |
| Performance during the period |
| From October 31, 2010, through April 30, 2011, most major currencies rose in value |
| against the U.S. dollar. In part, this reflected the Federal Reserve’s policy of holding |
| short-term interest rates near zero while some foreign central banks raised rates. |
| For U.S.-based investors, the shrinking dollar boosted returns earned in local markets. |
| Two widely used international benchmarks illustrate this: The MSCI Europe Index |
| returned more than 15% when translated into U.S. dollars, and the MSCI Emerging |
| Markets Index returned nearly 10% in dollars—both nearly double the indexes’ |
| local-currency returns. |
5
The fund’s holdings in Pacific Rim developed markets returned almost 16%. Australia was the standout, up about 25%; even Japan gained more than 11%, largely on the strength of its materials sector.
Performance of the fund’s emerging market stocks was decidedly mixed, netting only a mid-single-digit return. Double-digit gains in the Philippines and Indonesia were tempered by declines in China. Brazil, the largest developing market allocation in the fund, was just above breakeven. Central bankers in Brazil—as well as in China and India—raised interest rates to try to tame inflation, especially spiraling food prices.
Returns were positive across all ten industry sectors in the fund, led by materials—up almost 30% as prices for a variety of natural resources climbed. The stock price of Australia-based mining company Iluka Resources more than doubled, adding almost 1 percentage point to the fund’s total return.
Compared with the return of the benchmark index, the fund’s result was hampered by some laggards and missed opportunities in Europe, especially in the United Kingdom and France. In emerging markets, some Chinese and Brazilian holdings were disappointing. On the plus side, many of the advisors’ selections in developed Pacific Rim markets outperformed.
For more information on the advisors’ investment strategies, please see the Advisors’ Report following this letter.
Diversification makes sense in times of uncertainty
For the past two years, global equities have posted robust returns as many economies rebounded from the financial crisis. Until recently, emerging markets were star performers. But as the headline-grabbing events of the last few months have reminded us, the investing environment can change with startling speed.
That’s why Vanguard urges investors to take a disciplined, long-term approach. We believe that, rather than responding to major shifts in the market, you are better served by building a diversified portfolio that holds a mix of stock and bond funds and short-term reserves consistent with your risk tolerance and time horizon.
By including stocks of companies based outside the United States, you gain exposure to a wider array of economic and market forces. And Vanguard research has shown that a portfolio combining U.S. and international equities over the past several decades would have experienced lower risk (lower average volatility of returns) than one holding only U.S. stocks. The low-cost Vanguard International Explorer Fund, guided by Schroder Investment Management North America Inc., and Wellington Management Company, llp,
6
can play a useful role in such a portfolio. Your fund’s experienced advisors follow a disciplined, research-intensive strategy to identify small, non-U.S. companies that—in their judgment—are attractively priced and have superior long-term growth prospects.
As always, thank you for entrusting your assets to Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 16, 2011
7
Advisors’ Report
For the six months ended April 30, 2011, Vanguard International Explorer Fund returned 14.91%. Your fund is managed by two independent advisors, a strategy that enhances its diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the amount and percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the half-year and of how their portfolio positioning reflects this assessment. These comments were prepared on May 10, 2011.
Schroder Investment Management North America Inc.
Portfolio Manager:
Matthew F. Dobbs
Head of Global Small Companies
International equities continued to make progress, buoyed by a steady flow of supportive data on economic activity (particularly in the United States and core European economies) and broadly accommodative monetary stances. Geopolitical events such as the unrest in the Middle East, along with the To¯hoku earthquake and tsunami, had a relatively
Vanguard International Explorer Fund Investment Advisors
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| Schroder Investment | 93 | 2,700 | The advisor employs a fundamental investment |
| Management North America Inc. | approach that considers macroeconomic factors while | ||
| focusing primarily on company-specific factors, | |||
| including a company’s potential for long-term growth, | |||
| financial condition, quality of management, and | |||
| sensitivity to cyclical factors. The advisor also | |||
| considers the relative value of a company’s securities | |||
| compared with those of other companies and the | |||
| market as a whole. | |||
| Wellington Management | 4 | 111 | The advisor employs a traditional, bottom-up approach |
| Company, LLP | that is opportunistic in nature, relying on global and | ||
| regional research resources to identify both | |||
| growth-oriented and neglected or misunderstood | |||
| companies. | |||
| Cash Investments | 3 | 79 | These short-term reserves are invested by Vanguard in |
| equity index products to simulate investment in stocks. | |||
| Each advisor also may maintain a modest cash | |||
| position. | |||
8
transient impact on investor confidence—as did a sharp rise in oil prices and, late in the period, a first tightening of monetary policy in Europe. Currency shifts had a material effect on returns for U.S.-based investors; the euro and Australian dollar were notably strong.
It has been yet another period of strong relative performance for small-capitalization companies: For the six months ended April 30, the Standard & Poor’s Europe Pacific Asia Composite SmallCap Index rose 16.75%, well ahead of the 13.54% achieved by its LargeMidCap counterpart. Cyclical sectors such as materials, industrials, and information technology, along with energy, led the way, while financials, telecom, and health care lagged.
We struggled to keep pace with the benchmark during the period. Returns were held back primarily by stock selection in the United Kingdom in industrials (CPP Group), energy (Gulfsands Petroleum), and consumer cyclicals. However, Sports Direct was a notable strength.
Emerging-market exposure has also restrained performance, with concerns over inflation and interest rates affecting some of our financial and real estate holdings (Shriram Transport Finance, Cyrela Brazil Realty). More specific concerns over production delays in the company’s interests in India hampered Canada’s Niko Resources.
In continental Europe, our relative strength in financials (Helvetia, Delta Lloyd, and Tryg) was offset by shortfalls in energy (Bourbon Offshore, based in France) and industrials.
In the Pacific region, our performance was mixed. Outside of Japan, we had notable success with zircon producer Iluka Resources and Crane Group, which was acquired by Fletcher Building during the period. This was partly offset by weakness in China-exposed consumer cyclicals such as Parkson and Evergreen International. In Japan, the contrast has been between good performance from materials stocks (JSP, Osaka Titanium Technologies) and weakness in some more domestically sensitive stocks after the earthquake (Accordia Golf, Tokai Tokyo Financial). Nichi-Iko Pharmaceutical was weak following a surprise sale of additional shares.
We continue to seek out companies with visible growth prospects, relatively strong balance sheets, and shareholder-focused management. Given the looming prospect of a less-benign monetary environment, we believe our strategy should stand the portfolio in good stead. Regional allocations shifted only modestly over the half-year; we added to our weightings in the Pacific region ex Japan, while our commitment to emerging markets has been primarily funded from underweightings in continental Europe and the United Kingdom. Principal
9
sector overweightings are in energy, materials, and industrials, and the main underweighted areas are financials and information technology.
Wellington Management Company, LLP
Portfolio Manager:
Simon H. Thomas
Vice President and Equity Portfolio Manager
Global equities moved higher during the six months, driven by strong corporate earnings, generally solid economic data, and the Federal Reserve’s continued accommodative monetary policy. Markets experienced heightened volatility later in the period as unrest in North Africa and the Middle East, as well as the devastating earthquake and tsunami in Japan, increased investor uncertainty.
For the period, weak results among materials and information technology holdings restrained performance. Allocation among sectors, largely a result of our bottom-up stock selection process, was relatively neutral. At a regional level, our overweighting to Japan detracted following the natural disaster in that country.
Top contributors to relative returns were NRW Holdings, Kongsberg Gruppen, and Start Today. NRW Holdings, an Australia-based mining services provider, was among the top performers both in this period and in the prior one. The company continues to benefit from a growing order book and price strength across the commodities complex. The stock price of Kongsberg Gruppen, a Norway-based technology supplier to the defense, oil and gas, and maritime industries, rose after the company reported better-than-expected fourth-quarter earnings driven by solid revenue growth and operating margin expansion.
Shares of Start Today, a Japan-based online retail company and service provider for third-party e-commerce operations, also advanced sharply. The company is benefiting from rising e-commerce volumes as online purchases constitute a greater share of overall retail spending. A stock split during the fourth quarter also may have boosted performance as the stock became somewhat more attractive to retail investors. Other notable contributors to relative returns were Eurofins Scientific (health care) and WorleyParsons (energy).
The largest detractors from our relative performance during the period were Indofood Agri Resources, Kenedix, and Karoon Gas Australia. Shares of Singapore-based palm oil producer Indofood Agri Resources declined following the announcement of a corporate restructuring plan. Shares of Kenedix, a Japan-based real estate asset management company, traded lower following the earthquake. The company has conservative valuations on its existing portfolio, with 40% to 45% of those assets in Tokyo, and has
10
recapitalized and strengthened its balance sheet. As many competitors have been eliminated during the extended real estate downturn, the firm is now a main contender in the asset management industry. The stock of Karoon Gas Australia, a pure-play energy exploration company with resources in Australia, Peru, and Brazil, underperformed as a large investor was rumored to be looking for buyers for its stake. We view this stock as a compelling long-term investment proposition. Other notable relative detractors from returns included Japan-based education company Benesse Holdings and European online dating and matchmaking service Meetic.
Despite the rise in equities during the period, the macroeconomic environment remains uncertain, as geopolitical tension, inflation, and sovereign debt concerns still overhang financial markets. We continue to focus our analysis at the individual company level, seeking to identify companies with strong balance sheets, leading competitive positions, and solid free cash flows trading at attractive valuations.
At the end of the period, we were most overweighted in the industrials, health care, and consumer discretionary sectors, and most underweighted in financials and materials relative to the benchmark. On a regional basis, our greatest underweight position was to Europe. This was offset by overweightings in Japan and select emerging market countries.
11
International Explorer Fund
Fund Profile
As of April 30, 2011
| Portfolio Characteristics | |||
| S&P | MSCI AC | ||
| EPAC | World | ||
| SmallCap | Index | ||
| Fund | Index | ex USA | |
| Number of Stocks | 369 | 3,080 | 1,869 |
| Median Market Cap | $2.0B | $2.0B | $33.8B |
| Price/Earnings Ratio | 17.0x | 16.6x | 13.8x |
| Price/Book Ratio | 1.6x | 1.4x | 1.7x |
| Return on Equity | 13.8% | 12.0% | 17.8% |
| Earnings Growth Rate | 4.9% | 3.5% | 2.8% |
| Dividend Yield | 2.0% | 2.4% | 2.9% |
| Turnover Rate | |||
| (Annualized) | 44% | — | — |
| Ticker Symbol | VINEX | — | — |
| Expense Ratio1 | 0.39% | — | — |
| Short-Term Reserves | 1.9% | — | — |
| Sector Diversification (% of equity exposure) | |||
| S&P | MSCI AC | ||
| EPAC | World | ||
| SmallCap | Index | ||
| Fund | Index | ex USA | |
| Consumer | |||
| Discretionary | 19.0% | 18.4% | 9.0% |
| Consumer Staples | 5.3 | 5.3 | 8.5 |
| Energy | 9.3 | 3.8 | 11.6 |
| Financials | 13.2 | 18.2 | 24.8 |
| Health Care | 4.5 | 5.4 | 5.9 |
| Industrials | 26.5 | 24.0 | 11.0 |
| Information | |||
| Technology | 5.9 | 9.6 | 6.3 |
| Materials | 14.0 | 11.6 | 13.0 |
| Telecommunication | |||
| Services | 1.6 | 1.5 | 5.7 |
| Utilities | 0.7 | 2.2 | 4.2 |
| Volatility Measures | ||
| S&P | ||
| EPAC | MSCI AC | |
| SmallCap | World Index | |
| Index | ex USA | |
| R-Squared | 0.98 | 0.97 |
| Beta | 0.97 | 1.03 |
| These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | ||
| Ten Largest Holdings (% of total net assets) | ||
| Rheinmetall AG | Industrial | |
| Conglomerates | 1.2% | |
| Fletcher Building Ltd. | Construction | |
| Materials | 1.2 | |
| Delta Lloyd NV | Life & Health | |
| Insurance | 1.1 | |
| Helvetia Holding AG | Multi-line Insurance | 1.1 |
| Bilfinger Berger SE | Construction & | |
| Engineering | 1.1 | |
| DCC plc | Industrial | |
| Conglomerates | 1.1 | |
| Imtech NV | Construction & | |
| Engineering | 1.1 | |
| Computershare Ltd. | Data Processing & | |
| Outsourced | ||
| Services | 1.1 | |
| Freenet AG | Wireless | |
| Telecommunication | ||
| Services | 1.1 | |
| Semirara Mining Corp. | Coal & Consumable | |
| Class A | Fuels | 1.0 |
| Top Ten | 11.1% | |
| The holdings listed exclude any temporary cash investments and equity index products. | ||
Allocation by Region (% of equity exposure)
1 The expense ratio shown is from the prospectus dated February 24, 2011, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2011, the annualized expense ratio was 0.43%.
12
International Explorer Fund
| Market Diversification (% of equity exposure) | |||
| S&P | MSCI AC | ||
| EPAC | World | ||
| SmallCap | Index | ||
| Fund | Index | ex USA | |
| Europe | |||
| United Kingdom | 15.9% | 19.1% | 14.7% |
| Germany | 9.1 | 8.3 | 6.2 |
| France | 6.0 | 10.6 | 7.1 |
| Netherlands | 5.4 | 2.3 | 1.8 |
| Switzerland | 4.6 | 7.8 | 5.5 |
| Italy | 3.9 | 3.2 | 2.0 |
| Denmark | 2.5 | 0.9 | 0.7 |
| Ireland | 2.4 | 0.4 | 0.2 |
| Norway | 1.6 | 1.1 | 0.6 |
| Austria | 1.4 | 0.4 | 0.2 |
| Sweden | 1.2 | 3.0 | 2.3 |
| Belgium | 1.2 | 1.0 | 0.7 |
| Spain | 1.0 | 3.3 | 2.5 |
| Other | 0.7 | 2.8 | 1.1 |
| Subtotal | 56.9% | 64.2% | 45.6% |
| Pacific | |||
| Japan | 17.6% | 17.8% | 13.2% |
| Australia | 8.6 | 7.9 | 6.0 |
| Singapore | 2.2 | 1.4 | 1.2 |
| New Zealand | 1.2 | 0.2 | 0.1 |
| Other | 0.3 | 2.4 | 1.8 |
| Subtotal | 29.9% | 29.7% | 22.3% |
| Emerging Markets | |||
| Brazil | 2.5% | 0.0% | 3.6% |
| China | 2.4 | 0.5 | 4.0 |
| South Korea | 2.2 | 4.7 | 3.5 |
| Philippines | 1.3 | 0.0 | 0.1 |
| Indonesia | 1.2 | 0.0 | 0.6 |
| Other | 1.6 | 0.0 | 11.7 |
| Subtotal | 11.2% | 5.2% | 23.5% |
| Middle East | 0.0% | 0.7% | 0.5% |
| North America | |||
| Canada | 2.0% | 0.0% | 8.1% |
| Other | 0.0 | 0.2 | 0.0 |
| Subtotal | 2.0% | 0.2% | 8.1% |
13
International Explorer Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): October 31, 2000, Through April 30, 2011
Average Annual Total Returns: Periods Ended March 31, 2011
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| International Explorer Fund | 11/4/1996 | 20.58% | 3.51% | 9.77% |
Vanguard fund returns do not reflect the 2% fee on redemptions of shares held for less than two months.
See Financial Highlights for dividend and capital gains information.
