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: 811-03916
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Name of Registrant: Vanguard Specialized Funds
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Address of Registrant: P.O. Box 2600
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Name and address of agent for service: Heidi Stam, Esquire | ||
P.O. Box 876 | ||
Valley Forge, PA 19482
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Registrant’s telephone number, including area code: (610) 669-1000
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Date of fiscal year end: January 31 | ||
Date of reporting period: February 1, 2014 – January 31, 2015
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Item 1: Reports to Shareholders |
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x1x1.jpg)
Annual Report | January 31, 2015
Vanguard Energy Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisors’ Report. | 9 |
Fund Profile. | 13 |
Performance Summary. | 15 |
Financial Statements. | 17 |
Your Fund’s After-Tax Returns. | 31 |
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.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard Energy Fund | |
Investor Shares | -13.16% |
Admiral™ Shares | -13.11 |
MSCI ACWI Energy Index | -12.07 |
Global Natural Resources Funds Average | -13.66 |
Global Natural Resources Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. |
Your Fund’s Performance at a Glance | ||||
January 31, 2014, Through January 31, 2015 | ||||
Distributions Per Share | ||||
Starting | Ending | |||
Share | Share | Income | Capital | |
Price | Price | Dividends | Gains | |
Vanguard Energy Fund | ||||
Investor Shares | $63.85 | $51.53 | $1.206 | $2.954 |
Admiral Shares | 119.83 | 96.69 | 2.351 | 5.542 |
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![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x4x1.jpg)
Chairman’s Letter
Dear Shareholder,
The results of the energy sector for the two halves of the fiscal year ended January 31, 2015, could hardly have differed more. It was the broad market’s best-performing sector in the first half and its worst performer in the second, when energy stocks declined sharply in tandem with oil prices.
Vanguard Energy Fund returned –13.16% for the 12 months, trailing its benchmark index. In the first six months, your fund bested the average return of global natural resources funds—which have significant allocations to sectors other than energy, such as materials. But by year-end its lead was trimmed as nonenergy stocks posted 12-month gains.
For the fourth consecutive fiscal year, the energy sector lagged the broad U.S. stock market, Energy was the only sector in the red for the year that ended in January. Several factors have contributed to this multiyear lag, including forecasts of slower growth in global energy demand. In the period under review, the main driver was the roughly 50% drop in the price of a barrel of West Texas Intermediate crude oil. (For more insight on falling oil prices, see the box on page 6.) Natural gas also played a role: Amid seemingly abundant supply—and in contrast to the more typical seasonal pattern—natural gas prices dropped significantly after November.
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If you invest in the Energy Fund through a taxable account, you may wish to review information about the fund’s after-tax performance provided later in this report.
U.S. stocks posted strong results despite facing many challenges
The broad U.S. stock market returned about 13% for the 12 months ended January 31, 2015. Volatility picked up notably toward the end of the period. Mostly strong U.S. corporate earnings, combined with the effects of central bank stimulus abroad, helped domestic equities overcome worries about lofty stock valuations, plunging oil prices, and slower economic growth outside the United States.
The Federal Reserve ended its accommodative bond-buying program in October, and investors seemed reassured when the Fed said it would take a “patient” approach in deciding when to increase short-term interest rates. The Bank of Japan, the European Central Bank, and the People’s Bank of China all pursued aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging-market stocks outpaced those of the developed markets of the Pacific and Europe.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
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U.S. bond returns stood out, helped by stimulus measures
The broad U.S. taxable bond market returned 6.61%, benefiting from strong demand for safe havens from geopolitical risk and stock market volatility, and from generally falling interest rates overseas.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite directions.) The yield of the 10-year Treasury note ended January at 1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, boosted by strong demand and generally light supply along with the broader bond market’s advance.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61% in dollar terms. Like their equity counterparts, international bond returns for U.S. investors suffered because of the strength of the U.S. dollar. The currency-hedged version of the Barclays international bond index returned more than 9% for U.S. investors.
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
Falling oil prices produced both winners and losers
As with most commodities, oil-price changes benefit some segments of the economy and hurt others. Beneficiaries of
Expense Ratios | |||
Your Fund Compared With Its Peer Group | |||
Investor | Admiral | Peer Group | |
Shares | Shares | Average | |
Energy Fund | 0.38% | 0.32% | 1.45% |
The fund expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratios were 0.37% for Investor Shares and 0.31% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014. | |||
Peer group: Global Natural Resources Funds. |
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the steep, and largely unexpected, slide in global oil prices that began in June include consumers who enjoyed lower prices at the gas pump, and energy-intensive businesses such as airlines.
“Losers” include Brazil, Russia, Venezuela, and other oil-exporting nations, and exploration and production companies. As many companies, including oil and gas majors, began announcing budget cutbacks, there have been ripple effects for a wide range of other companies, including drillers, providers of oil-field supplies, and “mom and pop” businesses serving oil and gas workers.
These dynamics are reflected in varying degrees in the performance of the Energy Fund’s subsectors. Equipment and services providers, which constituted about 9% of total fund assets, were some of the best performers in the first half of the fiscal year—and among the hardest-hit later on. Some drilling company holdings lost about half their value during the 12 months. Other equipment and services providers, including some of the fund’s largest holdings, held up better.
Returns diverged notably among oil and gas exploration and production companies, which constituted roughly 40% of fund assets. A few U.S.-based companies, boosted by strong first-half results, finished the year with gains, while many others ended in the red. The pattern was a bit more consistent among integrated international oil and gas behemoths: A few exceptions produced gains for the year,
Total Returns | |
Ten Years Ended January 31, 2015 | |
Average | |
Annual Return | |
Energy Fund Investor Shares | 7.40% |
Spliced Energy Index | 5.52 |
Global Natural Resources Funds Average | 4.17 |
For a benchmark description, see the Glossary. | |
Global Natural Resources Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. | |
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Behind the headlines on falling oil prices |
The drop of more than 50% in oil prices from last June through January generated plenty of |
headlines. For some perspective, it can be helpful to note that, as shown below, since 1986 |
there have been five periods when oil prices dropped significantly, as much as 65%. |
Three key factors influence crude oil prices: oil supply (current inventories and future supply |
expectations), demand, and the strength of the U.S. dollar. The degree to which they drive |
price fluctuations is unique in each instance. Recently, supply was the main factor; in 2008, |
it was demand. Clearly, not all oil-price movements are created equal. (You can read more |
in Is the Barrel Half Empty or Half Full? Oil-Price Drops and Global Impacts, available at |
vanguard.com/research.) |
Unlike the price of oil, Vanguard’s message is constant: Because the Energy Fund is |
concentrated in one relatively volatile sector of the economy, it is suitable to play a supporting |
role in an already balanced and diversified portfolio. |
Drivers of the largest oil-price drops |
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x8x1.jpg)
Notes: Components of oil-price drop de ned as follows: Supply = 7-month cumulative price change (CPC) in West Texas Intermediate spot |
oil prices minus 7-month CPC in spot copper prices (copper prices are used as a proxy for global demand); Demand = 7-month CPC in spot |
copper prices minus 7-month CPC in the U.S. dollar; Strength of U.S. dollar = 7-month CPC in USD major currencies index. Winter 2015 price |
change is calculated from June 2014 through January 2015. |
Sources: Vanguard calculations, based on data from Thomson Reuters Datastream, U.S. Energy Information Administration, Standard & |
Poor’s, Federal Reserve Bank of St. Louis, and Federal Reserve. |
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but most holdings in the fund and its benchmark index declined—especially Brazilian and Russian companies that also faced political turmoil.
Companies that concentrate on refining crude oil into other products were a bright spot: Lower prices for their primary raw material helped boost profits. Even in this industry group, however, there were negative returns, especially among some non-U.S. companies.
Compared with the benchmark, the advisors added value with their selections among equipment and services providers. This benefit was offset, however, by the fund’s larger-than-index stake in oil and gas exploration and production companies.
The Advisors’ Report that follows this letter provides additional details about the management of the fund during the fiscal year.
Your fund outperformed over the past decade
For the decade ended January 31, 2015, the Energy Fund’s 7.40% average annual return placed it well ahead of its comparative standards.
However, both the fund and its benchmark index lost their long-term lead over the broad U.S. market: The Russell 3000 Index had an average annual return of almost 8% for these ten years. Of course, shifts in the beginning and ending dates of a performance-measurement period can have a significant influence on comparisons. A year ago, for example, the Energy Fund’s 10-year average annual return bested that of the broad market by about 5 percentage points, while its benchmark index was about 3 percentage points ahead of the broad market.
While volatility is inevitable, you don’t have to ‘inherit’ it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from shareholders as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer some insights, and reinforce some of Vanguard’s key principles.
Not surprisingly, volatility came up as a concern, given that the broad U.S. stock market had several daily swings of more than 1% in January. Meanwhile, bond yields, especially on longer-term bonds, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of our key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
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Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x10x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 12, 2015
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Advisors’ Report
Vanguard Energy Fund returned about –13% in the fiscal year ended January 31, 2015, behind the return of its benchmark index but ahead of the average return of global natural resources peer funds. Your fund is managed by two 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 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 provided a discussion of the investment environment that existed during the year and of how their portfolio positioning reflects this assessment. These reports were prepared on February 11, 2015.
Wellington Management Company llp
Portfolio Manager:
Karl E. Bandtel, Senior Managing Director
The investment environment
Global equities advanced in the 12 months ended January 31, 2015, albeit at a more muted pace than in recent years. The Energy Fund’s benchmark, the MSCI All Country World Energy Index, returned
Vanguard Energy Fund Investment Advisors | ||||
Fund Assets Managed | ||||
Investment Advisor | % | $ Million | Investment Strategy | |
Wellington Management | 94 | 9,280 | Emphasizes long-term total-return opportunities from | |
Company LLP | the various energy subsectors: international oils, | |||
foreign integrated oils and foreign producers, North | ||||
American producers, oil services and equipment, | ||||
transportation and distribution, and refining and | ||||
marketing. | ||||
Vanguard Equity Investment | 3 | 346 | Employs a quantitative fundamental management | |
Group | approach using models that assess valuation, | |||
management decisions, market sentiment, and | ||||
earnings and balance-sheet quality of companies as | ||||
compared with their peers. | ||||
Cash Investments | 3 | 277 | These short-term reserves are invested by Vanguard in | |
equity index products to simulate investments in stock. | ||||
Each advisor may also maintain a modest cash | ||||
position. |
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about –12%, significantly lagging the broad MSCI All Country World Index return of about 7%.