14
International Explorer Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2011
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Common Stocks (94.4%)1 | |||
| Australia (7.6%) | |||
| Computershare Ltd. | 2,903,648 | 30,899 | |
| Iluka Resources Ltd. | 1,870,919 | 25,743 | |
| Ansell Ltd. | 1,509,948 | 23,099 | |
| Amcor Ltd. | 2,913,235 | 22,393 | |
| Sims Metal Management | |||
| Ltd. | 979,695 | 18,803 | |
| ^ | Fairfax Media Ltd. | 12,174,507 | 17,661 |
| Coca-Cola Amatil Ltd. | 1,130,897 | 14,824 | |
| Myer Holdings Ltd. | 3,829,131 | 13,298 | |
| Transfield Services Ltd. | 2,763,958 | 10,799 | |
| Mirvac Group | 6,561,450 | 9,156 | |
| * | James Hardie Industries | ||
| SE | 1,382,832 | 8,991 | |
| * | Dart Energy Ltd. | 9,259,723 | 7,685 |
| * | Mesoblast Ltd. | 617,926 | 5,527 |
| Adelaide Brighton Ltd. | 1,140,151 | 3,957 | |
| NRW Holdings Ltd. | 487,696 | 1,450 | |
| Seek Ltd. | 153,239 | 1,172 | |
| WorleyParsons Ltd. | 30,640 | 1,023 | |
| * | Karoon Gas Australia Ltd. | 92,776 | 675 |
| Domino’s Pizza Enterprises | |||
| Ltd. | 94,420 | 663 | |
| * | Transpacific Industries | ||
| Group Ltd. | 504,596 | 616 | |
| Challenger Ltd. | 103,975 | 551 | |
| SAI Global Ltd. | 98,004 | 539 | |
| * | AJ Lucas Group Ltd. | 55,762 | 104 |
| 219,628 | |||
| Austria (1.4%) | |||
| Mayr Melnhof Karton AG | 155,000 | 18,830 | |
| * | RHI AG | 324,000 | 11,568 |
| Rosenbauer International | |||
| AG | 113,000 | 6,869 | |
| Andritz AG | 11,209 | 1,158 | |
| Zumtobel AG | 26,175 | 949 | |
| Schoeller-Bleckmann | |||
| Oilfield Equipment AG | 5,240 | 530 | |
| 39,904 | |||
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Belgium (1.1%) | |||
| Nyrstar | 850,000 | 11,738 | |
| Tessenderlo Chemie NV | 250,000 | 9,948 | |
| EVS Broadcast Equipment | |||
| SA | 110,000 | 7,535 | |
| Cie d’Entreprises CFE | 13,932 | 1,207 | |
| ^ | UCB SA | 23,324 | 1,127 |
| D’ieteren SA/NV | 12,315 | 895 | |
| Melexis NV | 28,705 | 549 | |
| ^,* | Nyrstar | 350,000 | 2 |
| * | Tessenderlo Chemie NV | 500 | — |
| 33,001 | |||
| Brazil (2.4%) | |||
| Localiza Rent a Car SA | 1,172,038 | 20,152 | |
| Cia Brasileira de | |||
| Distribuicao Grupo Pao | |||
| de Acucar ADR | 331,008 | 15,048 | |
| Cyrela Brazil Realty SA | |||
| Empreendimentos e | |||
| Participacoes | 1,129,037 | 11,964 | |
| Anhanguera Educacional | |||
| Participacoes SA | 475,355 | 10,615 | |
| PDG Realty SA | |||
| Empreendimentos e | |||
| Participacoes | 1,766,747 | 10,399 | |
| * | Arezzo Industria e | ||
| Comercio SA | 56,900 | 875 | |
| Totvs SA | 40,400 | 773 | |
| CETIP SA - Balcao | |||
| Organizado de Ativos e | |||
| Derivativos | 30,800 | 506 | |
| Brasil Insurance | |||
| Participacoes e | |||
| Administracao SA | 200 | 252 | |
| 70,584 | |||
| Canada (2.0%) | |||
| * | Sino-Forest Corp. | 1,156,052 | 28,726 |
| Niko Resources Ltd. | 334,368 | 28,254 | |
| 56,980 | |||
15
International Explorer Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| China (2.3%) | |||
| Ports Design Ltd. | 5,670,000 | 15,645 | |
| Parkson Retail Group Ltd. | 5,593,500 | 8,606 | |
| * | Leoch International | ||
| Technology Ltd. | 17,090,000 | 8,567 | |
| * | Shougang Concord | ||
| International | |||
| Enterprises Co. Ltd. | 40,272,000 | 5,359 | |
| Evergreen International | |||
| Holdings Ltd. | 10,475,000 | 5,182 | |
| * | Concord Medical Services | ||
| Holdings Ltd. ADR | 847,938 | 4,613 | |
| Intime Department Store | |||
| Group Co. Ltd. | 2,526,000 | 3,948 | |
| Guangzhou Automobile | |||
| Group Co. Ltd. | 3,469,870 | 3,926 | |
| Beijing Capital | |||
| International Airport | |||
| Co. Ltd. | 6,326,000 | 3,124 | |
| * | GZI Transport Ltd. | 5,634,000 | 3,116 |
| China National Building | |||
| Material Co. Ltd. | 1,320,000 | 2,793 | |
| China Automation Group | |||
| Ltd. | 857,000 | 751 | |
| ^ | BaWang International | ||
| Group Holding Ltd. | 2,588,000 | 724 | |
| ^ | Microport Scientific Corp. | 913,000 | 671 |
| ^,* | Boshiwa International | ||
| Holding Ltd. | 605,000 | 393 | |
| 67,418 | |||
| Denmark (2.4%) | |||
| Tryg A/S | 360,000 | 23,012 | |
| Sydbank A/S | 650,000 | 18,835 | |
| * | Jyske Bank A/S | 370,000 | 18,389 |
| Solar A/S Class B | 89,258 | 7,817 | |
| DSV A/S | 39,067 | 1,022 | |
| 69,075 | |||
| Finland (0.1%) | |||
| Tikkurila Oyj | 35,557 | 847 | |
| Nokian Renkaat Oyj | 11,475 | 595 | |
| 1,442 | |||
| France (5.5%) | |||
| ^ | Bourbon SA | 575,000 | 27,252 |
| ^ | Groupe Eurotunnel SA | 2,200,000 | 23,919 |
| Saft Groupe SA | 461,000 | 21,171 | |
| * | Club Mediterranee | 830,000 | 19,339 |
| Rubis | 124,008 | 15,228 | |
| APERAM | 280,000 | 11,788 | |
| * | Medica SA | 388,077 | 8,004 |
| Pierre & Vacances | 84,283 | 7,520 | |
| * | Store Electronic | 390,000 | 6,793 |
| Sword Group | 179,000 | 5,864 | |
| Meetic | 203,420 | 4,588 | |
| Bollore | 4,923 | 1,237 | |
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Wendel SA | 8,412 | 1,053 | |
| Eurazeo | 11,945 | 994 | |
| Imerys SA | 12,574 | 974 | |
| Eurofins Scientific | 8,004 | 862 | |
| Bureau Veritas SA | 9,864 | 851 | |
| CFAO SA | 17,710 | 712 | |
| ICADE | 5,288 | 678 | |
| Seche Environnement SA | 6,821 | 652 | |
| Sechilienne-Sidec | 21,836 | 639 | |
| 160,118 | |||
| Germany (8.6%) | |||
| ^ | Rheinmetall AG | 397,313 | 35,618 |
| * | Bilfinger Berger SE | 330,000 | 31,768 |
| ^ | Freenet AG | 2,400,000 | 30,520 |
| Brenntag AG | 230,000 | 28,256 | |
| ^,* | MTU Aero Engines | ||
| Holding AG | 317,081 | 24,273 | |
| Wirecard AG | 648,000 | 12,371 | |
| * | SAF-Holland SA | 995,573 | 12,037 |
| Grenkeleasing AG | 198,000 | 11,824 | |
| * | Tipp24 SE | 200,000 | 9,605 |
| ^ | Aixtron SE NA | 220,000 | 9,343 |
| Takkt AG | 498,200 | 8,577 | |
| * | XING AG | 110,000 | 7,819 |
| CompuGroup Medical AG | 429,161 | 7,339 | |
| * | Tom Tailor Holding AG | 370,000 | 7,268 |
| Draegerwerk AG & Co. | |||
| KGaA | 75,000 | 6,426 | |
| ^ | Bijou Brigitte AG | 19,388 | 2,790 |
| ^ | Delticom AG | 8,024 | 872 |
| Stratec Biomedical | |||
| Systems AG | 18,544 | 836 | |
| Rhoen Klinikum AG | 31,222 | 714 | |
| 248,256 | |||
| Greece (0.1%) | |||
| Eurobank Properties Real | |||
| Estate Investment Co. | 300,000 | 2,662 | |
| Hong Kong (0.3%) | |||
| Dah Sing Banking Group | |||
| Ltd. | 4,433,000 | 7,175 | |
| ASM Pacific Technology | |||
| Ltd. | 71,600 | 964 | |
| Techtronic Industries Co. | 571,500 | 782 | |
| 8,921 | |||
| India (0.9%) | |||
| * | Cairn India Ltd. | 2,322,073 | 18,347 |
| Shriram Transport Finance | |||
| Co. Ltd. | 451,549 | 7,923 | |
| Jyothy Laboratories Ltd. | 99,138 | 465 | |
| 26,735 | |||
16
International Explorer Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Indonesia (1.1%) | |||
| Bank Mandiri Tbk PT | 16,671,289 | 13,943 | |
| Ciputra Property | |||
| TBK PT | 166,055,500 | 8,074 | |
| United Tractors Tbk PT | 2,040,500 | 5,550 | |
| Semen Gresik Persero | |||
| Tbk PT | 4,873,500 | 5,415 | |
| 32,982 | |||
| Ireland (2.3%) | |||
| DCC plc | 950,000 | 31,665 | |
| Grafton Group plc | 2,200,000 | 11,565 | |
| * | Irish Continental Group | ||
| plc | 433,529 | 11,087 | |
| * | Smurfit Kappa Group plc | 691,500 | 9,414 |
| IFG Group plc | 1,577,929 | 3,296 | |
| 67,027 | |||
| Italy (3.8%) | |||
| Azimut Holding SPA | 1,999,998 | 25,575 | |
| Prysmian SPA | 1,000,000 | 23,605 | |
| * | CIR-Compagnie Industriali | ||
| Riunite SPA | 6,750,000 | 17,704 | |
| Ansaldo STS SPA | 1,100,000 | 17,001 | |
| Davide Campari-Milano | |||
| SPA | 1,300,000 | 9,360 | |
| * | Natuzzi SPA ADR | 1,708,450 | 7,534 |
| * | Sorin SPA | 1,960,000 | 5,634 |
| Iren SPA | 570,595 | 1,178 | |
| Immobiliare Grande | |||
| Distribuzione | 354,507 | 856 | |
| 108,447 | |||
| Japan (16.2%) | |||
| OSAKA Titanium | |||
| Technologies Co. | 314,200 | 24,404 | |
| ^ | Modec Inc. | 1,120,700 | 20,737 |
| Musashi Seimitsu | |||
| Industry Co. Ltd. | 805,100 | 19,433 | |
| Lintec Corp. | 582,100 | 17,227 | |
| Koito Manufacturing | |||
| Co. Ltd. | 1,042,000 | 16,386 | |
| Nifco Inc. | 626,600 | 15,843 | |
| Tokai Tokyo Financial | |||
| }Holdings Inc. | 5,054,000 | 15,148 | |
| Asahi Diamond Industrial | |||
| Co. Ltd. | 701,000 | 14,582 | |
| ^ | Nippon Thompson | ||
| Co. Ltd. | 1,872,000 | 13,934 | |
| Nihon Parkerizing Co. Ltd. | 977,000 | 13,590 | |
| ^ | Nichi-iko Pharmaceutical | ||
| Co. Ltd. | 516,700 | 13,356 | |
| Tsuruha Holdings Inc. | 276,400 | 13,075 | |
| Tsumura & Co. | 415,300 | 12,917 | |
| Arcs Co. Ltd. | 820,900 | 12,715 | |
| JSP Corp. | 710,500 | 12,654 | |
| Glory Ltd. | 546,500 | 12,002 | |
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Nitta Corp. | 625,700 | 11,215 | |
| Kuroda Electric Co. Ltd. | 990,900 | 11,042 | |
| Miura Co. Ltd. | 370,100 | 10,515 | |
| Daido Steel Co. Ltd. | 1,838,000 | 10,506 | |
| Nabtesco Corp. | 391,800 | 10,030 | |
| Trusco Nakayama Corp. | 583,200 | 9,873 | |
| Accordia Golf Co. Ltd. | 15,214 | 9,813 | |
| Shinko Plantech Co. Ltd. | 814,300 | 9,124 | |
| NEC Networks & System | |||
| Integration Corp. | 676,700 | 8,842 | |
| Exedy Corp. | 266,200 | 8,504 | |
| Aica Kogyo Co. Ltd. | 636,000 | 8,417 | |
| Hitachi Transport System | |||
| Ltd. | 601,000 | 8,351 | |
| Shinmaywa Industries Ltd. | 1,868,000 | 7,972 | |
| Takasago International | |||
| Corp. | 1,461,000 | 7,600 | |
| Moshi Moshi Hotline Inc. | 412,000 | 7,559 | |
| Yushin Precision | |||
| Equipment Co. Ltd. | 385,300 | 7,138 | |
| Tsutsumi Jewelry Co. Ltd. | 271,000 | 6,762 | |
| Hisaka Works Ltd. | 562,000 | 6,352 | |
| Sumida Corp. | 603,400 | 5,767 | |
| Nidec Copal Corp. | 416,500 | 4,857 | |
| Toyo Tanso Co. Ltd. | 81,700 | 4,538 | |
| Icom Inc. | 130,000 | 3,853 | |
| Nishimatsuya Chain | |||
| Co. Ltd. | 392,700 | 3,323 | |
| Fujikura Kasei Co. Ltd. | 486,200 | 2,846 | |
| Nafco Co. Ltd. | 141,300 | 2,442 | |
| Daihatsu Diesel | |||
| Manufacturing Co. Ltd. | 214,000 | 1,433 | |
| * | Cosmos Pharmaceutical | ||
| Corp. | 28,300 | 1,254 | |
| Disco Corp. | 18,000 | 1,235 | |
| Toyota Boshoku Corp. | 78,700 | 1,226 | |
| Dena Co. Ltd. | 29,200 | 1,096 | |
| Mori Seiki Co. Ltd. | 79,700 | 1,026 | |
| Benesse Holdings Inc. | 24,600 | 1,023 | |
| Teijin Ltd. | 196,000 | 939 | |
| Hino Motors Ltd. | 194,000 | 920 | |
| Fuji Heavy Industries Ltd. | 123,000 | 916 | |
| Shionogi & Co. Ltd. | 55,800 | 905 | |
| * | Yamaha Motor Co. Ltd. | 46,600 | 896 |
| Tokyo Ohka Kogyo Co. Ltd. | 42,300 | 895 | |
| Hoshizaki Electric Co. Ltd. | 45,700 | 888 | |
| Start Today Co. Ltd. | 48,700 | 851 | |
| Message Co. Ltd. | 295 | 847 | |
| Kakaku.com Inc. | 139 | 801 | |
| ABC-Mart Inc. | 21,300 | 798 | |
| Hitachi Metals Ltd. | 58,000 | 764 | |
| IBJ Leasing Co. Ltd. | 29,900 | 738 | |
| Mitsui-Soko Co. Ltd. | 194,000 | 720 | |
| Towa Pharmaceutical | |||
| Co. Ltd. | 13,300 | 693 |
17
International Explorer Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Dainippon Screen | |||
| Manufacturing Co. Ltd. | 71,000 | 659 | |
| Osaka Securities Exchange | |||
| Co. Ltd. | 129 | 654 | |
| Amada Co. Ltd. | 80,000 | 642 | |
| Nippon Denko Co. Ltd. | 97,000 | 634 | |
| Matsui Securities Co. Ltd. | 127,600 | 629 | |
| Jafco Co. Ltd. | 24,400 | 625 | |
| JSR Corp. | 29,700 | 625 | |
| ^ | Torishima Pump | ||
| Manufacturing Co. Ltd. | 38,800 | 620 | |
| Toyo Engineering Corp. | 153,000 | 618 | |
| Showa Denko KK | 297,000 | 593 | |
| Point Inc. | 12,370 | 566 | |
| * | CyberAgent Inc. | 157 | 565 |
| Megachips Corp. | 32,500 | 555 | |
| Proto Corp. | 14,600 | 547 | |
| * | Kenedix Inc. | 2,970 | 543 |
| Nihon Nohyaku Co. Ltd. | 118,000 | 529 | |
| Yaskawa Electric Corp. | 44,000 | 515 | |
| Japan Petroleum | |||
| Exploration Co. | 10,500 | 515 | |
| Square Enix Holdings | |||
| Co. Ltd. | 29,300 | 488 | |
| Sumitomo Real Estate | |||
| Sales Co. Ltd. | 10,040 | 409 | |
| Acom Co. Ltd. | 24,010 | 352 | |
| 467,991 | |||
| Luxembourg (0.5%) | |||
| * | L’Occitane International | ||
| SA | 5,113,750 | 12,260 | |
| * | Reinet Investments SCA | 45,253 | 805 |
| *,2 | O’Key Group SA GDR | 68,559 | 722 |
| 13,787 | |||
| Mexico (0.2%) | |||
| * | Desarrolladora Homex | ||
| SAB de CV ADR | 205,715 | 5,807 | |
| Netherlands (5.2%) | |||
| ^ | Delta Lloyd NV | 1,250,000 | 32,888 |
| ^ | Imtech NV | 820,252 | 31,151 |
| Fugro NV | 300,000 | 27,498 | |
| ^,* | TomTom NV | 2,100,000 | 18,994 |
| Koninklijke Ten Cate NV | 270,000 | 12,497 | |
| Sligro Food Group NV | 300,000 | 11,145 | |
| CSM | 280,000 | 10,726 | |
| ^,* | LBi International NV | 1,466,670 | 3,935 |
| HAL Trust | 4,912 | 771 | |
| 149,605 | |||
| New Zealand (1.2%) | |||
| Fletcher Building Ltd. | 3,825,586 | 28,519 | |
| * | Fletcher Building Ltd. | ||
| (Australia Shares) | 757,764 | 5,605 | |
| 34,124 | |||
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Norway (1.6%) | |||
| ^ | Storebrand ASA | 1,170,997 | 12,162 |
| * | Statoil Fuel & Retail ASA | 810,000 | 9,081 |
| * | Morpol ASA | 2,310,000 | 8,951 |
| ^,* | Dockwise Ltd. | 262,776 | 7,617 |
| * | Pronova BioPharma AS | 3,200,000 | 5,229 |
| ^ | Kongsberg Gruppen AS | 57,859 | 1,810 |
| 44,850 | |||
| Philippines (1.2%) | |||
| Semirara Mining Corp. | |||
| Class A | 5,941,790 | 30,312 | |
| Aboitiz Equity Ventures | |||
| Inc. | 6,059,900 | 5,618 | |
| 35,930 | |||
| Russia (0.0%) | |||
| * | Pharmstandard OJSC GDR | 26,344 | 680 |
| Singapore (2.1%) | |||
| * | STX OSV Holdings Ltd. | 8,862,000 | 8,138 |
| First Resources Ltd. | 7,100,000 | 8,022 | |
| * | Biosensors International | ||
| Group Ltd. | 6,834,000 | 7,543 | |
| Mapletree Industrial | |||
| Trust | 8,311,000 | 7,345 | |
| SIA Engineering Co. Ltd. | 1,472,000 | 5,017 | |
| Neptune Orient Lines | |||
| Ltd. | 2,754,000 | 4,242 | |
| Yanlord Land Group Ltd. | 3,473,000 | 4,120 | |
| UOL Group Ltd. | 1,003,000 | 3,971 | |
| SATS Ltd. | 1,860,000 | 3,925 | |
| SembCorp Industries Ltd. | 863,000 | 3,813 | |
| * | Tiger Airways Holdings | ||
| Ltd. | 2,815,000 | 3,453 | |
| * | Indofood Agri Resources | ||
| Ltd. | 592,000 | 1,009 | |
| Straits Asia Resources | |||
| Ltd. | 290,000 | 701 | |
| CapitaCommercial Trust | 458,000 | 540 | |
| 61,839 | |||
| South Africa (0.0%) | |||
| Aquarius Platinum Ltd. | 130,938 | 755 | |
| South Korea (2.2%) | |||
| * | BS Financial Group Inc. | 958,010 | 13,946 |
| Samsung SDI Co. Ltd. | 65,669 | 11,767 | |
| Mando Corp. | 47,885 | 8,421 | |
| Hankook Tire Co. Ltd. | 195,190 | 7,840 | |
| Hyundai Glovis Co. Ltd. | 50,932 | 7,279 | |
| Hyundai Development Co. | 246,210 | 6,744 | |
| * | Taewoong Co. Ltd. | 62,465 | 2,766 |
| Daum Communications | |||
| Corp. | 10,025 | 1,028 | |
| LG Household & Health | |||
| Care Ltd. | 1,846 | 742 | |
18
International Explorer Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| CJ O Shopping Co. Ltd. | 2,502 | 537 | |
| Green Cross Corp. | 3,959 | 514 | |
| Hotel Shilla Co. Ltd. | 19,130 | 470 | |
| 62,054 | |||
| Spain (0.8%) | |||
| Tecnicas Reunidas SA | 210,000 | 13,191 | |
| * | Codere SA | 450,000 | 7,286 |
| Pescanova SA | 82,274 | 3,422 | |
| 23,899 | |||
| Sweden (1.2%) | |||
| Byggmax Group AB | 2,500,000 | 24,022 | |
| Kungsleden AB | 810,718 | 8,554 | |
| Bjoern Borg AB | 66,982 | 656 | |
| Bjoern Borg AB Rights | |||
| Exp. 05/16/11 | 133,964 | 58 | |
| 33,290 | |||
| Switzerland (4.5%) | |||
| * | Helvetia Holding AG | 70,000 | 32,866 |
| Kuoni Reisen Holding AG | 50,000 | 23,008 | |
| * | Gategroup Holding AG | 350,000 | 18,758 |
| * | Forbo Holding AG | 20,000 | 16,366 |
| Orior AG | 220,000 | 13,380 | |
| Bank Sarasin & Cie AG | |||
| Class B | 195,507 | 8,591 | |
| Implenia AG | 200,474 | 7,271 | |
| Banque Cantonale | |||
| Vaudoise | 10,000 | 6,148 | |
| * | Dufry Group | 12,733 | 1,666 |
| * | Temenos Group AG | 32,124 | 1,069 |
| Straumann Holding AG | 3,748 | 981 | |
| Nobel Biocare Holding AG | 25,912 | 576 | |
| 130,680 | |||
| Taiwan (0.4%) | |||
| * | Bank of Kaohsiung | 16,143,000 | 7,896 |
| Hung Poo Real Estate | |||
| Development Corp. | 2,807,000 | 3,372 | |
| 11,268 | |||
| Thailand (0.1%) | |||
| Quality Houses PCL | 28,810,300 | 2,263 | |
| United Kingdom (15.1%) | |||
| * | Premier Oil plc | 775,000 | 26,048 |
| * | Sports Direct International | ||
| plc | 6,566,667 | 22,132 | |
| Elementis plc | 5,800,000 | 16,000 | |
| ^,* | CSR plc | 2,550,000 | 15,957 |
| * | Gulfsands Petroleum plc | 3,300,000 | 15,901 |
| Ultra Electronics | |||
| Holdings plc | 532,504 | 15,376 | |
| * | London Mining plc | 1,966,210 | 14,253 |
| Homeserve plc | 1,692,870 | 13,831 | |
| Atkins WS plc | 1,050,000 | 13,689 | |
| Millennium & Copthorne | |||
| Hotels plc | 1,545,315 | 13,667 | |
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Dechra Pharmaceuticals | |||
| plc | 1,483,982 | 11,911 | |
| * | SIG plc | 5,000,000 | 11,740 |
| JD Wetherspoon plc | 1,300,000 | 9,885 | |
| Grainger plc | 4,936,145 | 9,508 | |
| John Wood Group plc | 800,000 | 9,283 | |
| * | Punch Taverns plc | 7,000,000 | 9,209 |
| William Hill plc | 2,450,082 | 9,160 | |
| Telecom Plus plc | 1,100,000 | 8,951 | |
| Devro plc | 1,860,201 | 8,897 | |
| * | Highland Gold Mining | ||
| Ltd. | 3,000,000 | 8,689 | |
| CPP Group plc | 3,855,275 | 8,215 | |
| Booker Group plc | 8,000,000 | 8,045 | |
| Inchcape plc | 1,300,000 | 7,936 | |
| * | BTG plc | 1,878,398 | 7,814 |
| National Express Group | |||
| plc | 1,609,166 | 7,085 | |
| Petropavlovsk plc | 450,000 | 6,743 | |
| * | LMS Capital plc | 6,150,108 | 6,503 |
| Eco Animal Health | |||
| Group plc | 1,618,166 | 6,142 | |
| PV Crystalox Solar plc | 6,769,272 | 6,111 | |
| * | QinetiQ Group plc | 3,000,000 | 6,075 |
| Go-Ahead Group plc | 253,964 | 6,010 | |
| Informa plc | 859,200 | 5,995 | |
| Paragon Group of Cos. | |||
| plc | 1,905,916 | 5,511 | |
| Micro Focus International | |||
| plc | 850,630 | 5,290 | |
| Pace plc | 1,886,770 | 5,076 | |
| RM plc | 2,034,198 | 5,028 | |
| Hunting plc | 359,049 | 4,861 | |
| Travis Perkins plc | 258,937 | 4,664 | |
| ^ | Lamprell plc | 700,000 | 4,346 |
| Forth Ports plc | 127,658 | 3,460 | |
| * | Findel plc | 32,007,307 | 3,231 |
| * | Cove Energy plc | 2,050,923 | 3,215 |
| International Personal | |||
| Finance plc | 500,000 | 3,080 | |
| * | Wolfson Microelectronics | ||
| plc | 761,873 | 3,030 | |
| Photo-Me International | |||
| plc | 3,947,604 | 3,002 | |
| Carillion plc | 400,000 | 2,625 | |
| Speedy Hire plc | 5,000,000 | 2,614 | |
| Morgan Crucible Co. plc | 500,000 | 2,599 | |
| * | BowLeven plc | 500,000 | 2,453 |
| Future plc | 7,510,000 | 2,441 | |
| * | AEA Technology plc | 22,075,045 | 1,724 |
| Babcock International | |||
| Group plc | 154,627 | 1,656 | |
| * | Alexon Group plc | 7,303,119 | 1,428 |
| Chemring Group plc | 119,856 | 1,344 |
19
International Explorer Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Domino’s Pizza UK & | |||
| IRL plc | 158,471 | 1,226 | |
| ^,* | Yell Group plc | 10,000,000 | 1,192 |
| * | Helphire plc | 5,200,000 | 1,166 |
| Jupiter Fund | |||
| Management plc | 196,657 | 1,004 | |
| Kier Group plc | 43,206 | 963 | |
| Savills plc | 138,255 | 927 | |
| Rightmove plc | 51,573 | 914 | |
| Hansteen Holdings plc | 644,806 | 891 | |
| Thomas Cook Group plc | 302,926 | 869 | |
| Persimmon plc | 103,815 | 840 | |
| James Fisher & Sons plc | 90,750 | 836 | |
| Close Brothers Group plc | 55,903 | 758 | |
| * | Debenhams plc | 663,686 | 758 |
| N Brown Group plc | 147,484 | 749 | |
| Land Securities Group plc | 56,876 | 748 | |
| Ashmore Group plc | 102,806 | 642 | |
| ^ | HMV Group plc | 3,445,971 | 620 |
| * | Cookson Group plc | 47,549 | 571 |
| Mears Group plc | 138,879 | 560 | |
| * | Vallar plc | 21,944 | 511 |
| Hampson Industries plc | 468,311 | 206 | |
| * | Pinnacle Staffing Group | ||
| plc | 673,983 | 10 | |
| * | I-Mate plc | 2,100,000 | 4 |
| 436,404 | |||
| Total Common Stocks | |||
| (Cost $2,131,967) | 2,728,406 | ||
| Market | ||
| Value | ||
| Shares | ($000) | |
| Temporary Cash Investments (12.6%)1 | ||
| Money Market Fund (12.3%) | ||
| 3,4 Vanguard Market | ||
| Liquidity Fund, | ||
| 0.179% | 355,596,852 | 355,597 |
| Face | ||
| Amount | ||
| ($000) | ||
| Repurchase Agreement (0.1%) | ||
| Goldman, Sachs & Co. | ||
| 0.050%, 5/2/11 (Dated | ||
| 4/29/11, Repurchase Value | ||
| $1,500,000, collateralized | ||
| by Federal National | ||
| Mortgage Assn. | ||
| 4.500%, 10/1/40) | 1,500 | 1,500 |
| U.S. Government and Agency Obligations (0.2%) | ||
| 5,6 Federal Home Loan Bank | ||
| Discount Notes, | ||
| 0.210%, 6/3/11 | 8,000 | 7,999 |
| Total Temporary Cash Investments | ||
| (Cost $365,095) | 365,096 | |
| Total Investments (107.0%) | ||
| (Cost $2,497,062) | 3,093,502 | |
| Other Assets and Liabilities (-7.0%) | ||
| Other Assets | 32,555 | |
| Liabilities4 | (235,949) | |
| (203,394) | ||
| Net Assets (100%) | ||
| Applicable to 161,238,087 outstanding | ||
| $.001 par value shares of beneficial | ||
| interest (unlimited authorization) | 2,890,108 | |
| Net Asset Value Per Share | $17.92 | |
20
International Explorer Fund
| At April 30, 2011, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 2,249,919 |
| Undistributed Net Investment Income | 6,069 |
| Accumulated Net Realized Gains | 32,760 |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 596,440 |
| Futures Contracts | (522) |
| Forward Currency Contracts | 4,319 |
| Foreign Currencies | 1,123 |
| Net Assets | 2,890,108 |
See Note A in Notes to Financial Statements.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $212,024,000.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 97.4% and 9.6%, respectively, of net assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At April 30, 2011, the value of this security represented 0.0% of net assets.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
4 Includes $222,037,000 of collateral received for securities on loan.
5 The issuer operates under a congressional charter; its securities are not backed by the full faith and credit of the U.S. government.
6 Securities with a value of $7,999,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
21
International Explorer Fund
Statement of Operations
| Six Months Ended | |
| April 30, 2011 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1,2 | 18,312 |
| Interest2 | 164 |
| Security Lending | 731 |
| Total Income | 19,207 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 2,524 |
| Performance Adjustment | 483 |
| The Vanguard Group—Note C | |
| Management and Administrative | 2,029 |
| Marketing and Distribution | 307 |
| Custodian Fees | 293 |
| Shareholders’ Reports | 10 |
| Trustees’ Fees and Expenses | 2 |
| Total Expenses | 5,648 |
| Expenses Paid Indirectly | (26) |
| Net Expenses | 5,622 |
| Net Investment Income | 13,585 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 131,113 |
| Futures Contracts | 5,566 |
| Foreign Currencies and Forward Currency Contracts | 4,757 |
| Realized Net Gain (Loss) | 141,436 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities | 215,842 |
| Futures Contracts | (419) |
| Foreign Currencies and Forward Currency Contracts | 1,914 |
| Change in Unrealized Appreciation (Depreciation) | 217,337 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 372,358 |
1 Dividends are net of foreign withholding taxes of $1,163,000.
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $0, $153,000, and ($804,000) respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
22
International Explorer Fund
Statement of Changes in Net Assets
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2011 | 2010 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 13,585 | 36,580 |
| Realized Net Gain (Loss) | 141,436 | 109,840 |
| Change in Unrealized Appreciation (Depreciation) | 217,337 | 220,146 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 372,358 | 366,566 |
| Distributions | ||
| Net Investment Income | (35,218) | (29,545) |
| Realized Capital Gain | — | — |
| Total Distributions | (35,218) | (29,545) |
| Capital Share Transactions | ||
| Issued | 337,068 | 661,913 |
| Issued in Lieu of Cash Distributions | 31,579 | 26,292 |
| Redeemed1 | (251,342) | (501,045) |
| Net Increase (Decrease) from Capital Share Transactions | 117,305 | 187,160 |
| Total Increase (Decrease) | 454,445 | 524,181 |
| Net Assets | ||
| Beginning of Period | 2,435,663 | 1,911,482 |
| End of Period2 | 2,890,108 | 2,435,663 |
1 Net of redemption fees for fiscal 2011 and 2010 of $57,000 and $215,000, respectively.
2 Net Assets—End of Period includes undistributed net investment income of $6,069,000 and $26,689,000.
See accompanying Notes, which are an integral part of the Financial Statements.