Crude oil prices fell sharply after OPEC’s November decision to maintain current production levels even though it acknowledged the market was oversupplied. As a result, oil prices moved even lower as the period closed. All in all, the recent decline in crude oil prices is one of the largest we have seen in recent decades, and valuations are now at levels that we have not seen since the 2008 global financial crisis and subsequent downturn. The range of future outcomes remains wide for the price of oil, as the oil market remains finely balanced.
Our successes
Our strategy emphasizes long-term total-return opportunities across a broad range of energy companies and subsectors, including international oils, foreign integrated oils and foreign producers, North American producers, oil services and equipment, transportation and distribution, and refining and marketing.
Top individual contributors to our relative returns included our positions in U.S. exploration and production companies Athlon Energy and EOG Resources; both companies are focused on oil shale assets. Our underweighting of Russian integrated oil company Gazprom also helped.
Early in the period, we initiated a position in Athlon Energy. Shares subsequently rose nearly 90% following Encana’s September announcement of its intention to purchase the company, and we sold our position before the acquisition was completed.
EOG Resources, which focuses primarily in North America, has a strong asset portfolio with what we believe to be significant upside to current resource estimates. The company has high-quality assets and an experienced management team that is able to allocate capital efficiently. The shares remain attractively priced in our view and we continue to hold them.
Our shortfalls
Stock selection among producers, especially within natural-gas-focused exploration and production companies, was a source of underperformance, as was our bias toward exploration and production companies. Our most significant detractors were U.S.-domiciled, including Range Resources and Cabot Oil & Gas, two natural gas exploration and production companies with exposure to the Marcellus gas fields in the Northeast.
Given the pace of production growth coming from the Marcellus shale formation, it’s not surprising that the basin is feeling the effects of infrastructure constraints.
We believe capital will help lessen these bottlenecks. However, the congestion has caused Marcellus gas to trade at a discount—which in turn has pushed down
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the shares of Range Resources and Cabot Oil & Gas. We used the weakness as an opportunity to add to our position in Range Resources, but we trimmed our position in Cabot.
The fund’s positioning
We are excited by several themes within energy, most notably first movers in both oil and gas in North American shale. Over the longer term, liquefied natural gas (LNG) exports and the ongoing retirement of coal plants will continue to create structural support for increased natural gas demand.
While total supply levels remain higher than needed, supply growth has moderated because fewer rigs are drilling for gas (a reduction that itself is offset by improved well productivity). We believe that low-cost natural gas resource owners—particularly those with high-quality assets in the Marcellus Formation—are an attractive long-term opportunity.
Our portion of the fund holds stocks domiciled in 14 different countries. Over 30% of our assets are invested in international stocks (including roughly 5% in emerging markets).
We continue to believe that positive returns in energy investing result from a focus on companies with a track record of capturing attractive reinvestment opportunities. Consequently, our largest overweight remains U.S. producers. We also continue to assess where we are in the capital cycle for each subsector.
Although our turnover rate increased versus the previous year because of the increased volatility of the sector as a whole, it remains low at about 30%, and we continue to focus our holdings on stocks of companies that have clean balance sheets, long-lived resources, and high-quality management teams.
Vanguard Equity Investment Group
Portfolio Managers:
James D. Troyer, CFA, Principal
James P. Stetler, Principal
Michael R. Roach, CFA
The first and second halves of the fiscal year were marked by two very different return patterns for the energy sector. For the first half, the MSCI ACWI Energy Index returned about 16%; for the second, it returned about –24%. In the end, the index returned about –12% for the year, significantly lagging the aggregate global equity market, which returned about 7%. The broad U.S. equity market returned almost 13%, outpacing international markets.
2014 was another year of improving conditions in the U.S. economy. Third- and fourth-quarter GDP growth came in at an annual rate of 5% and 2.6% respectively; unemployment (5.6%) continued to decline, with the labor market approaching full employment, and wage growth will hopefully start to improve. U.S. companies
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have continued to improve their competitiveness, which should bode well for profit growth in the near term.
However, we are not without challenges. The housing market stalled for the year, and it remains uncertain when, and to what extent, the Federal Reserve might begin raising interest rates. Foreign economies continue to struggle, with some near recession and China’s growth rate decelerating. These uncertainties helped slow demand for oil despite an increasing supply fed by, for example, stepped-up shale production in the United States. Crude oil prices declined significantly—by more than 50%—in the last 12 months, most notably after OPEC’s decision not to cut oil production. These factors dampened the performance of the energy stocks throughout the fiscal year.
Although it’s important to understand how our performance is affected by the macro factors we’ve described, our investment philosophy and process focus on specific stock fundamentals. We compare all stocks in our investment universe within the same industry groups in order to identify those with characteristics that we believe will help them outperform over the long run. To do this, we use a strict quantitative process that evaluates a combination of valuation and other factors focused on fundamental growth. Using the results of our model, we then construct our portfolio, with the goal of maximizing expected return and minimizing exposure to risks that our research indicates do not improve returns.
Over the 12 months, our most successful holdings included U.S.-based Newfield Exploration (+20%), India’s Bharat Petroleum (+113%), and Finland’s Neste Oil (+62%). An important part of our performance came from our underweighting of companies that underperformed, such as Range Resources (–46%) and Norway’s Seadrill (–68%).
Our overweights in U.S. companies Nabors Industries (–32%) and Paragon Offshore (–82%), and in Norway’s Akastor (–38%), weighed on our results. In addition, we missed some opportunities by underweighting U.S. company Concho Resources (+13%) and Australia’s APA Group (+33%).
We thank you for your investment and look forward to the new year.
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Energy Fund
Fund Profile
As of January 31, 2015
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGENX | VGELX |
Expense Ratio1 | 0.38% | 0.32% |
30-Day SEC Yield | 2.13% | 2.19% |
Portfolio Characteristics | |||
DJ | |||
U.S. | |||
Total | |||
MSCI | Market | ||
ACWI | FA | ||
Fund | Energy | Index | |
Number of Stocks | 143 | 165 | 3,752 |
Median Market Cap | $39.2B | $60.9B | $47.6B |
Price/Earnings Ratio | 13.1x | 13.5x | 20.2x |
Price/Book Ratio | 1.5x | 1.4x | 2.7x |
Return on Equity | 13.2% | 15.2% | 17.8% |
Earnings Growth | |||
Rate | 8.7% | 7.3% | 15.1% |
Dividend Yield | 2.5% | 3.7% | 1.9% |
Foreign Holdings | 31.4% | 45.4% | 0.0% |
Turnover Rate | 31% | — | — |
Short-Term Reserves | 3.8% | — | — |
Volatility Measures | ||
DJ | ||
MSCI | U.S. Total | |
ACWI | Market | |
Energy | FA Index | |
R-Squared | 0.98 | 0.49 |
Beta | 0.98 | 1.14 |
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 | 9.1% |
Chevron Corp. | Integrated Oil & Gas | 5.3 |
Royal Dutch Shell plc | Integrated Oil & Gas | 5.0 |
Pioneer Natural | Oil & Gas Exploration | |
Resources Co. | & Production | 4.5 |
Schlumberger Ltd. | Oil & Gas Equipment | |
& Services | 3.4 | |
EOG Resources Inc. | Oil & Gas Exploration | |
& Production | 3.3 | |
Total SA | Integrated Oil & Gas | 2.9 |
Baker Hughes Inc. | Oil & Gas Equipment | |
& Services | 2.4 | |
Anadarko Petroleum | Oil & Gas Exploration | |
Corp. | & Production | 2.2 |
BP plc | Integrated Oil & Gas | 2.2 |
Top Ten | 40.3% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
1 The expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratios were 0.37% for Investor Shares and 0.31% for Admiral Shares.
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Energy Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Fund | Energy | |
Coal & Consumable Fuels | 2.0% | 1.2% |
Industrials | 1.3 | 0.0 |
Information Technology | 0.5 | 0.0 |
Integrated Oil & Gas | 38.4 | 52.0 |
Materials | 0.1 | 0.0 |
Oil & Gas Drilling | 0.7 | 1.3 |
Oil & Gas Equipment & | ||
Services | 8.9 | 9.2 |
Oil & Gas Exploration & | ||
Production | 36.9 | 20.1 |
Oil & Gas Refining & | ||
Marketing | 5.9 | 6.8 |
Oil & Gas Storage & | ||
Transportation | 3.7 | 9.4 |
Utilities | 0.3 | 0.0 |
Other | 1.3 | 0.0 |
Market Diversification (% of portfolio) | |
Europe | |
United Kingdom | 9.2% |
France | 3.0 |
Italy | 1.6 |
Other | 2.3 |
Subtotal | 16.1% |
Pacific | |
Japan | 1.0% |
Other | 0.7 |
Subtotal | 1.7% |
Emerging Markets | |
Russia | 1.8% |
China | 1.6 |
India | 1.5 |
Other | 0.9 |
Subtotal | 5.8% |
North America | |
United States | 67.7% |
Canada | 8.7 |
Subtotal | 76.4% |
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Energy Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2005, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x17x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2015 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Energy Fund*Investor Shares | -13.16% | 3.20% | 7.40% | $20,425 | |
•••••••• | Spliced Energy Index | -12.07 | 2.52 | 5.52 | 17,109 |
– – – – | Global Natural Resources Funds Average | -13.66 | -1.12 | 4.17 | 15,052 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 | |
For a benchmark description, see the Glossary. | |||||
Global Natural Resources Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Final Value | ||||
One | Five | Ten | of a $50,000 | |
Year | Years | Years | Investment | |
Energy Fund Admiral Shares | -13.11% | 3.26% | 7.47% | $102,776 |
Spliced Energy Index | -12.07 | 2.52 | 5.52 | 85,546 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 8.08 | 108,715 |
See Financial Highlights for dividend and capital gains information.