23
International Explorer Fund
Financial Highlights
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 |
| Net Asset Value, Beginning of Period | $15.81 | $13.55 | $9.52 | $24.70 | $21.50 | $17.99 |
| Investment Operations | ||||||
| Net Investment Income | .082 | .237 | .238 | .470 | .480 | .520 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 2.252 | 2.225 | 4.148 | (12.110) | 4.950 | 4.740 |
| Total from Investment Operations | 2.334 | 2.462 | 4.386 | (11.640) | 5.430 | 5.260 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.224) | (.202) | (.356) | (.620) | (.580) | (.400) |
| Distributions from Realized Capital Gains | — | — | — | (2.920) | (1.650) | (1.350) |
| Total Distributions | (.224) | (.202) | (.356) | (3.540) | (2.230) | (1.750) |
| Net Asset Value, End of Period | $17.92 | $15.81 | $13.55 | $9.52 | $24.70 | $21.50 |
| Total Return1 | 14.91% | 18.38% | 47.88% | -53.80% | 27.18% | 31.31% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $2,890 | $2,436 | $1,911 | $1,079 | $3,252 | $2,668 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets2 | 0.43% | 0.39% | 0.45% | 0.36% | 0.35% | 0.44% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 1.03% | 1.67% | 2.10% | 2.59% | 1.99% | 2.56% |
| Portfolio Turnover Rate | 44% | 51% | 52% | 29% | 45% | 32% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.00%, 0.00%, (0.01%), 0.00% and 0.02%.
See accompanying Notes, which are an integral part of the Financial Statements.
24
International Explorer Fund
Notes to Financial Statements
Vanguard International Explorer Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of United States corporations.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.
The fund also enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts or to protect the value of securities and related receivables and payables against changes in foreign exchange rates. The primary risk associated with the fund’s use of these contracts is that a counterparty will fail to fulfill its obligation to pay gains due to the fund under the contracts. Counterparty risk is mitigated by entering into forward currency contracts only with highly rated counterparties, by a master netting arrangement between the fund and the counterparty,
25
International Explorer Fund
and by the posting of collateral by the counterparty. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has posted. Any securities posted as collateral for open contracts are noted in the Statement of Net Assets.
Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.
4. Repurchase Agreements: The fund invests in repurchase agreements. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings.
5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2007–2010), and for the period ended April 30, 2011, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
7. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents fees charged to borrowers plus income earned on investing cash collateral, less expenses associated with the loan.
8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on redemptions of capital shares are credited to paid-in capital.
B. Schroder Investment Management North America Inc., and Wellington Management Co., LLP, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Schroder Investment Management North America Inc. is subject to quarterly adjustments based on the fund’s performance for the preceding three years relative to the S&P EPAC SmallCap Index. In accordance with the advisory contract entered into with Wellington Management Co., LLP, in June 2010, beginning May 1, 2011, the investment advisory fee will be subject to quarterly adjustments based on performance since July 31, 2010, relative to the S&P EPAC SmallCap Index.
26
International Explorer Fund
The Vanguard Group manages the cash reserves of the fund on an at-cost basis.
For the six months ended April 30, 2011, the aggregate investment advisory fee represented an effective annual basic rate of 0.19% of the fund’s average net assets, before an increase of $483,000 (0.04%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2011, the fund had contributed capital of $448,000 to Vanguard (included in Other Assets), representing 0.00% of the fund’s net assets and 0.18% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. The fund’s custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended April 30, 2011, these arrangements reduced the fund’s management and administrative expenses by $26,000. The total expense reduction represented an effective annual rate of 0.00% of the fund’s average net assets.
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
The following table summarizes the fund’s investments as of April 30, 2011, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 145,518 | 2,582,884 | 4 |
| Temporary Cash Investments | 355,597 | 9,499 | — |
| Futures Contracts—Liabilities1 | (247) | — | — |
| Forward Currency Contracts—Assets | — | 4,319 | — |
| Total | 500,868 | 2,596,702 | 4 |
| 1 Represents variation margin on the last day of the reporting period. | |||
27
International Explorer Fund
The following table summarizes changes in investments valued based on Level 3 inputs during the six months ended April 30, 2011:
| Investments in | |
| Common Stocks | |
| Amount Valued Based on Level 3 Inputs | ($000) |
| Balance as of October 31, 2010 | 4 |
| Change in Unrealized Appreciation (Depreciation) | — |
| Balance as of April 30, 2010 | 4 |
F. At April 30, 2011, the fair values of derivatives were reflected in the Statement of Net Assets as follows:
| Foreign | |||
| Equity | Exchange | ||
| Contracts | Contracts | Total | |
| Statement of Net Assets Caption | ($000) | ($000) | ($000) |
| Other Assets | — | 4,319 | 4,319 |
| Liabilities1 | (247) | — | (247) |
| 1 Represents variation margin on the last day of the reporting period. | |||
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended April 30, 2011, were:
| Foreign | |||
| Equity | Exchange | ||
| Contracts | Contracts | Total | |
| Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) |
| Futures Contracts | 5,566 | — | 5,566 |
| Forward Currency Contracts | — | 4,828 | 4,828 |
| Realized Net Gain (Loss) on Derivatives | 5,566 | 4,828 | 10,394 |
| Change in Unrealized Appreciation (Depreciation) on Derivatives | |||
| Futures Contracts | (419) | — | (419) |
| Forward Currency Contracts | — | 1,478 | 1,478 |
| Change in Unrealized Appreciation (Depreciation) on Derivatives | (419) | 1,478 | 1,059 |
28
International Explorer Fund
At April 30, 2011, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
| ($000) | ||||
| Aggregate | ||||
| Number of | Settlement | Unrealized | ||
| Long (Short) | Value | Appreciation | ||
| Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
| Topix Index | June 2011 | 299 | 31,451 | (2,997) |
| Dow Jones EURO STOXX 50 Index | June 2011 | 582 | 25,446 | 1,190 |
| S&P ASX 200 Index | June 2011 | 164 | 21,573 | 864 |
| FTSE 100 Index | June 2011 | 101 | 10,163 | 421 |
Unrealized appreciation (depreciation) on open FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.
At April 30, 2011, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.
| Unrealized | ||||||
| Contract | Appreciation | |||||
| Settlement | Contract Amount (000) | (Depreciation) | ||||
| Counterparty | Date | Receive | Deliver | ($000) | ||
| Brown Brothers Harriman & Co. | 6/15/11 | JPY | 2,820,520 | USD | 34,769 | 640 |
| Brown Brothers Harriman & Co. | 6/22/11 | EUR | 16,173 | USD | 23,959 | 1,390 |
| Brown Brothers Harriman & Co. | 6/22/11 | AUD | 18,464 | USD | 20,065 | 1,997 |
| Brown Brothers Harriman & Co. | 6/22/11 | GBP | 5,774 | USD | 9,623 | 292 |
AUD—Australian dollar.
EUR—Euro.
GBP—British pound.
JPY—Japanese yen.
USD—U.S. dollar.
At April 30, 2011, the counterparty had deposited in a segregated account cash with a value sufficient to cover substantially all amounts due to the fund in connection with open forward currency contracts.
29
International Explorer Fund
G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2011, the fund realized net foreign currency losses of $71,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to undistributed net investment income. Certain of the fund’s investments are in securities considered to be “passive foreign investment companies,” for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the six months ended April 30, 2011, the fund realized gains on the sale of passive foreign investment companies of $1,084,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized gains to undistributed net investment income. Unrealized appreciation through the most recent mark-to-market date for tax purposes on passive foreign investment company holdings at April 30, 2011, was $2,113,000, all of which has been distributed and is reflected in the balance of undistributed net investment income.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2010, the fund had available capital loss carryforwards totaling $105,115,000 to offset future net capital gains through October 31, 2017. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2011; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2011, the cost of investment securities for tax purposes was $2,499,175,000. Net unrealized appreciation of investment securities for tax purposes was $594,327,000, consisting of unrealized gains of $719,915,000 on securities that had risen in value since their purchase and $125,588,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the six months ended April 30, 2011, the fund purchased $658,080,000 of investment securities and sold $546,245,000 of investment securities, other than temporary cash investments.
I. The fund has invested in a company that is considered to be an affiliated company of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of this company were as follows:
| Current Period Transactions | |||||
| Oct. 31, 2010 | Proceeds from | Apr. 30, 2011 | |||
| Market | Purchases | Securities | Dividend | Market | |
| Value | at Cost | Sold | Income | Value | |
| ($000) | ($000) | ($000) | ($000) | ($000) | |
| AEA Technology plc | 1,303 | 734 | 48 | — | NA1 |
| 1 Not applicable—At April 30, 2011, the security was still held, but the issuer was no longer an affiliated company of the fund. | |||||
30
International Explorer Fund
J. Capital shares issued and redeemed were:
| Six Months Ended | Year Ended | |
| April 30, 2011 | October 31, 2010 | |
| Shares | Shares | |
| (000) | (000) | |
| Issued | 20,321 | 46,958 |
| Issued in Lieu of Cash Distributions | 1,940 | 1,900 |
| Redeemed | (15,065) | (35,926) |
| Net Increase (Decrease) in Shares Outstanding | 7,196 | 12,932 |
K. In preparing the financial statements as of April 30, 2011, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
31
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
32
Six Months Ended April 30, 2011
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| International Explorer Fund | 10/31/2010 | 4/30/2011 | Period |
| Based on Actual Fund Return | $1,000.00 | $1,149.06 | $2.29 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.66 | 2.16 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.43%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
33
Glossary
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.
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 measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
34
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
35
The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 179 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
| Interested Trustee1 | and President (2006–2008) of Rohm and Haas Co. |
| (chemicals); Director of Tyco International, Ltd. | |
| F. William McNabb III | (diversified manufacturing and services) and Hewlett- |
| Born 1957. Trustee Since July 2009. Chairman of the | Packard Co. (electronic computer manufacturing); |
| Board. Principal Occupation(s) During the Past Five | Senior Advisor at New Mountain Capital; Trustee |
| Years: Chairman of the Board of The Vanguard Group, | of The Conference Board; Member of the Board of |
| Inc., and of each of the investment companies served | Managers of Delphi Automotive LLP (automotive |
| by The Vanguard Group, since January 2010; Director | components). |
| of The Vanguard Group since 2008; Chief Executive | |
| Officer and President of The Vanguard Group and of | Amy Gutmann |
| each of the investment companies served by The | Born 1949. Trustee Since June 2006. Principal |
| Vanguard Group since 2008; Director of Vanguard | Occupation(s) During the Past Five Years: President |
| Marketing Corporation; Managing Director of The | of the University of Pennsylvania; Christopher H. |
| Vanguard Group (1995–2008). | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| appointments at the Annenberg School for Commu- | |
| Independent Trustees | nication and the Graduate School of Education |
| of the University of Pennsylvania; Director of | |
| Emerson U. Fullwood | Carnegie Corporation of New York, Schuylkill River |
| Born 1948. Trustee Since January 2008. Principal | Development Corporation, and Greater Philadelphia |
| Occupation(s) During the Past Five Years: Executive | Chamber of Commerce; Trustee of the National |
| Chief Staff and Marketing Officer for North America | Constitution Center; Chair of the Presidential |
| and Corporate Vice President (retired 2008) of Xerox | Commission for the Study of Bioethical Issues. |
| Corporation (document management products and | |
| services); Executive in Residence and 2010 | JoAnn Heffernan Heisen |
| Distinguished Minett Professor at the Rochester | Born 1950. Trustee Since July 1998. Principal |
| Institute of Technology; Director of SPX Corporation | Occupation(s) During the Past Five Years: Corporate |
| (multi-industry manufacturing), the United Way of | Vice President and Chief Global Diversity Officer |
| Rochester, Amerigroup Corporation (managed health | (retired 2008) and Member of the Executive |
| care), the University of Rochester Medical Center, | Committee (1997–2008) of Johnson & Johnson |
| Monroe Community College Foundation, and North | (pharmaceuticals/consumer products); Director of |
| Carolina A&T University. | Skytop Lodge Corporation (hotels), the University |
| Medical Center at Princeton, the Robert Wood | |
| Rajiv L. Gupta | Johnson Foundation, and the Center for Work Life |
| Born 1945. Trustee Since December 2001.2 | Policy; Member of the Advisory Board of the |
| Principal Occupation(s) During the Past Five Years: | Maxwell School of Citizenship and Public Affairs |
| Chairman and Chief Executive Officer (retired 2009) | at Syracuse University. |
| F. Joseph Loughrey | Thomas J. Higgins | |
| Born 1949. Trustee Since October 2009. Principal | Born 1957. Chief Financial Officer Since September | |
| Occupation(s) During the Past Five Years: President | 2008. Principal Occupation(s) During the Past Five | |
| and Chief Operating Officer (retired 2009) and Vice | Years: Principal of The Vanguard Group, Inc.; Chief | |
| Chairman of the Board (2008–2009) of Cummins Inc. | Financial Officer of each of the investment companies | |
| (industrial machinery); Director of SKF AB (industrial | served by The Vanguard Group since 2008; Treasurer | |
| machinery), Hillenbrand, Inc. (specialized consumer | of each of the investment companies served by The | |
| services), the Lumina Foundation for Education, and | Vanguard Group (1998–2008). | |
| Oxfam America; Chairman of the Advisory Council | ||
| for the College of Arts and Letters and Member | Kathryn J. Hyatt | |
| of the Advisory Board to the Kellogg Institute for | Born 1955. Treasurer Since November 2008. Principal | |
| International Studies at the University of Notre Dame. | Occupation(s) During the Past Five Years: Principal | |
| of The Vanguard Group, Inc.; Treasurer of each of | ||
| André F. Perold | the investment companies served by The Vanguard | |
| Born 1952. Trustee Since December 2004. Principal | Group since 2008; Assistant Treasurer of each of the | |
| Occupation(s) During the Past Five Years: George | investment companies served by The Vanguard Group | |
| Gund Professor of Finance and Banking at the Harvard | (1988–2008). | |
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Heidi Stam | |
| Born 1956. Secretary Since July 2005. Principal | ||
| Alfred M. Rankin, Jr. | Occupation(s) During the Past Five Years: Managing | |
| Born 1941. Trustee Since January 1993. Principal | Director of The Vanguard Group, Inc., since 2006; | |
| Occupation(s) During the Past Five Years: Chairman, | General Counsel of The Vanguard Group since 2005; | |
| President, and Chief Executive Officer of NACCO | Secretary of The Vanguard Group and of each of the | |
| Industries, Inc. (forklift trucks/housewares/lignite); | investment companies served by The Vanguard Group | |
| Director of Goodrich Corporation (industrial products/ | since 2005; Director and Senior Vice President of | |
| aircraft systems and services) and the National | Vanguard Marketing Corporation since 2005; | |
| Association of Manufacturers; Chairman of the | Principal of The Vanguard Group (1997–2006). | |
| Federal Reserve Bank of Cleveland; Vice Chairman | ||
| of University Hospitals of Cleveland; President of | ||
| the Board of The Cleveland Museum of Art. | Vanguard Senior Management Team | |
| Peter F. Volanakis | R. Gregory Barton | Michael S. Miller |
| Born 1955. Trustee Since July 2009. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: President | Kathleen C. Gubanich | Glenn W. Reed |
| and Chief Operating Officer (retired 2010) of Corning | Paul A. Heller | George U. Sauter |
| Incorporated (communications equipment); Director of | Martha G. King | |
| Corning Incorporated (2000–2010) and Dow Corning | ||
| (2001–2010); Overseer of the Amos Tuck School of | ||
| Business Administration at Dartmouth College. | Chairman Emeritus and Senior Advisor | |
| John J. Brennan | ||
| Executive Officers | Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | ||
| Glenn Booraem | ||
| Born 1967. Controller Since July 2010. Principal | ||
| Occupation(s) During the Past Five Years: Principal | Founder | |
| of The Vanguard Group, Inc.; Controller of each of | ||
| the investment companies served by The Vanguard | John C. Bogle | |
| Group since 2010; Assistant Controller of each of | Chairman and Chief Executive Officer, 1974–1996 | |
| the investment companies served by The Vanguard | ||
| Group (2001–2010). | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
| |
| P.O. Box 2600 | |
| Valley Forge, PA 19482-2600 |
Connect with Vanguard® > vanguard.com
| Fund Information > 800-662-7447 | |
| Direct Investor Account Services > 800-662-2739 | |
| Institutional Investor Services > 800-523-1036 | |
| Text Telephone for People | |
| With Hearing Impairment > 800-749-7273 | |
| This material may be used in conjunction | |
| with the offering of shares of any Vanguard | |
| fund only if preceded or accompanied by | |
| the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper Inc. or | |
| Morningstar, Inc., unless otherwise noted. | |
| You can obtain a free copy of Vanguard’s proxy voting | |
| guidelines by visiting vanguard.com/proxyreporting or by | |
| calling Vanguard at 800-662-2739. The guidelines are | |
| also available from the SEC’s website, sec.gov. In | |
| addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 | |
| months ended June 30. To get the report, visit either | |
| vanguard.com/proxyreporting or sec.gov. | |
| You can review and copy information about your fund at | |
| the SEC’s Public Reference Room in Washington, D.C. To | |
| find out more about this public service, call the SEC at | |
| 202-551-8090. Information about your fund is also | |
| available on the SEC’s website, and you can receive | |
| copies of this information, for a fee, by sending a | |
| request in either of two ways: via e-mail addressed to | |
| publicinfo@sec.gov or via regular mail addressed to the | |
| Public Reference Section, Securities and Exchange | |
| Commission, Washington, DC 20549-1520. | |
| © 2011 The Vanguard Group, Inc. | |
| All rights reserved. | |
| Vanguard Marketing Corporation, Distributor. | |
| Q1262 062011 | |
 |
| Vanguard High Dividend Yield |
| Index Fund Semiannual Report |
| April 30, 2011 |
 |
> Vanguard High Dividend Yield Index Fund returned about 16% for the six months ended April 30, 2011.
> The fund closely tracked its benchmark index, the FTSE High Dividend Yield Index. Its return was slightly ahead of the average return of its peer funds.
> Energy, industrial, and consumer staples stocks contributed most to the fund’s return.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Fund Profile. | 6 |
| Performance Summary. | 7 |
| Financial Statements. | 8 |
| About Your Fund’s Expenses. | 21 |
| Trustees Approve Advisory Arrangement. | 23 |
| Glossary. | 24 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Jean Maher.
Your Fund’s Total Returns
Six Months Ended April 30, 2011
| Total | |
| Returns | |
| Vanguard High Dividend Yield Index Fund | |
| Investor Shares | 16.30% |
| ETF Shares | |
| Market Price | 16.25 |
| Net Asset Value | 16.36 |
| FTSE High Dividend Yield Index | 16.44 |
| Equity Income Funds Average | 15.57 |
Equity Income Funds Average: Derived from data provided by Lipper Inc.
The Vanguard ETF® Shares shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. No. 6,879,964 B2; 7,337,138.
For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV.
Your Fund’s Performance at a Glance
October 31, 2010 , Through April 30, 2011
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard High Dividend Yield Index Fund | ||||
| Investor Shares | $15.94 | $18.28 | $0.239 | $0.000 |
| ETF Shares | 40.22 | 46.13 | 0.623 | 0.000 |
1
Chairman’s Letter
Dear Shareholder,
As the U.S. economy has strengthened, corporate dividends have rebounded from their financial crisis lows, bringing dividend-oriented stocks back into favor. Vanguard High Dividend Yield Index Fund returned about 16% for the six months ended April 30, 2011. The fund’s result was in line with that of its benchmark index, the FTSE High Dividend Yield Index. It was slightly ahead of the average return of peer funds.
The 30-day SEC yield of the High Dividend Yield Index Fund Investor Shares stood at 2.90% as of April 30, more than 1 percentage point higher than the yield of the broader stock market as measured by Vanguard Total Stock Market Fund’s Investor Shares.
Strong returns around the globe
The headlines were dominated by political upheaval, natural and nuclear disaster, and economic distress, but global stock markets produced outstanding returns for the six months ended April 30. The broad U.S. stock market returned more than 17%. Although rising food and gasoline prices put pressure on consumer budgets, corporate earnings growth remained strong and the pace of new job creation bounced back from extremely depressed levels.
2
For the U.S.-based investors, international stock markets produced a smaller but still robust six-month return of 12.44% in U.S. dollars. Almost half of this return reflected exchange-rate gains produced largely by strength in the euro and currencies in emerging economies.
As the economy found its footing, rates edged higher
Rising longer-term interest rates put pressure on bond prices, which led to modest bond market returns for the six-month period. The broad taxable U.S. bond market returned about 0%. The broad municipal market returned –1.68%. The rise in rates reflected both confidence that the economic recovery would prove self-sustaining and thus nudge rates higher, and concern that higher rates would be necessary to provide some protection from inflation. Even so, inflation expectations remained subdued, as measured by the difference between the yields of inflation-protected and nominal U.S. Treasury bonds.
The return on short-term money market instruments such as the 3-month U.S. Treasury bill remained near 0%, consistent with the Federal Reserve Board’s target for short-term rates.
All sectors benefited from a surge in dividend payouts
Over the past six months, many U.S. corporations reported strong earnings growth and increasingly robust financial
Market Barometer
| Total Returns | |||
| Periods Ended April 30, 2011 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 17.12% | 18.02% | 3.30% |
| Russell 2000 Index (Small-caps) | 23.73 | 22.20 | 3.89 |
| Dow Jones U.S. Total Stock Market Index | 17.28 | 18.40 | 3.65 |
| MSCI All Country World Index ex USA (International) | 12.44 | 19.73 | 3.55 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index (Broad | |||
| taxable market) | 0.02% | 5.36% | 6.33% |
| Barclays Capital Municipal Bond Index (Broad | |||
| tax-exempt market) | -1.68 | 2.20 | 4.52 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 | 0.15 | 2.02 |
| CPI | |||
| Consumer Price Index | 2.83% | 3.16% | 2.22% |
3
health, which have translated to increased dividends for investors. Although dividend payouts have not reached their pre-crisis highs, the increase is noteworthy.
In the first quarter alone, dividends for publicly traded companies rose nearly 28% compared with the same period last year, according to Standard and Poor’s, which tracks dividends for more than 7,000 publicly traded companies.
The High Dividend Yield Index Fund’s return was in line with that of the FTSE High Dividend Yield Index, which at the end of the period included more than 430 large-cap stocks from a broad swath of industries. The fund reported gains across all sectors, with eight out of ten posting double-digit returns for the six months through April.
By far the best-performing stocks came from the energy sector, which has benefited from a sharp increase in crude oil prices since January, when political unrest in the Middle East and North Africa sparked fears of supply disruptions. Growing global demand for energy also helped keep prices high.
Exxon Mobil (+34%), which accounted for about 7% of the value of the FTSE High Dividend Yield Index (and thus the fund), was the biggest contributor for the period. The oil giant added 2 percentage points to
Expense Ratios
Your Fund Compared With Its Peer Group
| Investor | ETF | Peer Group | |
| Shares | Shares | Average | |
| High Dividend Yield Index Fund | 0.30% | 0.18% | 1.35% |
The fund expense ratios shown are from the prospectus dated February 24, 2011, and represent estimated costs for the current fiscal year. For the six months ended April 30, 2011, the fund’s annualized expense ratios were 0.28% for Investor Shares and 0.16% for ETF Shares. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2010.
Peer group: Equity Income Funds.
4
the index’s total return for the six months. The company’s dividend was up 5% in the first quarter compared with the first quarter in 2010.
The industrial sector—among the first to benefit from the economic recovery—was the second-largest contributor to the index’s return for the period, with industrial conglomerates and heavy machinery manufacturers leading the way.
Consumer staples companies, representing the largest sector in the index and the fund, at nearly 19% of assets, on average, also boosted results. Tobacco, beverage, and food manufacturers were winners in this sector.
The financial sector, once a large component of the index and a historically important source of dividend income, regained some of the strength it had lost since late 2008. After being forced to put off dividend increases by the Federal Reserve, some banks passed regulatory “stress tests” and were allowed to raise their dividends for the first time since the financial crisis.
Tune out the noise, focus on the long term
The U.S. stock market posted solid returns over the past six months despite several hiccups caused by turmoil overseas. The market’s strong finish in April is encouraging and a reminder that it is nearly impossible to figure out how the market will react to unpredictable events.
There will always be unexpected news, such as the recent unrest in the Middle East and North Africa and the tragedy in Japan, that results in periodic jolts to stock markets worldwide. As tempting as it may be, we should not let such events influence the way we invest. We are probably best served as investors by remaining focused on our long-term investment goals.
No matter what the market’s direction will be in the short term, it is prudent to build a well-balanced, diversified portfolio that includes a mix of stocks, bonds, and short-term investments appropriate for your time horizon, financial objectives, and risk tolerance.
Vanguard High Dividend Yield Index Fund, with its focus on companies with higher-than-average yields, can play an important role in such a balanced portfolio.
Thank you for entrusting your assets to Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 11, 2011
5
High Dividend Yield Index Fund
Fund Profile
As of April 30, 2011
| Share-Class Characteristics | |||
| Investor | ETF | ||
| Shares | Shares | ||
| Ticker Symbol | VHDYX | VYM | |
| Expense Ratio1 | 0.30% | 0.18% | |
| 30-Day SEC Yield | 2.90% | 3.02% | |
| Portfolio Characteristics | |||
| FTSE High | DJ | ||
| Dividend | U.S. Total | ||
| Yield | Market | ||
| Fund | Index | Index | |
| Number of Stocks | 434 | 436 | 3,817 |
| Median Market Cap $80.3B | $80.3B | $31.8B | |
| Price/Earnings Ratio | 15.0x | 15.1x | 17.7x |
| Price/Book Ratio | 2.5x | 2.5x | 2.4x |
| Return on Equity | 22.1% | 22.2% | 18.9% |
| Earnings Growth Rate | 2.0% | 2.1% | 5.9% |
| Dividend Yield | 3.1% | 3.1% | 1.7% |
| Foreign Holdings | 0.0% | 0.0% | 0.0% |
| Turnover Rate | |||
| (Annualized) | 30% | — | — |
| Short-Term Reserves | 0.0% | — | — |
| Sector Diversification (% of equity exposure) | |||
| FTSE High | DJ | ||
| Dividend | U.S. Total | ||
| Yield | Market | ||
| Fund | Index | Index | |
| Consumer | |||
| Discretionary | 6.5% | 6.6% | 11.8% |
| Consumer Staples | 18.9 | 19.1 | 9.4 |
| Energy | 14.6 | 14.6 | 11.6 |
| Financials | 5.6 | 5.5 | 15.8 |
| Health Care | 12.5 | 12.6 | 11.1 |
| Industrials | 16.1 | 16.1 | 11.6 |
| Information | |||
| Technology | 8.8 | 8.8 | 18.5 |
| Materials | 3.4 | 3.4 | 4.5 |
| Telecommunication | |||
| Services | 5.5 | 5.3 | 2.6 |
| Utilities | 8.1 | 8.0 | 3.1 |
| Volatility Measures | ||
| FTSE High | DJ | |
| Dividend | U.S. Total | |
| Yield | Market | |
| Index | Index | |
| R-Squared | 1.00 | 0.92 |
| Beta | 1.00 | 0.95 |
| These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | ||
| Ten Largest Holdings (% of total net assets) | ||
| Exxon Mobil Corp | Integrated Oil & | |
| Gas | 7.3% | |
| Chevron Corp | Integrated Oil & | |
| Gas | 3.6 | |
| Microsoft Corp | Systems Software | 3.6 |
| General Electric Co | Industrial | |
| Conglomerates | 3.6 | |
| AT&T Inc | Integrated | |
| Telecommunication | ||
| Services | 3.1 | |
| Procter & Gamble Co | Household | |
| Products | 3.0 | |
| Johnson & Johnson | Pharmaceuticals | 3.0 |
| Pfizer Inc | Pharmaceuticals | 2.8 |
| Coca-Cola Co | Soft Drinks | 2.6 |
| Wal-Mart Stores Inc | Hypermarkets & | |
| Super Centers | 2.4 | |
| Top Ten | 35.0% | |
| The holdings listed exclude any temporary cash investments and equity index products. | ||
Investment Focus
1 The expense ratios shown are from the prospectus dated February 24, 2011, and represent estimated costs for the current fiscal year. For the six months ended April 30, 2011, the annualized expense ratios were 0.28% for Investor Shares and 0.16% for ETF Shares.
6
High Dividend Yield Index Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): November 16, 2006, Through April 30, 2011
Average Annual Total Returns: Periods Ended March 31, 2011
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Since | |
| Date | Year | Inception | |
| Investor Shares | 11/16/2006 | 15.25% | -0.04% |
| ETF Shares | 11/10/2006 | ||
| Market Price | 15.41 | 0.31 | |
| Net Asset Value | 15.35 | 0.28 |
See Financial Highlights for dividend and capital gains information.