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Energy Fund
Fiscal-Year Total Returns (%): January 31, 2005, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x18x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2014 | ||||
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 | |
Investor Shares | 5/23/1984 | -14.26% | 3.00% | 8.06% |
Admiral Shares | 11/12/2001 | -14.22 | 3.06 | 8.13 |
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Energy Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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 (94.2%)1 | |||
United States (62.8%) | |||
Energy Equipment & Services (9.0%) | |||
Schlumberger Ltd. | 4,139,331 | 341,040 | |
Baker Hughes Inc. | 4,114,185 | 238,582 | |
Halliburton Co. | 4,819,881 | 192,747 | |
* | SEACOR Holdings Inc. | 643,756 | 46,318 |
Ensco plc Class A | 1,232,524 | 34,560 | |
Patterson-UTI Energy Inc. | 1,528,000 | 26,220 | |
National Oilwell | |||
Varco Inc. | 82,776 | 4,506 | |
^ | Transocean Ltd. | 145,629 | 2,374 |
Noble Corp. plc | 142,300 | 2,308 | |
Nabors Industries Ltd. | 188,300 | 2,167 | |
* | Weatherford | ||
International plc | 194,700 | 2,011 | |
Paragon Offshore plc | 603,424 | 1,261 | |
* | Cameron | ||
International Corp. | 11,500 | 515 | |
* | FMC Technologies Inc. | 10,000 | 375 |
894,984 | |||
Oil, Gas & Consumable Fuels (53.0%) | |||
Coal & Consumable Fuels (1.5%) | |||
CONSOL Energy Inc. | 5,080,300 | 147,075 | |
Integrated Oil & Gas (16.3%) | |||
Exxon Mobil Corp. | 10,350,462 | 904,837 | |
Chevron Corp. | 5,080,790 | 520,934 | |
Occidental | |||
Petroleum Corp. | 1,736,138 | 138,891 | |
Hess Corp. | 721,739 | 48,710 | |
Oil & Gas Exploration & Production (29.5%) | |||
Pioneer Natural | |||
Resources Co. | 2,990,050 | 450,092 | |
EOG Resources Inc. | 3,654,936 | 325,399 | |
Anadarko | |||
Petroleum Corp. | 2,663,714 | 217,759 | |
EQT Corp. | 2,514,522 | 187,181 |
Market | |||
Value• | |||
Shares | ($000) | ||
Energen Corp. | 2,704,452 | 171,516 | |
* | Southwestern | ||
Energy Co. | 6,585,313 | 163,250 | |
*,^ | Antero Resources Corp. | 4,487,975 | 155,508 |
Range Resources Corp. | 3,348,490 | 154,935 | |
Noble Energy Inc. | 3,136,890 | 149,755 | |
* | Concho Resources Inc. | 1,252,155 | 138,801 |
Cabot Oil & Gas Corp. | 4,735,308 | 125,486 | |
ConocoPhillips | 1,968,381 | 123,969 | |
* | Diamondback | ||
Energy Inc. | 1,486,718 | 102,569 | |
QEP Resources Inc. | 3,747,515 | 75,775 | |
* | Whiting Petroleum Corp. | 2,493,655 | 74,859 |
Marathon Oil Corp. | 2,476,241 | 65,868 | |
Devon Energy Corp. | 994,025 | 59,910 | |
* | Rice Energy Inc. | 3,193,895 | 54,552 |
* | Cobalt International | ||
Energy Inc. | 3,900,572 | 35,573 | |
* | Continental | ||
Resources Inc. | 666,962 | 30,280 | |
Murphy Oil Corp. | 638,200 | 28,661 | |
Denbury Resources Inc. | 3,454,987 | 23,839 | |
Chesapeake Energy Corp. | 178,000 | 3,414 | |
* | Newfield Exploration Co. | 83,300 | 2,481 |
Apache Corp. | 18,600 | 1,164 | |
Oil & Gas Refining & Marketing (4.2%) | |||
Phillips 66 | 2,306,650 | 162,204 | |
Marathon | |||
Petroleum Corp. | 1,375,950 | 127,399 | |
Valero Energy Corp. | 1,853,950 | 98,037 | |
HollyFrontier Corp. | 727,100 | 26,117 | |
Oil & Gas Storage & Transportation (1.5%) | |||
Spectra Energy Corp. | 2,239,135 | 74,877 | |
Kinder Morgan Inc. | 1,768,800 | 72,609 | |
Williams Cos. Inc. | 54,400 | 2,386 | |
* | Cheniere Energy Inc. | 4,800 | 342 |
5,247,014 |
17
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Other (0.4%) | |||
^,2 | Vanguard Energy ETF | 363,000 | 38,551 |
Trading Companies & Distributors (0.4%) | |||
*,^ | NOW Inc. | 1,606,900 | 40,092 |
Total United States | 6,220,641 | ||
International (31.4%) | |||
Australia (0.7%) | |||
Oil Search Ltd. | 10,589,728 | 63,727 | |
Woodside | |||
Petroleum Ltd. | 90,753 | 2,410 | |
WorleyParsons Ltd. | 247,958 | 1,845 | |
67,982 | |||
Brazil (0.7%) | |||
Petroleo Brasileiro | |||
SA ADR | 11,773,207 | 70,757 | |
Petroleo Brasileiro SA | |||
Preference Shares | 267,444 | 814 | |
Petroleo Brasileiro SA | 178,932 | 536 | |
72,107 | |||
Canada (8.4%) | |||
Suncor Energy Inc. | 4,342,978 | 129,464 | |
Canadian Natural | |||
Resources Ltd. | 3,876,675 | 112,191 | |
Cenovus Energy Inc. | 5,319,511 | 100,486 | |
* | Paramount Resources | ||
Ltd. Class A | 3,278,700 | 73,562 | |
TransCanada Corp. | 1,586,100 | 70,550 | |
*,^ | Seven Generations | ||
Energy Ltd. Class A | 3,885,129 | 49,959 | |
Enbridge Inc. XTSE | 1,002,900 | 48,570 | |
Cameco Corp. | 3,418,370 | 47,926 | |
Encana Corp. | 3,589,990 | 43,941 | |
^ | Pembina Pipeline Corp. | 1,010,000 | 31,380 |
^ | Crescent Point | ||
Energy Corp. | 1,013,600 | 24,090 | |
Keyera Corp. | 359,600 | 21,225 | |
^ | Veresen Inc. | 1,519,200 | 19,332 |
Trilogy Energy Corp. | 2,789,900 | 14,271 | |
Canadian Oil Sands Ltd. | 1,484,000 | 9,168 | |
*,^ | Pacific Rubiales | ||
Energy Corp. | 3,931,795 | 9,128 | |
Suncor Energy Inc. | 246,534 | 7,353 | |
Canadian Natural | |||
Resources Ltd. | 174,678 | 5,064 | |
Cenovus Energy Inc. | 183,039 | 3,467 | |
^ | Enbridge Inc. XYNX | 66,850 | 3,238 |
Encana Corp. | 226,000 | 2,764 | |
TransCanada Corp. | 48,496 | 2,158 | |
829,287 | |||
China (1.6%) | |||
^ | PetroChina Co. Ltd. ADR | 777,370 | 84,399 |
Beijing Enterprises | |||
Holdings Ltd. | 7,191,000 | 54,900 |
Market | |||
Value• | |||
Shares | ($000) | ||
CNOOC Ltd. | 3,330,717 | 4,419 | |
China Petroleum & | |||
Chemical Corp. | 5,583,600 | 4,418 | |
PetroChina Co. Ltd. | 3,302,000 | 3,586 | |
* | GCL-Poly Energy | ||
Holdings Ltd. | 8,607,000 | 1,869 | |
153,591 | |||
Denmark (0.0%) | |||
* | Vestas Wind Systems A/S | 77,418 | 3,008 |
Finland (0.0%) | |||
Neste Oil Oyj | 82,202 | 2,286 | |
France (2.9%) | |||
Total SA ADR | 5,284,364 | 272,198 | |
Total SA | 292,415 | 15,010 | |
Technip SA | 44,446 | 2,595 | |
289,803 | |||
Hong Kong (0.0%) | |||
* | Brightoil Petroleum | ||
Holdings Ltd. | 3,851,000 | 945 | |
Hungary (0.0%) | |||
MOL Hungarian | |||
Oil & Gas plc | 40,254 | 1,611 | |
India (1.5%) | |||
Reliance Industries Ltd. | 7,371,717 | 108,748 | |
Power Grid Corp. | |||
of India Ltd. | 10,281,528 | 24,519 | |
Hindustan Petroleum | |||
Corp. Ltd. | 218,656 | 2,312 | |
Bharat Petroleum | |||
Corp. Ltd. | 188,609 | 2,273 | |
Indian Oil Corp. Ltd. | 386,961 | 2,161 | |
* | Essar Oil Ltd. | 1,046,558 | 1,871 |
* | Mangalore Refinery | ||
& Petrochemicals Ltd. | 1,278,860 | 1,219 | |
143,103 | |||
Israel (0.0%) | |||
Paz Oil Co. Ltd. | 6,298 | 806 | |
* | Oil Refineries Ltd. | 1,554,083 | 452 |
1,258 | |||
Italy (1.5%) | |||
Eni SPA ADR | 4,350,099 | 147,468 | |
Eni SPA | 202,146 | 3,402 | |
150,870 | |||
Japan (1.0%) | |||
Inpex Corp. | 8,732,200 | 96,634 | |
Japan Petroleum | |||
Exploration Co. Ltd. | 61,700 | 1,874 | |
Idemitsu Kosan Co. Ltd. | 12,000 | 200 | |
98,708 |
18
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Netherlands (0.2%) | |||
Koninklijke Vopak NV | 281,837 | 15,718 | |
Fugro NV | 96,396 | 2,090 | |
17,808 | |||
Norway (0.9%) | |||
Statoil ASA ADR | 2,476,590 | 41,607 | |
*,^ | DNO ASA | 18,136,636 | 39,960 |
Statoil ASA | 220,244 | 3,688 | |
Subsea 7 SA | 213,715 | 1,818 | |
*,3 | Aker Solutions ASA | 210,655 | 1,028 |
88,101 | |||
Poland (0.0%) | |||
Polskie Gornictwo | |||
Naftowe i | |||
Gazownictwo SA | 1,686,654 | 1,990 | |
Polski Koncern | |||
Naftowy Orlen SA | 124,211 | 1,833 | |
3,823 | |||
Portugal (1.2%) | |||
Galp Energia SGPS SA | 11,028,616 | 116,511 | |
Russia (1.8%) | |||
Rosneft OAO GDR | 22,460,030 | 72,797 | |
Lukoil OAO ADR | 1,495,230 | 58,792 | |
Gazprom OAO ADR | 9,742,020 | 39,105 | |
Tatneft OAO ADR | 102,235 | 2,394 | |
AK Transneft OAO | |||
Preference Shares | 724 | 1,487 | |
Surgutneftegas OAO | |||
ADR | 303,180 | 1,316 | |
Gazprom OAO | 124,674 | 259 | |
176,150 | |||
South Africa (0.1%) | |||
Sasol Ltd. | 119,694 | 4,323 | |
South Korea (0.0%) | |||
SK Holdings Co. Ltd. | 6,500 | 1,013 | |
Spain (0.0%) | |||
Repsol SA | 30,482 | 540 | |
Thailand (0.1%) | |||
PTT PCL (Foreign) | 283,700 | 3,000 | |
PTT Exploration & | |||
Production PCL | |||
(Foreign) | 625,100 | 2,041 | |
* | PTT Global Chemical PCL | 230,000 | 397 |
5,438 | |||
Turkey (0.0%) | |||
Tupras Turkiye Petrol | |||
Rafinerileri AS | 93,266 | 2,021 | |
KOC Holding AS | 73,000 | 379 | |
2,400 |
Market | |||
Value• | |||
Shares | ($000) | ||
United Kingdom (8.8%) | |||
Royal Dutch Shell plc | |||
ADR | 7,604,689 | 467,308 | |
BP plc ADR | 5,176,534 | 201,005 | |
BG Group plc | 10,045,962 | 133,992 | |
* | Ophir Energy plc | 13,649,538 | 27,635 |
BP plc | 2,591,085 | 16,645 | |
Royal Dutch Shell plc | |||
Class B | 335,937 | 10,636 | |
* | Royal Dutch Shell plc | ||
Class A | 331,089 | 10,090 | |
Royal Dutch Shell plc | |||
Class A (Amsterdam | |||
Shares) | 194,150 | 5,907 | |
Amec Foster Wheeler plc | 184,279 | 2,204 | |
* | Cairn Energy plc | 1 | — |
875,422 | |||
Total International | 3,106,088 | ||
Total Common Stocks | |||
(Cost $7,102,162) | 9,326,729 | ||
Temporary Cash Investments (7.8%)1 | |||
Money Market Fund (3.9%) | |||
4,5 | Vanguard Market | ||
Liquidity Fund, | |||
0.133% | 386,344,362 | 386,344 | |
Face | |||
Amount | |||
($000) | |||
Repurchase Agreements (2.1%) | |||
RBS Securities, Inc. 0.060%, | |||
2/2/15 (Dated 1/30/15, | |||
Repurchase Value | |||
$119,501,000 collateralized | |||
by U.S. Treasury Note/Bond | |||
1.625%–2.125%, | |||
4/30/19–1/31/21, | |||
with a value of | |||
$121,894,000) | 119,500 | 119,500 | |
Societe Generale 0.060%, | |||
2/2/15 (Dated 1/30/15, | |||
Repurchase Value | |||
$88,700,000 collateralized | |||
by U.S. Treasury Note/Bond | |||
0.000%–4.000%, | |||
2/5/15–5/15/21, | |||
with a value of | |||
$90,474,000) | 88,700 | 88,700 | |
208,200 | |||
U.S. Government and Agency Obligations (1.8%) | |||
6,7 | Fannie Mae Discount | ||
Notes, 0.170%, 6/17/15 | 1,300 | 1,299 |
Energy Fund
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
7,8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.087%, 2/6/15 | 5,000 | 5,000 | |
8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.125%, 2/20/15 | 65,710 | 65,708 | |
7,8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.100%, 3/4/15 | 2,000 | 2,000 | |
8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.087%, 3/25/15 | 100,000 | 100,000 | |
7,8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.070%, 3/27/15 | 1,300 | 1,300 | |
7,8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.130%, 7/24/15 | 1,000 | 999 | |
8 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.133%, 7/31/15 | 700 | 700 | |
177,006 | |||
Total Temporary Cash Investments | |||
(Cost $771,535) | 771,550 | ||
Total Investments (102.0%) | |||
(Cost $7,873,697) | 10,098,279 | ||
Other Assets and Liabilities (-2.0%) | |||
Other Assets | 45,542 | ||
Liabilities5 | (241,036) | ||
(195,494) | |||
Net Assets (100%) | 9,902,785 |
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 7,758,134 |
Overdistributed Net Investment Income | (22,973) |
Accumulated Net Realized Losses | (54,595) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 2,224,582 |
Futures Contracts | (2,236) |
Foreign Currencies | (127) |
Net Assets | 9,902,785 |
Investor Shares—Net Assets | |
Applicable to 64,689,465 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 3,333,568 |
Net Asset Value Per Share— | |
Investor Shares | $51.53 |
Admiral Shares—Net Assets | |
Applicable to 67,938,931 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 6,569,217 |
Net Asset Value Per Share— | |
Admiral Shares | $96.69 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $153,899,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 96.5% and 5.5%, respectively, of net assets.
2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
3 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 January 31, 2015, the value of this security represented 0.0% of net assets.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Includes $168,520,000 of collateral received for securities on loan.
6 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.
7 Securities with a value of $9,699,000 have been segregated as initial margin for open futures contracts.
8 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Energy Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 265,892 |
Interest2 | 405 |
Securities Lending | 5,890 |
Total Income | 272,187 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 17,466 |
Performance Adjustment | 3,515 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 6,991 |
Management and Administrative—Admiral Shares | 9,118 |
Marketing and Distribution—Investor Shares | 734 |
Marketing and Distribution—Admiral Shares | 1,319 |
Custodian Fees | 898 |
Auditing Fees | 30 |
Shareholders’ Reports—Investor Shares | 86 |
Shareholders’ Reports—Admiral Shares | 34 |
Trustees’ Fees and Expenses | 24 |
Total Expenses | 40,215 |
Expenses Paid Indirectly | (168) |
Net Expenses | 40,047 |
Net Investment Income | 232,140 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | 440,758 |
Futures Contracts | 17,269 |
Foreign Currencies | (819) |
Realized Net Gain (Loss) | 457,208 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | (2,165,932) |
Futures Contracts | 1,776 |
Foreign Currencies | (69) |
Change in Unrealized Appreciation (Depreciation) | (2,164,225) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (1,474,877) |
1 Dividends are net of foreign withholding taxes of $19,744,000. | |
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $802,000, $221,000, and $0, respectively. | |
See accompanying Notes, which are an integral part of the Financial Statements.
21
Energy Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 232,140 | 241,331 |
Realized Net Gain (Loss) | 457,208 | 322,801 |
Change in Unrealized Appreciation (Depreciation) | (2,164,225) | 126,151 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (1,474,877) | 690,283 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (70,637) | (84,107) |
Admiral Shares | (149,548) | (153,175) |
Realized Capital Gain1 | ||
Investor Shares | (174,243) | (78,608) |
Admiral Shares | (352,074) | (143,323) |
Total Distributions | (746,502) | (459,213) |
Capital Share Transactions | ||
Investor Shares | (123,324) | (1,350,467) |
Admiral Shares | 569,662 | 678,643 |
Net Increase (Decrease) from Capital Share Transactions | 446,338 | (671,824) |
Total Increase (Decrease) | (1,775,041) | (440,754) |
Net Assets | ||
Beginning of Period | 11,677,826 | 12,118,580 |
End of Period2 | 9,902,785 | 11,677,826 |
1 Includes fiscal 2015 and 2014 short-term gain distributions totaling $64,227,000 and $6,818,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($22,973,000) and ($26,108,000). | ||
See accompanying Notes, which are an integral part of the Financial Statements.
22
Energy Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $63.85 | $62.66 | $62.60 | $69.20 | $57.17 |
Investment Operations | |||||
Net Investment Income | 1.276 | 1.291 | 1.336 | 1.072 | 1.053 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (9.436) | 2.413 | 1.098 | (3.949) | 14.103 |
Total from Investment Operations | (8.160) | 3.704 | 2.434 | (2.877) | 15.156 |
Distributions | |||||
Dividends from Net Investment Income | (1.206) | (1.277) | (1.340) | (1.102) | (.977) |
Distributions from Realized Capital Gains | (2.954) | (1.237) | (1.034) | (2.621) | (2.149) |
Total Distributions | (4.160) | (2.514) | (2.374) | (3.723) | (3.126) |
Net Asset Value, End of Period | $51.53 | $63.85 | $62.66 | $62.60 | $69.20 |
Total Return1 | -13.16% | 5.88% | 4.07% | -3.82% | 27.17% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $3,334 | $4,138 | $5,340 | $5,945 | $6,731 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | 0.37% | 0.38% | 0.31% | 0.34% | 0.34% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.84% | 1.97% | 2.15% | 1.67% | 1.74% |
Portfolio Turnover Rate | 31% | 17% | 18% | 24% | 31% |
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 0.03%, 0.04%, (0.02%), 0.01%, and 0.0%. |
See accompanying Notes, which are an integral part of the Financial Statements.
23
Energy Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $119.83 | $117.63 | $117.52 | $129.93 | $107.34 |
Investment Operations | |||||
Net Investment Income | 2.479 | 2.530 | 2.586 | 2.101 | 2.045 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (17.726) | 4.491 | 2.060 | (7.432) | 26.479 |
Total from Investment Operations | (15.247) | 7.021 | 4.646 | (5.331) | 28.524 |
Distributions | |||||
Dividends from Net Investment Income | (2.351) | (2.500) | (2.595) | (2.159) | (1.899) |
Distributions from Realized Capital Gains | (5.542) | (2.321) | (1.941) | (4.920) | (4.035) |
Total Distributions | (7.893) | (4.821) | (4.536) | (7.079) | (5.934) |
Net Asset Value, End of Period | $96.69 | $119.83 | $117.63 | $117.52 | $129.93 |
Total Return1 | -13.11% | 5.94% | 4.14% | -3.76% | 27.24% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $6,569 | $7,540 | $6,778 | $6,756 | $6,871 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | 0.31% | 0.32% | 0.26% | 0.28% | 0.28% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.90% | 2.03% | 2.20% | 1.73% | 1.80% |
Portfolio Turnover Rate | 31% | 17% | 18% | 24% | 31% |
1 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees. | |||||
2 Includes performance-based investment advisory fee increases (decreases) of 0.03%, 0.04%, (0.02%), 0.01%, and 0.00%. |
See accompanying Notes, which are an integral part of the Financial Statements.