7
High Dividend Yield Index Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2011
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Common Stocks (100.0%) | |||
| Consumer Discretionary (6.5%) | |||
| McDonald’s Corp. | 330,575 | 25,887 | |
| Home Depot Inc. | 519,308 | 19,287 | |
| Time Warner Inc. | 346,287 | 13,110 | |
| Time Warner Cable Inc. | 108,823 | 8,502 | |
| Yum! Brands Inc. | 148,226 | 7,951 | |
| Comcast Corp. Class A | |||
| Special Shares | 225,268 | 5,530 | |
| McGraw-Hill Cos. Inc. | 97,961 | 3,964 | |
| Stanley Black & Decker Inc. | 52,502 | 3,814 | |
| VF Corp. | 34,234 | 3,443 | |
| Mattel Inc. | 110,431 | 2,951 | |
| JC Penney Co. Inc. | 74,704 | 2,872 | |
| Genuine Parts Co. | 49,981 | 2,684 | |
| Whirlpool Corp. | 24,067 | 2,074 | |
| Darden Restaurants Inc. | 44,145 | 2,073 | |
| Hasbro Inc. | 43,138 | 2,021 | |
| H&R Block Inc. | 96,702 | 1,672 | |
| ^,* | Garmin Ltd. | 46,280 | 1,584 |
| Tupperware Brands Corp. | 19,928 | 1,269 | |
| Leggett & Platt Inc. | 46,361 | 1,219 | |
| Polaris Industries Inc. | 10,726 | 1,131 | |
| Foot Locker Inc. | 49,289 | 1,061 | |
| American Eagle | |||
| Outfitters Inc. | 61,930 | 964 | |
| Weight Watchers | |||
| International Inc. | 11,668 | 907 | |
| Service Corp. International | 76,107 | 896 | |
| Choice Hotels | |||
| International Inc. | 18,885 | 706 | |
| Brinker International Inc. | 28,335 | 683 | |
| Regal Entertainment Group | |||
| Class A | 41,514 | 572 | |
| Cinemark Holdings Inc. | 27,079 | 550 | |
| Strayer Education Inc. | 4,224 | 523 | |
| Pool Corp. | 15,631 | 473 | |
| Hillenbrand Inc. | 19,711 | 452 | |
| CTC Media Inc. | 14,890 | 351 | |
| Market | ||
| Value | ||
| Shares | ($000) | |
| Buckle Inc. | 7,401 | 337 |
| MDC Holdings Inc. | 11,105 | 324 |
| National CineMedia Inc. | 17,348 | 303 |
| Bob Evans Farms Inc. | 9,608 | 301 |
| Washington Post Co. | ||
| Class B | 683 | 298 |
| American Greetings Corp. | ||
| Class A | 11,845 | 291 |
| Meredith Corp. | 8,713 | 291 |
| Stewart Enterprises Inc. | ||
| Class A | 27,945 | 227 |
| Cato Corp. Class A | 8,807 | 225 |
| Superior Industries | ||
| International Inc. | 8,394 | 212 |
| Brown Shoe Co. Inc. | 13,797 | 175 |
| Barnes & Noble Inc. | 14,251 | 157 |
| Ameristar Casinos Inc. | 7,333 | 146 |
| Harte-Hanks Inc. | 14,959 | 139 |
| Nutrisystem Inc. | 8,620 | 130 |
| HOT Topic Inc. | 13,800 | 93 |
| Speedway Motorsports Inc. | 5,212 | 81 |
| Marcus Corp. | 6,441 | 71 |
| Christopher & Banks Corp. | 11,229 | 69 |
| Ambassadors Group Inc. | 5,963 | 60 |
| 125,106 | ||
| Consumer Staples (18.9%) | ||
| Procter & Gamble Co. | 886,935 | 57,562 |
| Coca-Cola Co. | 733,608 | 49,489 |
| Wal-Mart Stores Inc. | 828,471 | 45,549 |
| Philip Morris | ||
| International Inc. | 574,899 | 39,921 |
| PepsiCo Inc. | 504,094 | 34,727 |
| Kraft Foods Inc. | 553,529 | 18,587 |
| Altria Group Inc. | 659,126 | 17,691 |
| Colgate-Palmolive Co. | 156,496 | 13,200 |
| Kimberly-Clark Corp. | 128,152 | 8,466 |
| General Mills Inc. | 202,926 | 7,829 |
| Archer-Daniels-Midland Co. | 203,975 | 7,551 |
| Sysco Corp. | 184,601 | 5,337 |
| HJ Heinz Co. | 101,617 | 5,206 |
8
High Dividend Yield Index Fund
| Market | ||
| Value | ||
| Shares | ($000) | |
| Reynolds American Inc. | 138,508 | 5,140 |
| Kellogg Co. | 87,497 | 5,011 |
| Lorillard Inc. | 46,118 | 4,912 |
| Avon Products Inc. | 135,247 | 3,974 |
| Sara Lee Corp. | 197,269 | 3,788 |
| ConAgra Foods Inc. | 138,116 | 3,377 |
| Hershey Co. | 53,124 | 3,066 |
| Clorox Co. | 43,576 | 3,036 |
| JM Smucker Co. | 37,739 | 2,833 |
| Dr Pepper Snapple | ||
| Group Inc. | 70,959 | 2,782 |
| Campbell Soup Co. | 79,911 | 2,684 |
| Molson Coors Brewing Co. | ||
| Class B | 51,391 | 2,505 |
| McCormick & Co. Inc. | 37,937 | 1,863 |
| Hormel Foods Corp. | 63,328 | 1,862 |
| Flowers Foods Inc. | 29,075 | 889 |
| SUPERVALU Inc. | 67,264 | 757 |
| Lancaster Colony Corp. | 6,588 | 403 |
| Universal Corp. | 7,395 | 321 |
| Snyders-Lance Inc. | 15,148 | 299 |
| WD-40 Co. | 5,389 | 224 |
| Vector Group Ltd. | 11,720 | 215 |
| Nash Finch Co. | 3,902 | 145 |
| Weis Markets Inc. | 3,368 | 139 |
| Farmer Bros Co. | 2,781 | 33 |
| 361,373 | ||
| Energy (14.6%) | ||
| Exxon Mobil Corp. | 1,597,750 | 140,602 |
| Chevron Corp. | 635,188 | 69,515 |
| ConocoPhillips | 452,990 | 35,755 |
| Marathon Oil Corp. | 223,593 | 12,083 |
| Williams Cos. Inc. | 184,664 | 6,125 |
| Spectra Energy Corp. | 203,796 | 5,918 |
| EQT Corp. | 47,206 | 2,484 |
| Linn Energy LLC | 55,099 | 2,225 |
| Southern Union Co. | 39,175 | 1,171 |
| Tidewater Inc. | 16,326 | 972 |
| Copano Energy LLC | 20,733 | 743 |
| Teekay Corp. | 17,234 | 586 |
| Ship Finance | ||
| International Ltd. | 18,606 | 372 |
| Nordic American | ||
| Tanker Shipping | 14,803 | 340 |
| Overseas Shipholding | ||
| Group Inc. | 9,585 | 267 |
| ^ Knightsbridge Tankers Ltd. | 7,524 | 168 |
| Crosstex Energy Inc. | 11,300 | 119 |
| Tsakos Energy | ||
| Navigation Ltd. | 11,184 | 116 |
| Delek US Holdings Inc. | 5,030 | 68 |
| 279,629 |
| Market | ||
| Value | ||
| Shares | ($000) | |
| Financials (5.6%) | ||
| Travelers Cos. Inc. | 136,603 | 8,644 |
| Aflac Inc. | 149,206 | 8,384 |
| Chubb Corp. | 94,177 | 6,139 |
| BB&T Corp. | 220,037 | 5,923 |
| Allstate Corp. | 167,832 | 5,679 |
| Marsh & McLennan | ||
| Cos. Inc. | 171,473 | 5,192 |
| Northern Trust Corp. | 76,366 | 3,818 |
| Invesco Ltd. | 146,447 | 3,642 |
| M&T Bank Corp. | 37,845 | 3,344 |
| NYSE Euronext | 82,433 | 3,301 |
| XL Group plc Class A | 98,440 | 2,404 |
| New York Community | ||
| Bancorp Inc. | 137,825 | 2,288 |
| Willis Group Holdings plc | 54,212 | 2,240 |
| PartnerRe Ltd. | 23,602 | 1,897 |
| Cincinnati Financial Corp. | 51,726 | 1,639 |
| People’s United | ||
| Financial Inc. | 118,657 | 1,624 |
| Hudson City Bancorp Inc. | 166,946 | 1,591 |
| Everest Re Group Ltd. | 17,438 | 1,589 |
| First Niagara | ||
| Financial Group Inc. | 96,968 | 1,396 |
| Axis Capital Holdings Ltd. | 39,233 | 1,387 |
| Eaton Vance Corp. | 37,347 | 1,261 |
| HCC Insurance Holdings Inc. | 36,396 | 1,184 |
| Commerce Bancshares Inc. | 27,565 | 1,173 |
| Cullen/Frost Bankers Inc. | 19,367 | 1,147 |
| Waddell & Reed | ||
| Financial Inc. Class A | 27,244 | 1,117 |
| Fidelity National | ||
| Financial Inc. Class A | 70,838 | 1,094 |
| Old Republic | ||
| International Corp. | 81,780 | 1,036 |
| Arthur J Gallagher & Co. | 34,393 | 1,024 |
| Validus Holdings Ltd. | 31,021 | 1,009 |
| Erie Indemnity Co. Class A | 11,926 | 864 |
| Federated Investors Inc. | ||
| Class B | 32,977 | 850 |
| Alterra Capital Holdings Ltd. | 36,588 | 804 |
| Bank of Hawaii Corp. | 15,211 | 742 |
| Valley National Bancorp | 51,147 | 732 |
| Protective Life Corp. | 27,161 | 731 |
| Aspen Insurance | ||
| Holdings Ltd. | 24,546 | 701 |
| Endurance Specialty | ||
| Holdings Ltd. | 15,481 | 686 |
| StanCorp Financial | ||
| Group Inc. | 14,612 | 630 |
| American Financial | ||
| Group Inc. | 17,225 | 616 |
| Capitol Federal | ||
| Financial Inc. | 53,242 | 603 |
9
High Dividend Yield Index Fund
| Market | ||
| Value | ||
| Shares | ($000) | |
| Hanover Insurance | ||
| Group Inc. | 14,253 | 602 |
| FirstMerit Corp. | 34,259 | 599 |
| Iberiabank Corp. | 8,515 | 511 |
| Westamerica | ||
| Bancorporation | 9,253 | 470 |
| Trustmark Corp. | 20,066 | 466 |
| Hancock Holding Co. | 13,610 | 445 |
| Astoria Financial Corp. | 30,592 | 443 |
| Northwest Bancshares Inc. | 34,754 | 438 |
| Unitrin Inc. | 14,437 | 437 |
| FNB Corp. | 38,131 | 418 |
| Greenhill & Co. Inc. | 6,966 | 411 |
| UMB Financial Corp. | 9,624 | 405 |
| RLI Corp. | 6,613 | 392 |
| Montpelier Re | ||
| Holdings Ltd. | 21,173 | 383 |
| First Financial | ||
| Bankshares Inc. | 6,559 | 364 |
| United Bankshares Inc. | 13,737 | 359 |
| BancorpSouth Inc. | 26,232 | 355 |
| BOK Financial Corp. | 6,495 | 349 |
| Glacier Bancorp Inc. | 22,857 | 344 |
| Mercury General Corp. | 8,623 | 343 |
| Park National Corp. | 4,817 | 333 |
| CVB Financial Corp. | 33,699 | 328 |
| Old National Bancorp | 30,141 | 312 |
| Selective Insurance | ||
| Group Inc. | 17,219 | 304 |
| First Financial Bancorp | 18,237 | 301 |
| Community Bank | ||
| System Inc. | 11,775 | 295 |
| International | ||
| Bancshares Corp. | 16,085 | 283 |
| Provident Financial | ||
| Services Inc. | 19,170 | 278 |
| NBT Bancorp Inc. | 10,800 | 244 |
| Safety Insurance Group Inc. | 4,760 | 223 |
| BGC Partners Inc. Class A | 21,418 | 207 |
| American National | ||
| Insurance Co. | 2,523 | 200 |
| Independent Bank Corp. | 6,675 | 196 |
| S&T Bancorp Inc. | 8,725 | 178 |
| Chemical Financial Corp. | 8,686 | 175 |
| WesBanco Inc. | 8,451 | 172 |
| Brookline Bancorp Inc. | 18,530 | 171 |
| Maiden Holdings Ltd. | 22,814 | 170 |
| Dime Community | ||
| Bancshares Inc. | 10,964 | 170 |
| City Holding Co. | 4,959 | 169 |
| Trustco Bank Corp. NY | 24,786 | 149 |
| Simmons First | ||
| National Corp. Class A | 5,517 | 146 |
| Flushing Financial Corp. | 9,752 | 144 |
| Harleysville Group Inc. | 4,348 | 139 |
| Market | ||
| Value | ||
| Shares | ($000) | |
| Community Trust | ||
| Bancorp Inc. | 4,725 | 134 |
| Renasant Corp. | 7,929 | 133 |
| Republic Bancorp Inc. | ||
| Class A | 5,830 | 127 |
| United Fire & Casualty Co. | 6,275 | 124 |
| 1st Source Corp. | 5,792 | 123 |
| Washington Trust | ||
| Bancorp Inc. | 5,106 | 120 |
| Advance America Cash | ||
| Advance Centers Inc. | 19,925 | 117 |
| Provident New York Bancorp | 12,220 | 115 |
| SY Bancorp Inc. | 4,372 | 109 |
| Tompkins Financial Corp. | 2,587 | 105 |
| Calamos Asset | ||
| Management Inc. Class A | 6,402 | 104 |
| First Financial Corp. | 3,210 | 103 |
| GFI Group Inc. | 19,813 | 101 |
| Oritani Financial Corp. | 7,857 | 96 |
| Arrow Financial Corp. | 3,478 | 86 |
| State Auto Financial Corp. | 4,949 | 84 |
| First Community | ||
| Bancshares Inc. | 5,474 | 81 |
| Bancfirst Corp. | 1,919 | 77 |
| Presidential Life Corp. | 6,902 | 77 |
| First Bancorp | 5,179 | 72 |
| Baldwin & Lyons Inc. | 2,849 | 66 |
| Kearny Financial Corp. | 6,449 | 62 |
| Bank Mutual Corp. | 14,310 | 59 |
| Suffolk Bancorp | 3,031 | 50 |
| Capital City Bank Group Inc. | 3,917 | 44 |
| 106,315 | ||
| Health Care (12.5%) | ||
| Johnson & Johnson | 870,161 | 57,187 |
| Pfizer Inc. | 2,554,492 | 53,542 |
| Merck & Co. Inc. | 973,882 | 35,011 |
| Abbott Laboratories | 488,931 | 25,444 |
| Bristol-Myers Squibb Co. | 542,298 | 15,239 |
| Medtronic Inc. | 343,122 | 14,325 |
| Eli Lilly & Co. | 364,074 | 13,474 |
| Baxter International Inc. | 185,130 | 10,534 |
| Becton Dickinson and Co. | 70,043 | 6,019 |
| Cardinal Health Inc. | 111,261 | 4,861 |
| Pharmaceutical Product | ||
| Development Inc. | 37,316 | 1,151 |
| Lincare Holdings Inc. | 30,495 | 958 |
| Teleflex Inc. | 12,562 | 792 |
| Owens & Minor Inc. | 20,108 | 693 |
| Meridian Bioscience Inc. | 9,687 | 239 |
| Landauer Inc. | 2,967 | 179 |
| National Healthcare Corp. | 3,199 | 149 |
| Computer Programs & | ||
| Systems Inc. | 1,763 | 104 |
| 239,901 |
10
High Dividend Yield Index Fund
| Market | ||
| Value | ||
| Shares | ($000) | |
| Industrials (16.1%) | ||
| General Electric Co. | 3,380,770 | 69,137 |
| United Technologies Corp. | 292,587 | 26,210 |
| Caterpillar Inc. | 201,112 | 23,210 |
| 3M Co. | 224,326 | 21,807 |
| Boeing Co. | 231,865 | 18,498 |
| United Parcel Service Inc. | ||
| Class B | 229,694 | 17,220 |
| Honeywell International Inc. | 247,175 | 15,135 |
| Emerson Electric Co. | 239,221 | 14,535 |
| Illinois Tool Works Inc. | 158,230 | 9,242 |
| Norfolk Southern Corp. | 123,738 | 9,241 |
| Lockheed Martin Corp. | 114,875 | 9,104 |
| General Dynamics Corp. | 118,113 | 8,601 |
| Tyco International Ltd. | 150,152 | 7,318 |
| Waste Management Inc. | 151,237 | 5,968 |
| Northrop Grumman Corp. | 93,203 | 5,929 |
| Eaton Corp. | 106,184 | 5,684 |
| Raytheon Co. | 113,947 | 5,532 |
| Rockwell Automation Inc. | 44,838 | 3,907 |