24
Energy Fund
Notes to Financial Statements
Vanguard Energy 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 U.S. corporations. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been 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 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. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered
25
Energy Fund
into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2015, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.
4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under 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. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counter-party’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
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 (January 31, 2012–2015), 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. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counter-parties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counter-party risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
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Energy Fund
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
9. 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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
B. Wellington Management Company LLP provides 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 is subject to quarterly adjustments based on performance for the preceding three years relative to the MSCI ACWI Energy Index.
The Vanguard Group provides investment advisory services to a portion of the fund on an at-cost basis; the fund paid Vanguard advisory fees of $477,000 for the year ended January 31, 2015.
For the year ended January 31, 2015, the aggregate investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets, before an increase of $3,515,000 (0.03%) 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 based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At January 31, 2015, the fund had contributed capital of $960,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.38% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisor 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 year ended January 31, 2015, these arrangements reduced the fund’s expenses by $168,000 (an annual rate of 0.00% of average net assets).
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Energy Fund
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 market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—United States | 6,220,641 | — | — |
Common Stocks—International | 2,114,029 | 992,059 | — |
Temporary Cash Investments | 386,344 | 385,206 | — |
Futures Contracts—Liabilities1 | (3,378) | — | — |
Total | 8,717,636 | 1,377,265 | — |
1 Represents variation margin on the last day of the reporting period. |
F. At January 31, 2015, 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 500 Index | March 2015 | 1,589 | 157,979 | (3,049) |
S&P 500 Index | March 2015 | 143 | 71,085 | 813 |
(2,236) |
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.
During the year ended January 31, 2015, the fund realized net foreign currency losses of $819,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to overdistributed net investment income. Certain
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Energy Fund
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 year ended January 31, 2015, the fund realized gains on the sale of passive foreign investment companies of $319,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to overdistributed net investment income. Passive foreign investment companies held at January 31, 2015, had unrealized appreciation of $114,000, of which all has been distributed and is reflected in the balance of overdistributed net investment income.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $8,199,000 from overdistributed net investment income, and $28,241,000 from accumulated net realized gains, to paid-in capital.
For tax purposes, at January 31, 2015, the fund had no ordinary income available for distribution. The fund had available capital losses totaling $25,339,000 that may be carried forward indefinitely to offset future net capital gains.
At January 31, 2015, the cost of investment securities for tax purposes was $7,905,302,000. Net unrealized appreciation of investment securities for tax purposes was $2,192,977,000, consisting of unrealized gains of $3,106,071,000 on securities that had risen in value since their purchase and $913,094,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the year ended January 31, 2015, the fund purchased $3,638,050,000 of investment securities and sold $3,797,602,000 of investment securities, other than temporary cash investments.
I. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2015 | 2014 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 965,086 | 15,490 | 502,609 | 7,800 |
Issued in Lieu of Cash Distributions | 232,323 | 4,226 | 153,964 | 2,391 |
Redeemed | (1,320,733) | (19,842) | (2,007,040) | (30,600) |
Net Increase (Decrease)—Investor Shares | (123,324) | (126) | (1,350,467) | (20,409) |
Admiral Shares | ||||
Issued | 1,676,293 | 13,605 | 1,701,087 | 13,744 |
Issued in Lieu of Cash Distributions | 454,847 | 4,415 | 266,568 | 2,204 |
Redeemed | (1,561,478) | (13,001) | (1,289,012) | (10,651) |
Net Increase (Decrease)—Admiral Shares | 569,662 | 5,019 | 678,643 | 5,297 |
J. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
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Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard Energy Fund:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Energy Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodians and brokers, by agreement to the underlying ownership records of the transfer agent and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 13, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/energy_510x32x1.jpg)
Special 2014 tax information (unaudited) for Vanguard Energy Fund
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $486,579,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.
The fund distributed $196,846,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 44.8% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
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Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Energy Fund Investor Shares | |||
Periods Ended January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | -13.16% | 3.20% | 7.40% |
Returns After Taxes on Distributions | -14.77 | 2.07 | 6.42 |
Returns After Taxes on Distributions and Sale of Fund Shares | -6.26 | 2.65 | 6.22 |
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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.
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Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Energy Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $757.18 | $1.64 |
Admiral Shares | 1,000.00 | 757.44 | 1.33 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.34 | $1.89 |
Admiral Shares | 1,000.00 | 1,023.69 | 1.53 |
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 0.37% for Investor Shares and 0.30% for Admiral 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. | |||
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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 (for bonds), its actual income (for asset-backed securities), 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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
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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.
Benchmark Information
Spliced Energy Index: S&P 500 Index through November 30, 2000; S&P Energy Sector Index through May 31, 2010; MSCI All Country World Energy Index thereafter.
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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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | ||
College of Arts and Letters and of the Advisory Board | Thomas J. Higgins | |
to the Kellogg Institute for International Studies, both | Born 1957. Chief Financial Officer Since September | |
at the University of Notre Dame. | 2008. Principal Occupation(s) During the Past Five | |
Years and Other Experience: Principal of The Vanguard | ||
Mark Loughridge | Group, Inc.; Chief Financial Officer of each of the | |
Born 1953. Trustee Since March 2012. Principal | investment companies served by The Vanguard Group; | |
Occupation(s) During the Past Five Years and Other | Treasurer of each of the investment companies served | |
Experience: Senior Vice President and Chief Financial | by The Vanguard Group (1998–2008). | |
Officer (retired 2013) at IBM (information technology | ||
services); Fiduciary Member of IBM’s Retirement Plan | Kathryn J. Hyatt | |
Committee (2004–2013); Director of the Dow Chemical | Born 1955. Treasurer Since November 2008. Principal | |
Company; Member of the Council on Chicago Booth. | Occupation(s) During the Past Five Years and Other | |
Experience: Principal of The Vanguard Group, Inc.; | ||
Scott C. Malpass | Treasurer of each of the investment companies served | |
Born 1962. Trustee Since March 2012. Principal | by The Vanguard Group; Assistant Treasurer of each of | |
Occupation(s) During the Past Five Years and Other | the investment companies served by The Vanguard | |
Experience: Chief Investment Officer and Vice | Group (1988–2008). | |
President at the University of Notre Dame; Assistant | ||
Professor of Finance at the Mendoza College of | Heidi Stam | |
Business at Notre Dame; Member of the Notre Dame | Born 1956. Secretary Since July 2005. Principal | |
403(b) Investment Committee; Board Member of | Occupation(s) During the Past Five Years and Other | |
TIFF Advisory Services, Inc., and Catholic Investment | Experience: Managing Director of The Vanguard | |
Services, Inc. (investment advisors); Member of | Group, Inc.; General Counsel of The Vanguard Group; | |
the Investment Advisory Committee of Major | Secretary of The Vanguard Group and of each of the | |
League Baseball. | investment companies served by The Vanguard Group; | |
Director and Senior Vice President of Vanguard | ||
André F. Perold | Marketing Corporation. | |
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
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This material may be used in conjunction | |
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All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, 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 | |
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vanguard.com/proxyreporting or sec.gov. | |
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© 2015 The Vanguard Group, Inc. | |
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Vanguard Marketing Corporation, Distributor. | |
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![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x1x1.jpg)
Annual Report | January 31, 2015
Vanguard Health Care Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisor’s Report. | 8 |
Fund Profile. | 12 |
Performance Summary. | 14 |
Financial Statements. | 16 |
Your Fund’s After-Tax Returns. | 32 |
About Your Fund’s Expenses. | 33 |
Glossary. | 35 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard Health Care Fund | |
Investor Shares | 28.15% |
Admiral™ Shares | 28.20 |
MSCI All Country World Health Care Index | 20.22 |
Global Health/Biotechnology Funds Average | 24.53 |
Global Health/Biotechnology Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. |
Your Fund’s Performance at a Glance | ||||
January 31, 2014, Through January 31, 2015 | ||||
Distributions Per Share | ||||
Starting | Ending | |||
Share | Share | Income | Capital | |
Price | Price | Dividends | Gains | |
Vanguard Health Care Fund | ||||
Investor Shares | $191.63 | $216.14 | $2.115 | $25.443 |
Admiral Shares | 80.84 | 91.17 | 0.942 | 10.733 |
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x4x1.jpg)
Chairman’s Letter
Dear Shareholder,
The health care sector outshone the broader global stock market for the fourth straight fiscal year. Against this backdrop, Vanguard Health Care Fund flourished: For the 12 months ended January 31, 2015, the fund returned about 28%, notably better than its comparative standards. Its benchmark, the MSCI All Country World Health Care Index, returned about 20%, while the average return of its peers was close to 25%.
In the previous two fiscal years, the fund’s relatively light allocation to small-capitalization biotechnology stocks curbed its otherwise robust returns. Over the recent fiscal year, however, the advisor’s holdings in several industry subsectors––especially pharmaceuticals––put the fund ahead of its benchmark and peers. The Health Care Fund also benefited as large-cap stocks outpaced their small-cap brethren, both in the biotech arena and more broadly.
If you own shares of this fund in a taxable account, you may wish to review the fund’s after-tax returns later in this report.
U.S. stocks posted strong results despite facing many challenges
Although volatility picked up toward the end of the period and flat results in December turned negative in January, the broad U.S. stock market returned about 13% for the 12 months ended January 31, 2015. Mostly strong U.S. corporate earnings, combined with the effects of global monetary stimulus,
helped domestic equities overcome worries about lofty stock valuations, plunging oil prices, and economic weakness abroad.
The Federal Reserve ended its accommodative bond-buying program in October, and investors seemed reassured when the Fed said that it would take a “patient” approach in deciding when to increase short-term interest rates. The Bank of Japan, the European Central Bank, and the People’s Bank of China all embarked on aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging markets stocks outpaced those of the developed markets of the Pacific and Europe.
U.S. bond returns stood out, helped by stimulus measures
The broad U.S. taxable bond market returned 6.61% as bond prices benefited from global stimulus programs and many investors were drawn to the relative stability of bonds amid the volatility in equity markets.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite directions.) The yield of the 10-year Treasury note ended January at
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
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1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, helped by the effects of greater demand and reduced supply along with the broader bond market’s advance.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61%. Like their equity counterparts, international bonds suffered because of the strength of the U.S. dollar.
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
The advisor’s focus on value stocks led to strong returns for the fund
The health care sector’s rise and expansion have received a lot of media attention, as this research-intensive industry has been capitalizing on certain larger developments of the last few years. These include the aging population, the creation of new and innovative drugs, more accessibility to health care worldwide, and the expectation that the Affordable Care Act will result in health care insurance for more Americans.
In what may seem like a counterintuitive approach, the fund’s advisor, Wellington Management Company, concentrates on value in this growth industry. Although
Expense Ratios | |||
Your Fund Compared With Its Peer Group | |||
Investor | Admiral | Peer Group | |
Shares | Shares | Average | |
Health Care Fund | 0.35% | 0.30% | 1.34% |
The fund expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratios were 0.34% for Investor Shares and 0.29% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014. | |||
Peer group: Global Health/Biotechnology Funds. |
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Wellington diversifies the fund’s portfolio across the sector’s full spectrum, it also accumulates holdings in segments or specific companies that have fallen out of favor or that may not be in line with the latest investment trends. The advisor takes the long-term view and displays patience and conviction with companies that its research has identified as likely success stories.
In recent years, the environment has been mostly rosy, and health care stocks have recorded generous returns. The past fiscal year was an especially good one for the Health Care Fund, with its pharmaceutical holdings driving results. Its pharmaceutical stocks, which accounted for more than 45% of fund assets, on average, during the period, rose about 26%; those in the index rose about 17%. Mergers and acquisitions provided a boost here, along with strong product pipelines, fewer patent expirations compared to recent years, and effective cost-cutting.
Biotech stocks, a weakness for the fund over the fiscal year’s first half, turned into a strong point by the period’s end. The advisor’s patient approach and large-cap tilt worked in its favor in this segment. Concerns over expensive valuations subsided as profits stayed impressive and product innovation was high. The fund’s biotech stocks climbed more than 35%, compared to about 31% for their benchmark counterparts.
Total Returns | |
Ten Years Ended January 31, 2015 | |
Average | |
Annual Return | |
Health Care Fund Investor Shares | 13.19% |
Spliced Health Care Index | 10.01 |
Global Health/Biotechnology Funds Average | 11.47 |
For a benchmark description, see the Glossary. | |
Global Health/Biotechnology Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.
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Health care providers and services companies, chiefly managed-care firms, also paced the fund. While the Affordable Care Act may bring health insurance to more people, it may also make it harder for these companies to maximize profits. Several of the fund’s holdings in this subsector are succeeding in the changing landscape, and the advisor, which pays close attention to the regulatory climate in Washington, D.C., deserves credit for seeing their potential. Its selections among health care equipment companies also helped performance.
The fund wasn’t without its trouble spots. Health care technology firms, which account for less than 5% of fund assets on average, restrained results. Although small, the portfolio’s exposure was still much larger than that of the benchmark, and the advisor’s selections posted disappointing results.
The Advisor’s Report that follows this letter provides additional details about the management and performance of your fund during the year.
Through a long-term lens, the fund’s results stand out
Of course, investing in any sector fund–– no matter how well-managed it is, or how impressive its record––is accompanied by a high degree of risk. The health care sector can be extremely volatile at times. Expiring patents on blockbuster drugs, failure to receive regulatory approval on new drugs, and uncertainty about U.S. health care reform can wreak havoc on returns and sour investors on the industry.
Over the past decade, the advisor has steered the Health Care Fund through challenging situations. Its average annual return of about 13% over the ten years exceeds that of both its peers and its benchmark index. This outstanding performance is a credit to the Wellington team, especially Jean M. Hynes, who took over as the fund’s lead portfolio manager in December 2012 and was a member of the team for about two decades before that.
Although volatility is inevitable, you don’t have to ‘inherit’ it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from shareholders as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer some insights, and reinforce Vanguard’s key principles of investing.
Not surprisingly, given that the first month of 2015 was marked by sharp fluctuations in the markets, volatility came up as a concern. The broad stock market had several swings of more than 1% in January. Bond yields, meanwhile, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of our key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
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Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x9x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 12, 2015
Advisor’s Report
For the fiscal year ended January 31, 2015, Vanguard Health Care Fund delivered solid absolute and relative returns, gaining 28.15% for Investor Shares and 28.20% for Admiral Shares. The fund surpassed the 20.22% return of its benchmark, the MSCI All Country World Health Care Index, and the 24.53% average return of global health/biotechnology funds.
Major Portfolio Changes | |
Year Ended January 31, 2015 | |
Additions | Comments |
Actavis | Actavis is a specialty pharmaceutical company that develops generic |
and branded products. We owned Actavis prior to its Forest Labs | |
acquisition but increased our position. We are attracted to the | |
uniqueness of the combined company’s business model, which | |
provides exposure to both generic and branded pharmaceuticals | |
globally. The company’s Irish tax rate could also be strategically | |
important in future mergers and acquisitions. Actavis was the | |
fund’s second-largest holding as of the end of the period. | |
Bristol-Myers Squibb | We increased our position in this biopharmaceutical company. |
We see its immuno-oncology franchise as a transformative driver | |
in the years ahead and believe the market does not fully recognize | |
the magnitude of the company’s potential in this area. Bristol-Myers | |
Squibb was the fund’s largest holding at the end of the period. | |
Mylan | We increased our position in this global generic pharmaceutical |
manufacturer as its core generics business remains steady and has | |
benefited from selective price increases. We believe the planned | |
acquisition of Abbott’s non-U.S. established pharmaceuticals | |
business will augment the company’s globalization strategy. | |
Reductions | Comments |
Teva Pharmaceuticals | We trimmed into strength our position in Teva, an Israel-based global |
biopharmaceutical company specializing in generic formulations. The | |
stock rose substantially on a combination of speculation around M&A | |
in the sector, enthusiasm for the new CEO, and the strong conversion | |
of once-daily Copaxone to the three-times-a-week version. | |
Amgen | We trimmed our position in Amgen, a U.S.-based global |
biotechnology company that discovers, develops, manufactures, | |
and delivers human therapeutics. The stock was a strong performer | |
in the latter half of 2014 given restructuring efforts to focus more | |
attention on research and development. | |
Covance | We eliminated our position in Covance, a contract research organization |
that works with biopharmaceutical companies to help manage their | |
clinical trial process, after LabCorp announced in the fall that it would | |
acquire the company. |
8
The investment environment
The 12-month period was strong for developed-market stocks and particularly impressive for the health care sector. The MSCI All Country World Health Care Index outpaced the MSCI All Country World Index, which returned 7.40%.
Mergers and acquisitions within the health care industry continued to dominate headlines. Most relevant for Vanguard Health Care Fund was Actavis’ purchase of one of our largest holdings, Forest Labs, and Pfizer’s public bid for AstraZeneca. Pfizer’s final bid of nearly $120 billion was ultimately turned down by AstraZeneca’s board, as the company believed the offer did not appropriately value the strength of its development pipeline. Other notable developments included Medtronic’s acquisition of Covidien and Mylan’s proposed purchase of Abbott’s non-U.S. established pharmaceuticals business.
This is an exciting time for the health care sector, as two major secular trends will create dynamic opportunities in the future. The first is a deeper understanding of human diseases. This has been enabled by advances in gene sequencing, allowing for a fuller knowledge of disease biology. We are on the cusp of some truly exciting innovation in pharmaceuticals. The progress we have seen recently is more profound and has occurred more rapidly than we imagined even a few years ago.
The second trend is the changing shape of health care delivery in the United States. The emergence of a digital health care system, combined with potential payment reforms, will slowly shift incentives toward health care outcomes, creating many winners and losers. Longer term, this trend may also have an impact on health care systems outside the United States. More broadly, this environment should provide investors with deep research expertise the opportunity to shine.
Our successes
Our mid- and large-cap biopharmaceutical holdings were key drivers of the fund’s returns during the period. Stock selection among companies in North America and other developed markets added most to relative outperformance; selections among Japanese and United Kingdom-based companies also contributed.
Among mid-cap biopharmaceuticals, Forest Labs and Actavis were two of the top relative contributors. In the first quarter of 2014, it was announced that Forest would be acquired by Actavis, which is the world’s third-largest generic manufacturer and also has a significant branded pharmaceuticals business following its merger with Warner Chilcott in 2013. We viewed the merger as transformational and purchased more Actavis; at the end of the period, Actavis was our second-largest holding. Our position in Vertex Pharmaceuticals also added to returns, after the company reported positive phase 3 clinical data for its combination cystic fibrosis regimen.
In the large-cap biopharmaceutical space, our underweight position in Pfizer helped the fund’s relative performance. Pfizer’s stock price fell after AstraZeneca rebuffed its acquisition plans. As I mentioned, AstraZeneca’s decision was based largely on its belief that the final offer price
9
undervalued its early-stage pipeline, a view we share. Our exposure to AstraZeneca aided the fund’s absolute returns as Pfizer’s bid shed light on AstraZeneca’s enviable pipeline. Our position in Roche Holding also added to returns.
Within health care services, managed care organizations (MCOs) responded favorably to the proposed 2015 Medicare Advantage rates as well as to continued positive enrollment and cost trends. We continue to believe that MCOs, such as UnitedHealth and Aetna, will play an increasingly important role in the U.S. health care system. Our positions in UnitedHealth and Humana contributed to relative returns within this subindustry. We believe drug store holdings Walgreens and CVS should benefit in the future from generic pricing and accelerating volume, as an increasing number of Americans obtain health insurance. Both companies also contributed to relative returns.
Within medical devices, our holding in Edwards Lifesciences benefited from the greater-than-expected market growth of transcatheter aortic valve replacement (TAVR) and its market-leading valve, Sapien.
Our shortfalls
The most significant detractors from relative performance were stocks that we did not own or stocks in which we had underweight positions. These included Allergan, Celgene, Gilead Sciences, and Novartis. Our position in Allscripts Healthcare, a health care information technology company that is not included in the benchmark, and our allocation to Daiichi Sankyo, a mid-cap biopharmaceutical company based in Japan, also detracted, as did our small-cap biophar-maceutical holdings and our cash position.