| Republic Services Inc. | ||
| Class A | 121,387 | 3,838 |
| Cooper Industries plc | 52,110 | 3,437 |
| L-3 Communications | ||
| Holdings Inc. | 34,375 | 2,757 |
| Pitney Bowes Inc. | 64,469 | 1,583 |
| Masco Corp. | 114,186 | 1,532 |
| Avery Dennison Corp. | 35,389 | 1,477 |
| Pentair Inc. | 31,212 | 1,253 |
| RR Donnelley & Sons Co. | 64,862 | 1,223 |
| Hubbell Inc. Class B | 16,913 | 1,184 |
| Snap-On Inc. | 18,350 | 1,134 |
| Graco Inc. | 19,036 | 952 |
| Crane Co. | 18,522 | 924 |
| Harsco Corp. | 25,458 | 906 |
| Ryder System Inc. | 16,403 | 878 |
| Alexander & Baldwin Inc. | 13,113 | 691 |
| Watsco Inc. | 8,834 | 626 |
| † Huntington Ingalls | ||
| Industries Inc. | 15,581 | 623 |
| GATX Corp. | 14,620 | 618 |
| Brady Corp. Class A | 15,508 | 585 |
| Applied Industrial | ||
| Technologies Inc. | 13,472 | 475 |
| Deluxe Corp. | 16,118 | 436 |
| Seaspan Corp. | 21,463 | 408 |
| Kaydon Corp. | 10,339 | 400 |
| HNI Corp. | 14,220 | 391 |
| Briggs & Stratton Corp. | 15,762 | 372 |
| Healthcare Services | ||
| Group Inc. | 20,856 | 370 |
| Mine Safety Appliances Co. | 8,736 | 347 |
| ABM Industries Inc. | 12,652 | 308 |
| Kaman Corp. | 8,174 | 304 |
| Aircastle Ltd. | 18,687 | 233 |
| Market | ||
| Value | ||
| Shares | ($000) | |
| NACCO Industries Inc. | ||
| Class A | 2,113 | 222 |
| Albany International Corp. | 8,781 | 222 |
| McGrath Rentcorp | 7,699 | 219 |
| TAL International | ||
| Group Inc. | 4,941 | 178 |
| AZZ Inc. | 3,966 | 174 |
| Textainer Group | ||
| Holdings Ltd. | 4,644 | 165 |
| Ennis Inc. | 8,070 | 151 |
| Federal Signal Corp. | 19,541 | 132 |
| Apogee Enterprises Inc. | 8,835 | 126 |
| Navios Maritime | ||
| Holdings Inc. | 23,791 | 126 |
| US Ecology Inc. | 4,240 | 78 |
| CDI Corp. | 4,420 | 66 |
| 308,402 | ||
| Information Technology (8.8%) | ||
| Microsoft Corp. | 2,662,324 | 69,274 |
| Intel Corp. | 1,738,896 | 40,325 |
| Accenture plc Class A | 201,802 | 11,529 |
| Automatic Data | ||
| Processing Inc. | 155,927 | 8,474 |
| Applied Materials Inc. | 417,915 | 6,557 |
| TE Connectivity Ltd. | 141,610 | 5,077 |
| Analog Devices Inc. | 94,346 | 3,803 |
| Paychex Inc. | 115,256 | 3,770 |
| Xilinx Inc. | 82,069 | 2,861 |
| Maxim Integrated | ||
| Products Inc. | 94,611 | 2,587 |
| Linear Technology Corp. | 71,949 | 2,504 |
| Microchip Technology Inc. | 59,134 | 2,427 |
| KLA-Tencor Corp. | 53,122 | 2,332 |
| National | ||
| Semiconductor Corp. | 75,828 | 1,829 |
| Broadridge Financial | ||
| Solutions Inc. | 39,623 | 921 |
| Diebold Inc. | 21,036 | 711 |
| Molex Inc. | 22,785 | 615 |
| Intersil Corp. Class A | 39,327 | 581 |
| Molex Inc. Class A | 25,204 | 567 |
| Earthlink Inc. | 34,337 | 282 |
| Comtech | ||
| Telecommunications Corp. | 8,787 | 249 |
| MTS Systems Corp. | 4,829 | 214 |
| Methode Electronics Inc. | 11,527 | 142 |
| United Online Inc. | 20,259 | 134 |
| Electro Rent Corp. | 5,561 | 87 |
| Renaissance Learning Inc. | 3,897 | 47 |
| 167,899 | ||
| Materials (3.4%) | ||
| EI du Pont de | ||
| Nemours & Co. | 289,219 | 16,425 |
| Praxair Inc. | 96,092 | 10,226 |
11
High Dividend Yield Index Fund
| Market | ||
| Value | ||
| Shares | ($000) | |
| Air Products & | ||
| Chemicals Inc. | 67,872 | 6,483 |
| PPG Industries Inc. | 50,882 | 4,817 |
| Nucor Corp. | 99,351 | 4,665 |
| Southern Copper Corp. | 80,759 | 3,025 |
| Eastman Chemical Co. | 22,394 | 2,402 |
| Vulcan Materials Co. | 40,898 | 1,849 |
| MeadWestvaco Corp. | 53,328 | 1,797 |
| International Flavors | ||
| & Fragrances Inc. | 25,221 | 1,602 |
| Sealed Air Corp. | 50,509 | 1,302 |
| Huntsman Corp. | 56,373 | 1,175 |
| Sonoco Products Co. | 32,567 | 1,125 |
| Bemis Co. Inc. | 34,544 | 1,083 |
| RPM International Inc. | 41,190 | 968 |
| Cabot Corp. | 20,679 | 927 |
| Temple-Inland Inc. | 34,102 | 802 |
| Packaging Corp. of America | 24,423 | 697 |
| Olin Corp. | 25,047 | 645 |
| Commercial Metals Co. | 36,296 | 608 |
| Sensient Technologies Corp. | 15,742 | 596 |
| Worthington Industries Inc. | 23,577 | 509 |
| Greif Inc. Class A | 7,839 | 487 |
| Arch Chemicals Inc. | 7,948 | 307 |
| Koppers Holdings Inc. | 6,485 | 297 |
| AMCOL International Corp. | 7,423 | 276 |
| A Schulman Inc. | 9,979 | 253 |
| Innophos Holdings Inc. | 5,113 | 237 |
| PH Glatfelter Co. | 14,510 | 197 |
| Myers Industries Inc. | 8,162 | 87 |
| 65,869 | ||
| Telecommunication Services (5.5%) | ||
| AT&T Inc. | 1,882,427 | 58,581 |
| Verizon | ||
| Communications Inc. | 903,235 | 34,124 |
| CenturyLink Inc. | 187,114 | 7,631 |
| Frontier | ||
| Communications Corp. | 313,887 | 2,596 |
| Windstream Corp. | 159,701 | 2,046 |
| NTELOS Holdings Corp. | 9,846 | 194 |
| Alaska Communications | ||
| Systems Group Inc. | 14,396 | 139 |
| Atlantic Tele-Network Inc. | 3,647 | 134 |
| Consolidated | ||
| Communications | ||
| Holdings Inc. | 7,025 | 129 |
| 105,574 | ||
| Utilities (8.1%) | ||
| Southern Co. | 267,894 | 10,459 |
| Exelon Corp. | 209,145 | 8,815 |
| Dominion Resources Inc. | 183,966 | 8,540 |
| Duke Energy Corp. | 421,235 | 7,856 |
| NextEra Energy Inc. | 133,412 | 7,547 |
| PG&E Corp. | 125,526 | 5,784 |
| Market | ||
| Value | ||
| Shares | ($000) | |
| American Electric | ||
| Power Co. Inc. | 151,037 | 5,510 |
| FirstEnergy Corp. | 132,475 | 5,294 |
| Public Service Enterprise | ||
| Group Inc. | 161,125 | 5,183 |
| PPL Corp. | 182,841 | 5,015 |
| Consolidated Edison Inc. | 92,055 | 4,798 |
| Progress Energy Inc. | 92,711 | 4,399 |
| Sempra Energy | 76,071 | 4,191 |
| Edison International | 103,250 | 4,055 |
| Entergy Corp. | 57,333 | 3,997 |
| Xcel Energy Inc. | 152,713 | 3,715 |
| DTE Energy Co. | 53,406 | 2,699 |
| CenterPoint Energy Inc. | 133,752 | 2,488 |
| Oneok Inc. | 33,684 | 2,356 |
| Wisconsin Energy Corp. | 74,055 | 2,311 |
| Constellation Energy | ||
| Group Inc. | 63,414 | 2,310 |
| Ameren Corp. | 75,727 | 2,220 |
| Northeast Utilities | 55,477 | 1,975 |
| National Fuel Gas Co. | 25,952 | 1,902 |
| NiSource Inc. | 87,744 | 1,707 |
| SCANA Corp. | 40,152 | 1,667 |
| OGE Energy Corp. | 30,775 | 1,636 |
| American Water | ||
| Works Co. Inc. | 55,355 | 1,626 |
| CMS Energy Corp. | 79,975 | 1,583 |
| NSTAR | 32,864 | 1,522 |
| Pinnacle West Capital Corp. | 34,404 | 1,493 |
| MDU Resources Group Inc. | 59,378 | 1,419 |
| Alliant Energy Corp. | 34,892 | 1,380 |
| Pepco Holdings Inc. | 71,219 | 1,372 |
| TECO Energy Inc. | 67,984 | 1,310 |
| Integrys Energy Group Inc. | 24,682 | 1,292 |
| UGI Corp. | 35,171 | 1,171 |
| ITC Holdings Corp. | 16,038 | 1,138 |
| NV Energy Inc. | 73,980 | 1,124 |
| Westar Energy Inc. | 37,835 | 1,029 |
| AGL Resources Inc. | 24,560 | 1,019 |
| Atmos Energy Corp. | 28,561 | 996 |
| Aqua America Inc. | 43,382 | 978 |
| Questar Corp. | 55,471 | 975 |
| Great Plains Energy Inc. | 42,809 | 881 |
| DPL Inc. | 27,804 | 842 |
| Nicor Inc. | 14,317 | 794 |
| Hawaiian Electric | ||
| Industries Inc. | 29,876 | 762 |
| Vectren Corp. | 25,704 | 735 |
| Piedmont Natural | ||
| Gas Co. Inc. | 22,774 | 723 |
| Cleco Corp. | 19,180 | 673 |
| WGL Holdings Inc. | 16,096 | 636 |
| IDACORP Inc. | 15,709 | 616 |
| Portland General | ||
| Electric Co. | 23,883 | 596 |
12
High Dividend Yield Index Fund
| Market | ||
| Value | ||
| Shares | ($000) | |
| Southwest Gas Corp. | 14,560 | 579 |
| New Jersey Resources Corp. | 13,174 | 577 |
| South Jersey Industries Inc. | 9,428 | 542 |
| UIL Holdings Corp. | 15,934 | 507 |
| Black Hills Corp. | 13,661 | 475 |
| Allete Inc. | 11,261 | 456 |
| Avista Corp. | 18,055 | 440 |
| Unisource Energy Corp. | 11,454 | 425 |
| PNM Resources Inc. | 27,236 | 418 |
| Northwest Natural Gas Co. | 8,378 | 387 |
| NorthWestern Corp. | 11,429 | 372 |
| MGE Energy Inc. | 7,236 | 304 |
| Empire District Electric Co. | 13,139 | 295 |
| CH Energy Group Inc. | 4,996 | 268 |
| Laclede Group Inc. | 6,956 | 267 |
| Otter Tail Corp. | 11,266 | 263 |
| California Water | ||
| Service Group | 6,547 | 247 |
| American States Water Co. | 5,788 | 202 |
| SJW Corp. | 4,449 | 103 |
| Central Vermont | ||
| Public Service Corp. | 4,252 | 100 |
| 154,341 | ||
| Total Common Stocks | ||
| (Cost $1,635,247) | 1,914,409 | |
| Temporary Cash Investment (0.1%) | ||
| Money Market Fund (0.1%) | ||
| 1,2 Vanguard Market | ||
| Liquidity Fund, 0.179% | ||
| (Cost $1,405) | 1,405,202 | 1,405 |
| Total Investments (100.1%) | ||
| (Cost $1,636,652) | 1,915,814 | |
| Other Assets and Liabilities (-0.1%) | ||
| Other Assets | 4,568 | |
| Liabilities2 | (5,900) | |
| (1,332) | ||
| Net Assets (100%) | 1,914,482 | |
| At April 30, 2011, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 1,657,584 |
| Undistributed Net Investment Income | 3,086 |
| Accumulated Net Realized Losses | (25,350) |
| Unrealized Appreciation (Depreciation) | 279,162 |
| Net Assets | 1,914,482 |
| Investor Shares—Net Assets | |
| Applicable to 30,044,774 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 549,083 |
| Net Asset Value Per Share— | |
| Investor Shares | $18.28 |
| ETF Shares—Net Assets | |
| Applicable to 29,601,830 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 1,365,399 |
| Net Asset Value Per Share— | |
| ETF Shares | $46.13 |
See Note A in Notes to Financial Statements.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $1,365,000.
* Non-income-producing security.
† Non-income producing security—new issue that has not paid a dividend as of April 30, 2011.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
2 Includes $1,405,000 of collateral received for securities on loan.
See accompanying Notes, which are an integral part of the Financial Statements.
13
High Dividend Yield Index Fund
Statement of Operations
| Six Months Ended | |
| April 30, 2011 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 24,547 |
| Interest1 | 2 |
| Security Lending | 32 |
| Total Income | 24,581 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 107 |
| Management and Administrative—Investor Shares | 476 |
| Management and Administrative—ETF Shares | 599 |
| Marketing and Distribution—Investor Shares | 46 |
| Marketing and Distribution—ETF Shares | 152 |
| Custodian Fees | 64 |
| Shareholders’ Reports—Investor Shares | 5 |
| Shareholders’ Reports—ETF Shares | 26 |
| Trustees’ Fees and Expenses | 1 |
| Total Expenses | 1,476 |
| Net Investment Income | 23,105 |
| Realized Net Gain (Loss) on Investment Securities Sold | 43,816 |
| Change in Unrealized Appreciation (Depreciation) of Investment Securities | 169,378 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 236,299 |
| 1 Interest income from an affiliated company of the fund was $2,000. | |
See accompanying Notes, which are an integral part of the Financial Statements.
14
High Dividend Yield Index Fund
Statement of Changes in Net Assets
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2011 | 2010 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 23,105 | 24,181 |
| Realized Net Gain (Loss) | 43,816 | (40,717) |
| Change in Unrealized Appreciation (Depreciation) | 169,378 | 134,572 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 236,299 | 118,036 |
| Distributions | ||
| Net Investment Income | ||
| Investor Shares | (5,849) | (5,649) |
| ETF Shares | (16,468) | (17,618) |
| Realized Capital Gain | ||
| Investor Shares | — | — |
| ETF Shares | — | — |
| Total Distributions | (22,317) | (23,267) |
| Capital Share Transactions | ||
| Investor Shares | 194,418 | 117,470 |
| ETF Shares | 325,508 | 383,901 |
| Net Increase (Decrease) from Capital Share Transactions | 519,926 | 501,371 |
| Total Increase (Decrease) | 733,908 | 596,140 |
| Net Assets | ||
| Beginning of Period | 1,180,574 | 584,434 |
| End of Period1 | 1,914,482 | 1,180,574 |
| 1 Net Assets—End of Period includes undistributed net investment income of $3,086,000 and $2,298,000. | ||
See accompanying Notes, which are an integral part of the Financial Statements.