Shares of Allscripts fell more than 28% during the period. The company remains a turnaround, and management’s 2014 financial road map may take longer to materialize. We continue to own a position and believe the stock is attractive at the current valuation. Shares of Daiichi Sankyo have been weak as investors have been concerned about the efficacy of its anticoagulation drug Edoxaban. We continue to own the stock.
The fund’s positioning
We currently hold about 20% of the fund’s assets in non-U.S. investments, a strategy that we believe provides diversification to shareholders over the long term. The portfolio is distributed among 89 equity names across health care’s subsectors. We expect that number to remain near the existing level or perhaps increase slightly, as we sometimes elect to gain exposure to certain themes or subsectors of the market by holding a “basket” of smaller positions rather than fewer larger ones.
Nonetheless, the top ten largest positions constituted a meaningful portion—more than 38%—of the fund’s assets at the period’s close. We expect turnover to remain quite low. The fund’s annualized turnover as of January 31, 2015, was approximately 20%, partially inflated by the large number of M&A deals.
We are optimistic about the long-term outlook for the health care sector and continue to have exposure to a number
10
of positive forces, such as delivery changes in the U.S. health care system and new biological approaches to disease. One area of exciting science is immuno-oncology, which may be broadly applicable to treating cancer. Leaders in this field include our holdings Bristol-Myers Squibb, Merck, Roche, AstraZeneca, and Incyte. The structure of the U.S. health care market is in the early stages of dynamic change, which will result in opportunities and challenges for market participants. Our holdings are aligned with companies that we believe can benefit from these opportunities, including health plans such as UnitedHealth and Humana and other players that will facilitate transparency, such as health care information company Cerner or hospital leader HCA.
In recent years we have observed an increasingly difficult reimbursement environment for drugs that compete in crowded categories with minimal product differentiation. Embedded in our investment process for biopharmaceutical, health care service, and medical device stocks is our assumption that a tougher pricing environment represents the way of the future. As an example, we have chosen not to own stocks that may have solid current fundamentals but are likely to face increasing pricing pressure from biosimilar or generic competition in the mid- to long-term. We also try to position the fund to hold pharmaceutical supply chain companies that will benefit from this changing pricing environment.
While valuations have risen after another strong year of outperformance for the health care sector, for the most part, they remain in line with historical levels—albeit at the high end—and fundamentals continue to surprise on the upside. As I mentioned earlier, we continue to believe we are in the early years of secular growth in the industry driven by biopharmaceutical discoveries and opportunities afforded with the changing health care delivery landscape.
Our philosophy of using a long-term horizon while looking at secular themes and trends across the entire market should help us identify pockets of health care that will generate sustainable, innovation-driven, differentiated growth. We will remain diversified across subsectors and regions, focused on the long haul, and positioned in the most promising health care stocks to generate attractive, risk-adjusted returns for Vanguard’s shareholders.
Jean M. Hynes, CFA
Senior Managing Director and
Portfolio Manager
Wellington Management Company llp
February 19, 2015
Health Care Fund
Fund Profile
As of January 31, 2015
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGHCX | VGHAX |
Expense Ratio1 | 0.35% | 0.30% |
30-Day SEC Yield | 0.93% | 0.98% |
Portfolio Characteristics | |||
DJ | |||
U.S. | |||
MSCI | Total | ||
ACWI | Market | ||
Health | FA | ||
Fund | Care | Index | |
Number of Stocks | 89 | 155 | 3,752 |
Median Market Cap | $42.0B | $95.4B | $47.6B |
Price/Earnings Ratio | 37.5x | 26.8x | 20.2x |
Price/Book Ratio | 3.8x | 4.2x | 2.7x |
Return on Equity | 14.8% | 20.1% | 17.8% |
Earnings Growth | |||
Rate | 6.3% | 8.4% | 15.1% |
Dividend Yield | 1.3% | 1.8% | 1.9% |
Foreign Holdings | 20.1% | 41.1% | 0.0% |
Turnover Rate | 20% | — | — |
Short-Term Reserves | 4.7% | — | — |
Volatility Measures | ||
MSCI | DJ | |
ACWI | U.S. Total | |
Health | Market | |
Care | FA Index | |
R-Squared | 0.85 | 0.61 |
Beta | 0.92 | 0.79 |
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) | ||
Bristol-Myers Squibb Co. Pharmaceuticals | 5.5% | |
Actavis plc | Pharmaceuticals | 5.1 |
UnitedHealth Group Inc. | Managed Health | |
Care | 4.7 | |
Merck & Co. Inc. | Pharmaceuticals | 4.7 |
AstraZeneca plc | Pharmaceuticals | 3.8 |
Eli Lilly & Co. | Pharmaceuticals | 3.5 |
McKesson Corp. | Health Care | |
Distributors | 2.9 | |
Medtronic plc | Health Care | |
Equipment | 2.9 | |
Regeneron | ||
Pharmaceuticals Inc. | Biotechnology | 2.6 |
Roche Holding AG | Pharmaceuticals | 2.5 |
Top Ten | 38.2% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
1 The expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratios were 0.34% for Investor Shares and 0.29% for Admiral Shares.
12
Health Care Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Health | ||
Fund | Care | |
Biotechnology | 12.3% | 15.0% |
Consumer Staples | 2.2 | 0.0 |
Health Care Distributors | 4.2 | 2.9 |
Health Care Equipment | 12.1 | 10.6 |
Health Care Facilities | 2.6 | 1.4 |
Health Care Services | 1.6 | 3.6 |
Health Care Supplies | 0.4 | 1.1 |
Health Care Technology | 3.1 | 0.6 |
Information Technology | 0.2 | 0.0 |
Life Sciences Tools & Services | 3.9 | 2.9 |
Managed Health Care | 11.0 | 5.2 |
Materials | 0.5 | 0.0 |
Pharmaceuticals | 45.9 | 56.7 |
Market Diversification (% of equity exposure) | |
Europe | |
Switzerland | 5.4% |
United Kingdom | 4.2 |
Belgium | 1.8 |
France | 1.4 |
Other | 0.2 |
Subtotal | 13.0% |
Pacific | |
Japan | 7.2% |
North America | |
United States | 78.7% |
Other | 0.6 |
Subtotal | 79.3% |
Middle East | 0.5% |
13
Health Care Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2005, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x16x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2015 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Health Care Fund*Investor Shares | 28.15% | 20.70% | 13.19% | $34,526 | |
•••••••• | Spliced Health Care Index | 20.22 | 17.17 | 10.01 | 25,970 |
– – – – | Global Health/Biotechnology Funds Average | 24.53 | 19.86 | 11.47 | 29,627 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 | |
For a benchmark description, see the Glossary. | |||||
Global Health/Biotechnology Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Final Value | ||||
One | Five | Ten | of a $50,000 | |
Year | Years | Years | Investment | |
Health Care Fund Admiral Shares | 28.20% | 20.76% | 13.27% | $173,759 |
Spliced Health Care Index | 20.22 | 17.17 | 10.01 | 129,849 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 8.08 | 108,715 |
See Financial Highlights for dividend and capital gains information.
14
Health Care Fund
Fiscal-Year Total Returns (%): January 31, 2005, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x17x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2014 | ||||
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 | |
Investor Shares | 5/23/1984 | 28.52% | 20.17% | 12.69% |
Admiral Shares | 11/12/2001 | 28.57 | 20.23 | 12.77 |
15
Health Care Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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 (95.4%) | |||
United States (75.3%) | |||
Biotechnology (11.1%) | |||
* | Regeneron | ||
Pharmaceuticals Inc. | 2,921,000 | 1,217,064 | |
* | Vertex | ||
Pharmaceuticals Inc. | 9,533,911 | 1,050,065 | |
Amgen Inc. | 5,580,485 | 849,685 | |
*,1 | Incyte Corp. | 10,174,343 | 810,997 |
*,1 | Alnylam | ||
Pharmaceuticals Inc. | 6,094,810 | 571,876 | |
* | Alkermes plc | 6,229,583 | 450,087 |
* | Ironwood | ||
Pharmaceuticals Inc. | |||
Class A | 4,169,598 | 64,962 | |
*,1 | Prothena Corp. plc | 1,662,794 | 37,629 |
*,^ | Agios Pharmaceuticals Inc. | 312,200 | 36,190 |
5,088,555 | |||
Chemicals (0.5%) | |||
Monsanto Co. | 1,835,700 | 216,576 | |
Electronic Equipment, Instruments | |||
& Components (0.2%) | |||
* | Keysight | ||
Technologies Inc. | 2,812,100 | 93,896 | |
Food & Staples Retailing (2.1%) | |||
* | Walgreens Boots | ||
Alliance Inc. | 7,693,500 | 567,396 | |
CVS Health Corp. | 3,899,920 | 382,816 | |