15
High Dividend Yield Index Fund
Financial Highlights
Investor Shares
| Six Months | Nov. 16, | ||||
| Ended | 20061 to | ||||
| April 30, | Year Ended October 31, | Oct. 31, | |||
| For a Share Outstanding Throughout Each Period | 2011 | 2010 | 2009 | 2008 | 2007 |
| Net Asset Value, Beginning of Period | $15.94 | $14.15 | $14.20 | $21.61 | $20.00 |
| Investment Operations | |||||
| Net Investment Income | .237 | .415 | .4682 | .589 | .5422 |
| Net Realized and Unrealized Gain (Loss) | |||||
| on Investments | 2.342 | 1.792 | (.070) | (7.409) | 1.477 |
| Total from Investment Operations | 2.579 | 2.207 | .398 | (6.820) | 2.019 |
| Distributions | |||||
| Dividends from Net Investment Income | (.239) | (.417) | (.448) | (.590) | (.409) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.239) | (.417) | (.448) | (.590) | (.409) |
| Net Asset Value, End of Period | $18.28 | $15.94 | $14.15 | $14.20 | $21.61 |
| Total Return3 | 16.30% | 15.79% | 3.27% | -32.17% | 10.16% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $549 | $296 | $155 | $77 | $67 |
| Ratio of Total Expenses to | |||||
| Average Net Assets | 0.28% | 0.30% | 0.35% | 0.35% | 0.40%4 |
| Ratio of Net Investment Income to | |||||
| Average Net Assets | 2.94% | 2.86% | 3.63% | 3.41% | 2.43%4 |
| Portfolio Turnover Rate5 | 30% | 34% | 20% | 11% | 11% |
| The expense ratio, net income ratio, and turnover rate for the current period have been annualized. | |||||
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Annualized.
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, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
16
High Dividend Yield Index Fund
Financial Highlights
ETF Shares
| Six Months | Nov. 10, | ||||
| Ended | 20061 to | ||||
| April 30, | Year Ended October 31, | Oct. 31, | |||
| For a Share Outstanding Throughout Each Period | 2011 | 2010 | 2009 | 2008 | 2007 |
| Net Asset Value, Beginning of Period | $40.22 | $35.70 | $35.84 | $54.55 | $50.04 |
| Investment Operations | |||||
| Net Investment Income | .620 | 1.092 | 1.2352 | 1.553 | 1.4052 |
| Net Realized and Unrealized Gain (Loss) | |||||
| on Investments | 5.913 | 4.527 | (.198) | (18.703) | 4.190 |
| Total from Investment Operations | 6.533 | 5.619 | 1.037 | (17.150) | 5.595 |
| Distributions | |||||
| Dividends from Net Investment Income | (.623) | (1.099) | (1.177) | (1.560) | (1.085) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.623) | (1.099) | (1.177) | (1.560) | (1.085) |
| Net Asset Value, End of Period | $46.13 | $40.22 | $35.70 | $35.84 | $54.55 |
| Total Return | 16.36% | 15.93% | 3.38% | -32.07% | 11.26% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $1,365 | $884 | $430 | $161 | $115 |
| Ratio of Total Expenses to | |||||
| Average Net Assets | 0.16% | 0.18% | 0.20% | 0.20% | 0.25%3 |
| Ratio of Net Investment Income to | |||||
| Average Net Assets | 3.06% | 2.98% | 3.78% | 3.56% | 2.58%3 |
| Portfolio Turnover Rate4 | 30% | 34% | 20% | 11% | 11% |
| The expense ratio, net income ratio, and turnover rate for the current period have been annualized. | |||||
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.
See accompanying Notes, which are an integral part of the Financial Statements.
17
High Dividend Yield Index Fund
Notes to Financial Statements
Vanguard High Dividend Yield Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on the NYSE Arca, Inc.; they can be purchased and sold through a broker.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value.
2. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2007–2010), and for the period ended April 30, 2011, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
4. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents fees charged to borrowers plus income earned on investing cash collateral, less expenses associated with the loan.
5. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
18
High Dividend Yield Index Fund
B. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2011, the fund had contributed capital of $283,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.11% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
At April 30, 2011, 100% of the fund’s investments were valued based on Level 1 inputs.
D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2011, the fund realized $2,665,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2010, the fund had available capital loss carryforwards totaling $66,500,000 to offset future net capital gains of $609,000 through October 31, 2015, $5,260,000 through October 31, 2016, $17,104,000 through October 31, 2017, and $43,527,000 through October 31, 2018. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2011; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2011, the cost of investment securities for tax purposes was $1,636,652,000. Net unrealized appreciation of investment securities for tax purposes was $279,162,000, consisting of unrealized gains of $288,945,000 on securities that had risen in value since their purchase and $9,783,000 in unrealized losses on securities that had fallen in value since their purchase.
19
High Dividend Yield Index Fund
E. During the six months ended April 30, 2011, the fund purchased $759,412,000 of investment securities and sold $238,709,000 of investment securities, other than temporary cash investments.
F. Capital share transactions for each class of shares were:
| Six Months Ended | Year Ended | |||
| April 30, 2011 | October 31, 2010 | |||
| Amount | Shares | Amount | Shares | |
| ($000) | (000) | ($000) | (000) | |
| Investor Shares | ||||
| Issued | 240,026 | 14,097 | 172,365 | 11,302 |
| Issued in Lieu of Cash Distributions | 4,896 | 288 | 4,536 | 300 |
| Redeemed | (50,504) | (2,941) | (59,431) | (3,924) |
| Net Increase (Decrease)—Investor Shares | 194,418 | 11,444 | 117,470 | 7,678 |
| ETF Shares | ||||
| Issued | 334,156 | 7,820 | 387,936 | 10,039 |
| Issued in Lieu of Cash Distributions | — | — | — | — |
| Redeemed | (8,648) | (200) | (4,035) | (100) |
| Net Increase (Decrease)—ETF Shares | 325,508 | 7,620 | 383,901 | 9,939 |
G. In preparing the financial statements as of April 30, 2011, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
20
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
21
Six Months Ended April 30, 2011
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| High Dividend Yield Index Fund | 10/31/2010 | 4/30/2011 | Period |
| Based on Actual Fund Return | |||
| Investor Shares | $1,000.00 | $1,162.99 | $1.50 |
| ETF Shares | 1,000.00 | 1,163.62 | 0.86 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,023.41 | $1.40 |
| ETF Shares | 1,000.00 | 1,024.00 | 0.80 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.28% for Investor Shares and 0.16% for ETF Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
22
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard High Dividend Yield Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. Vanguard—through its Quantitative Equity Group—serves as the investment advisor for the fund. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board considered the quality of the fund’s investment management since the fund’s inception in 2006, and took into account the organizational depth and stability of the advisor. Vanguard has been managing investments for more than three decades. The Quantitative Equity Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the fund’s performance since its inception, including any periods of outperformance or underperformance of its target index and peer group. The board concluded that the fund has performed in line with expectations, and that the results have been consistent with the fund’s investment strategy. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section.
The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees, and produces “profits” only in the form of reduced expenses for fund shareholders.
The benefit of economies of scale
The board concluded that the fund’s low-cost arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
23
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.
Foreign Holdings. The percentage of a fund represented by stocks or depositary receipts of companies based outside the United States.
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 measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
24
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
25
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 179 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
| Interested Trustee1 | and President (2006–2008) of Rohm and Haas Co. |
| (chemicals); Director of Tyco International, Ltd. | |
| F. William McNabb III | (diversified manufacturing and services) and Hewlett- |
| Born 1957. Trustee Since July 2009. Chairman of the | Packard Co. (electronic computer manufacturing); |
| Board. Principal Occupation(s) During the Past Five | Senior Advisor at New Mountain Capital; Trustee |
| Years: Chairman of the Board of The Vanguard Group, | of The Conference Board; Member of the Board of |
| Inc., and of each of the investment companies served | Managers of Delphi Automotive LLP (automotive |
| by The Vanguard Group, since January 2010; Director | components). |
| of The Vanguard Group since 2008; Chief Executive | |
| Officer and President of The Vanguard Group and of | Amy Gutmann |
| each of the investment companies served by The | Born 1949. Trustee Since June 2006. Principal |
| Vanguard Group since 2008; Director of Vanguard | Occupation(s) During the Past Five Years: President |
| Marketing Corporation; Managing Director of The | of the University of Pennsylvania; Christopher H. |
| Vanguard Group (1995–2008). | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| appointments at the Annenberg School for Commu- | |
| Independent Trustees | nication and the Graduate School of Education |
| of the University of Pennsylvania; Director of | |
| Emerson U. Fullwood | Carnegie Corporation of New York, Schuylkill River |
| Born 1948. Trustee Since January 2008. Principal | Development Corporation, and Greater Philadelphia |
| Occupation(s) During the Past Five Years: Executive | Chamber of Commerce; Trustee of the National |
| Chief Staff and Marketing Officer for North America | Constitution Center; Chair of the Presidential |
| and Corporate Vice President (retired 2008) of Xerox | Commission for the Study of Bioethical Issues. |
| Corporation (document management products and | |
| services); Executive in Residence and 2010 | JoAnn Heffernan Heisen |
| Distinguished Minett Professor at the Rochester | Born 1950. Trustee Since July 1998. Principal |
| Institute of Technology; Director of SPX Corporation | Occupation(s) During the Past Five Years: Corporate |
| (multi-industry manufacturing), the United Way of | Vice President and Chief Global Diversity Officer |
| Rochester, Amerigroup Corporation (managed health | (retired 2008) and Member of the Executive |
| care), the University of Rochester Medical Center, | Committee (1997–2008) of Johnson & Johnson |
| Monroe Community College Foundation, and North | (pharmaceuticals/consumer products); Director of |
| Carolina A&T University. | Skytop Lodge Corporation (hotels), the University |
| Medical Center at Princeton, the Robert Wood | |
| Rajiv L. Gupta | Johnson Foundation, and the Center for Work Life |
| Born 1945. Trustee Since December 2001.2 | Policy; Member of the Advisory Board of the |
| Principal Occupation(s) During the Past Five Years: | Maxwell School of Citizenship and Public Affairs |
| Chairman and Chief Executive Officer (retired 2009) | at Syracuse University. |
| F. Joseph Loughrey | Thomas J. Higgins | |
| Born 1949. Trustee Since October 2009. Principal | Born 1957. Chief Financial Officer Since September | |
| Occupation(s) During the Past Five Years: President | 2008. Principal Occupation(s) During the Past Five | |
| and Chief Operating Officer (retired 2009) and Vice | Years: Principal of The Vanguard Group, Inc.; Chief | |
| Chairman of the Board (2008–2009) of Cummins Inc. | Financial Officer of each of the investment companies | |
| (industrial machinery); Director of SKF AB (industrial | served by The Vanguard Group since 2008; Treasurer | |
| machinery), Hillenbrand, Inc. (specialized consumer | of each of the investment companies served by The | |
| services), the Lumina Foundation for Education, and | Vanguard Group (1998–2008). | |
| Oxfam America; Chairman of the Advisory Council | ||
| for the College of Arts and Letters and Member | Kathryn J. Hyatt | |
| of the Advisory Board to the Kellogg Institute for | Born 1955. Treasurer Since November 2008. Principal | |
| International Studies at the University of Notre Dame. | Occupation(s) During the Past Five Years: Principal | |
| of The Vanguard Group, Inc.; Treasurer of each of | ||
| André F. Perold | the investment companies served by The Vanguard | |
| Born 1952. Trustee Since December 2004. Principal | Group since 2008; Assistant Treasurer of each of the | |
| Occupation(s) During the Past Five Years: George | investment companies served by The Vanguard Group | |
| Gund Professor of Finance and Banking at the Harvard | (1988–2008). | |
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Heidi Stam | |
| Born 1956. Secretary Since July 2005. Principal | ||
| Alfred M. Rankin, Jr. | Occupation(s) During the Past Five Years: Managing | |
| Born 1941. Trustee Since January 1993. Principal | Director of The Vanguard Group, Inc., since 2006; | |
| Occupation(s) During the Past Five Years: Chairman, | General Counsel of The Vanguard Group since 2005; | |
| President, and Chief Executive Officer of NACCO | Secretary of The Vanguard Group and of each of the | |
| Industries, Inc. (forklift trucks/housewares/lignite); | investment companies served by The Vanguard Group | |
| Director of Goodrich Corporation (industrial products/ | since 2005; Director and Senior Vice President of | |
| aircraft systems and services) and the National | Vanguard Marketing Corporation since 2005; | |
| Association of Manufacturers; Chairman of the | Principal of The Vanguard Group (1997–2006). | |
| Federal Reserve Bank of Cleveland; Vice Chairman | ||
| of University Hospitals of Cleveland; President of | ||
| the Board of The Cleveland Museum of Art. | Vanguard Senior Management Team | |
| Peter F. Volanakis | R. Gregory Barton | Michael S. Miller |
| Born 1955. Trustee Since July 2009. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: President | Kathleen C. Gubanich | Glenn W. Reed |
| and Chief Operating Officer (retired 2010) of Corning | Paul A. Heller | George U. Sauter |
| Incorporated (communications equipment); Director of | Martha G. King | |
| Corning Incorporated (2000–2010) and Dow Corning | ||
| (2001–2010); Overseer of the Amos Tuck School of | ||
| Business Administration at Dartmouth College. | Chairman Emeritus and Senior Advisor | |
| John J. Brennan | ||
| Executive Officers | Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | ||
| Glenn Booraem | ||
| Born 1967. Controller Since July 2010. Principal | ||
| Occupation(s) During the Past Five Years: Principal | Founder | |
| of The Vanguard Group, Inc.; Controller of each of | ||
| the investment companies served by The Vanguard | John C. Bogle | |
| Group since 2010; Assistant Controller of each of | Chairman and Chief Executive Officer, 1974–1996 | |
| the investment companies served by The Vanguard | ||
| Group (2001–2010). | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
 | |
| P.O. Box 2600 | |
| Valley Forge, PA 19482-2600 |
Connect with Vanguard® > vanguard.com
| Fund Information > 800-662-7447 | “FTSE®” is a trademark jointly owned by the London |
| Direct Investor Account Services > 800-662-2739 | Stock Exchange plc and The Financial Times Limited |
| Institutional Investor Services > 800-523-1036 | and is used by FTSE International Limited under license. |
| Text Telephone for People | The FTSE High Dividend Yield Index is calculated by |
| With Hearing Impairment > 800-749-7273 | FTSE International Limited. FTSE International Limited |
| does not sponsor, endorse, or promote the fund; is not | |
| in any way connected to it; and does not accept any | |
| This material may be used in conjunction | liability in relation to its issue, operation, and trading. |
| with the offering of shares of any Vanguard | |
| fund only if preceded or accompanied by | |
| the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper Inc. or | |
| Morningstar, Inc., unless otherwise noted. | |
| You can obtain a free copy of Vanguard’s proxy voting | |
| guidelines by visiting vanguard.com/proxyreporting or by | |
| calling Vanguard at 800-662-2739. The guidelines are | |
| also available from the SEC’s website, sec.gov. In | |
| addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 | |
| months ended June 30. To get the report, visit either | |
| vanguard.com/proxyreporting or sec.gov. | |
| You can review and copy information about your fund at | |
| the SEC’s Public Reference Room in Washington, D.C. To | |
| find out more about this public service, call the SEC at | |
| 202-551-8090. Information about your fund is also | |
| available on the SEC’s website, and you can receive | |
| copies of this information, for a fee, by sending a | |
| request in either of two ways: via e-mail addressed to | |
| publicinfo@sec.gov or via regular mail addressed to the | |
| Public Reference Section, Securities and Exchange | |
| Commission, Washington, DC 20549-1520. | |
| © 2011 The Vanguard Group, Inc. | |
| All rights reserved. | |
| Vanguard Marketing Corporation, Distributor. | |
| Q6232 062011 | |
Item 2: Code of Ethics.
Not Applicable.
Item 3: Audit Committee Financial Expert.
Not Applicable.
Item 4: Principal Accountant Fees and Services.
Not Applicable.
Item 5: Audit Committee of Listed Registrants.
Not Applicable.
Item 6: Investments.
Not Applicable.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not Applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not Applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not Applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant's Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Exhibits.
(a) Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VANGUARD WHITEHALL FUNDS | |
| By: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: June 16, 2011 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| VANGUARD WHITEHALL FUNDS | |
| By: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: June 16, 2011 | |
| VANGUARD WHITEHALL FUNDS | |
| By: | /s/ THOMAS J. HIGGINS* |
| THOMAS J. HIGGINS | |
| CHIEF FINANCIAL OFFICER | |
| Date: June 16, 2011 | |
* By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on April 26, 2010, see file Number 33-53683, Incorporated by Reference.