950,212 | |||
Health Care Equipment & Supplies (11.3%) | |||
* | Medtronic plc | 18,885,933 | 1,348,456 |
* | Boston Scientific Corp. | 59,624,800 | 883,043 |
* | Edwards Lifesciences | ||
Corp. | 3,402,670 | 426,525 | |
St. Jude Medical Inc. | 5,795,500 | 381,750 |
Market | |||
Value• | |||
Shares | ($000) | ||
Becton Dickinson and Co. | 2,635,600 | 363,924 | |
Abbott Laboratories | 7,591,400 | 339,791 | |
* | CareFusion Corp. | 5,661,354 | 335,718 |
* | Hologic Inc. | 7,379,300 | 224,072 |
* | Intuitive Surgical Inc. | 414,400 | 204,913 |
Zimmer Holdings Inc. | 1,589,200 | 178,149 | |
DENTSPLY | |||
International Inc. | 3,258,900 | 163,026 | |
CR Bard Inc. | 912,700 | 156,099 | |
Stryker Corp. | 1,433,500 | 130,520 | |
* | NuVasive Inc. | 1,628,303 | 75,423 |
5,211,409 | |||
Health Care Providers & Services (18.0%) | |||
UnitedHealth Group Inc. | 20,519,100 | 2,180,154 | |
McKesson Corp. | 6,342,800 | 1,348,796 | |
Humana Inc. | 5,247,894 | 768,502 | |
Cigna Corp. | 6,163,900 | 658,489 | |
Aetna Inc. | 7,119,383 | 653,702 | |
* | HCA Holdings Inc. | 7,075,900 | 500,974 |
* | Anthem Inc. | 3,500,500 | 472,428 |
Cardinal Health Inc. | 5,043,241 | 419,547 | |
Universal Health Services | |||
Inc. Class B | 4,053,000 | 415,554 | |
* | Express Scripts | ||
Holding Co. | 3,206,500 | 258,797 | |
* | Envision Healthcare | ||
Holdings Inc. | 4,187,700 | 143,973 | |
* | Community Health | ||
Systems Inc. | 2,536,704 | 119,403 | |
Owens & Minor Inc. | 3,000,000 | 102,690 | |
* | Tenet Healthcare Corp. | 2,053,200 | 86,809 |
* | WellCare Health Plans Inc. | 1,189,900 | 86,684 |
* | MEDNAX Inc. | 805,600 | 54,692 |
* | LifePoint Hospitals Inc. | 341,100 | 22,253 |
* | Community Health | ||
Systems Inc. Rights | 18,834,700 | 509 | |
8,293,956 |
16
Health Care Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Health Care Technology (3.0%) | |||
* | Cerner Corp. | 12,842,400 | 852,093 |
* | IMS Health Holdings Inc. | 11,995,380 | 295,206 |
*,1 | Allscripts Healthcare | ||
Solutions Inc. | 11,198,893 | 133,379 | |
* | athenahealth Inc. | 715,400 | 99,949 |
1,380,627 | |||
Life Sciences Tools & Services (3.7%) | |||
* | Illumina Inc. | 1,932,800 | 377,263 |
* | Quintiles Transnational | ||
Holdings Inc. | 5,636,278 | 340,995 | |
Thermo Fisher | |||
Scientific Inc. | 2,179,000 | 272,833 | |
*,1 | PAREXEL | ||
International Corp. | 4,057,900 | 247,370 | |
Agilent Technologies Inc. | 5,624,200 | 212,426 | |
* | VWR Corp. | 3,784,600 | 91,436 |
* | Bruker Corp. | 4,669,258 | 88,062 |
PerkinElmer Inc. | 1,441,400 | 65,886 | |
1,696,271 | |||
Pharmaceuticals (25.4%) | |||
Bristol-Myers | |||
Squibb Co. | 42,172,531 | 2,541,738 | |
* | Actavis plc | 8,795,896 | 2,344,458 |
Merck & Co. Inc. | 35,788,048 | 2,157,304 | |
Eli Lilly & Co. | 22,594,700 | 1,626,818 | |
* | Mylan Inc. | 15,362,980 | 816,542 |
Pfizer Inc. | 19,395,622 | 606,113 | |
Perrigo Co. plc | 3,855,652 | 585,057 | |
* | Hospira Inc. | 7,517,770 | 476,852 |
Zoetis Inc. | 9,178,657 | 392,204 | |
*,1 | Medicines Co. | 5,559,220 | 159,383 |
11,706,469 | |||
Total United States | 34,637,971 | ||
International (20.1%) | |||
Belgium (1.7%) | |||
1 | UCB SA | 10,202,034 | 793,099 |
Canada (0.5%) | |||
* | Catamaran Corp. | 4,937,683 | 246,440 |
Denmark (0.2%) | |||
H Lundbeck | 3,563,634 | 72,376 | |
France (1.3%) | |||
Sanofi | 5,889,603 | 542,671 | |
Ipsen SA | 1,094,832 | 55,721 | |
598,392 | |||
Israel (0.4%) | |||
Teva Pharmaceutical | |||
Industries Ltd. ADR | 3,507,100 | 199,414 |
Market | ||
Value• | ||
Shares | ($000) | |
Japan (6.9%) | ||
Astellas Pharma Inc. | 53,280,100 | 822,931 |
Shionogi & Co. Ltd. | 17,307,554 | 519,352 |
Takeda Pharmaceutical | ||
Co. Ltd. | 10,319,900 | 515,576 |
Eisai Co. Ltd. | 8,095,400 | 403,623 |
Daiichi Sankyo Co. Ltd. | 18,853,000 | 273,507 |
Chugai Pharmaceutical | ||
Co. Ltd. | 6,885,200 | 205,839 |
Ono Pharmaceutical | ||
Co. Ltd. | 1,659,900 | 174,695 |
* Olympus Corp. | 4,588,200 | 158,679 |
Kyowa Hakko Kirin | ||
Co. Ltd. | 5,250,000 | 59,784 |
Mitsubishi Tanabe | ||
Pharma Corp. | 2,734,400 | 43,228 |
3,177,214 | ||
Switzerland (5.1%) | ||
Roche Holding AG | 3,849,572 | 1,037,527 |
Novartis AG | 8,995,500 | 876,636 |
Actelion Ltd. | 2,837,238 | 313,403 |
Roche Holding AG | ||
(Bearer) | 454,604 | 124,708 |
2,352,274 | ||
United Kingdom (4.0%) | ||
AstraZeneca plc | 24,440,247 | 1,739,794 |
Smith & Nephew plc | 5,047,506 | 90,012 |
1,829,806 | ||
Total International | 9,269,015 | |
Total Common Stocks | ||
(Cost $23,667,423) | 43,906,986 |
17
Health Care Fund
Market | ||
Value• | ||
Shares | ($000) | |
Temporary Cash Investments (4.9%) | ||
Money Market Fund (0.0%) | ||
2,3 Vanguard Market Liquidity | ||
Fund, 0.133% | 15,425,600 | 15,426 |
Face | ||
Amount | ||
($000) | ||
Repurchase Agreements (1.4%) | ||
Bank of America Securities, | ||
LLC 0.060%, 2/2/15 (Dated | ||
1/30/15, Repurchase Value | ||
$59,600,000, collateralized | ||
by Government National | ||
Mortgage Assn. | ||
3.500%–4.500%, | ||
10/15/39–7/15/42, Federal | ||
National Mortgage Assn. | ||
1.850%–4.000%, | ||
10/1/20–2/1/45, and Federal | ||
Home Loan Mortgage Corp. | ||
1.986%–5.500%, | ||
4/1/35–2/1/45, with a | ||
value of $60,792,000) | 59,600 | 59,600 |
Barclays Capital Inc. 0.040%, | ||
2/2/15 (Dated 1/30/15, | ||
Repurchase Value | ||
$84,500,000, collateralized | ||
by U.S. Treasury Note/Bond, | ||
2.250%, 4/30/21, with a | ||
value of $86,190,000) | 84,500 | 84,500 |
Barclays Capital Inc. 0.050%, | ||
2/4/15 (Dated 1/28/15, | ||
Repurchase Value | ||
$100,001,000, collateralized | ||
by Federal National | ||
Mortgage Assn. | ||
2.500%–4.500%, | ||
7/1/27–11/1/40, and | ||
Federal Home Loan | ||
Mortgage Corp. | ||
3.000%–3.095%, | ||
1/1/30–1/1/45, with a | ||
value of $102,000,000) | 100,000 | 100,000 |
Face | Market | |
Amount | Value• | |
($000) | ($000) | |
BNP Paribas Securities Corp. | ||
0.080%, 2/2/15 (Dated | ||
1/30/15, Repurchase Value | ||
$49,100,000 collateralized | ||
by Government National | ||
Mortgage Assn. | ||
4.500%–5.500%, | ||
8/15/18–8/15/40, Federal | ||
National Mortgage Assn. | ||
2.000%–7.000%, | ||
8/1/17–2/1/44, and Federal | ||
Home Loan Mortgage Corp. | ||
2.500%–8.000%, | ||
1/1/17–11/1/44, with a | ||
value of $50,082,000) | 49,100 | 49,100 |
HSBC Bank USA 0.060%, | ||
2/2/15 (Dated 1/30/15, | ||
Repurchase Value | ||
$216,501,000, collateralized | ||
by Federal National | ||
Mortgage Assn. | ||
2.500%–6.500%, | ||
8/1/22–11/1/42, with a | ||
value of $220,834,000) | 216,500 | 216,500 |
Morgan Stanley & Co., Inc. | ||
0.080%, 2/2/15 (Dated | ||
1/30/15, Repurchase Value | ||
$72,100,000, collateralized | ||
by Federal National | ||
Mortgage Assn. | ||
2.500%–6.625%, | ||
5/1/15–12/1/39, Federal | ||
Home Loan Mortgage | ||
Corp. 3.750%–11.500%, | ||
10/18/16–3/27/19, Federal | ||
Home Loan Bank 4.875%, | ||
5/17/17, Federal Farm Credit | ||
Bank 1.230%–4.850%, | ||
4/23/18–7/21/31, and Student | ||
Loan Marketing Assn. | ||
0.000%, 10/3/22, with a | ||
value of $73,542,000) | 72,100 | 72,100 |
18
Health Care Fund
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
RBC Capital Markets LLC | |||
0.080%, 2/2/15 (Dated | |||
1/30/15, Repurchase Value | |||
$51,200,000, collateralized | |||
by Government National | |||
Mortgage Assn. | |||
3.500%–4.000%, | |||
10/20/44–1/20/45, Federal | |||
National Mortgage Assn. | |||
2.024%–4.865%, | |||
12/1/20–12/1/44, and | |||
Federal Home Loan | |||
Mortgage Corp. 2.256%, | |||
11/1/42, with a value of | |||
$52,224,000) | 51,200 | 51,200 | |
633,000 | |||
U.S. Government and Agency Obligations (2.2%) | |||
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.085%, 2/4/15 | 100,000 | 100,000 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.090%, 2/13/15 | 100,000 | 99,999 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.094%, 2/20/15 | 150,000 | 149,995 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.085%, 2/25/15 | 150,000 | 149,995 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.106%, 3/6/15 | 125,000 | 125,003 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.070%, 3/19/15 | 100,000 | 99,997 | |
4,5 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.165%, 3/20/15 | 100,000 | 100,000 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.065%, 3/25/15 | 23,950 | 23,950 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.060%–0.700%, 3/27/15 | 105,414 | 105,413 | |
4 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.070%, 4/6/15 | 75,000 | 74,998 | |
1,029,350 |
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
Commercial Paper (1.3%) | |||
General Electric Capital | |||
Corp., 0.200%, 3/10/15 | 200,000 | 199,970 | |
General Electric Capital | |||
Corp., 0.190%, 5/6/15 | 200,000 | 199,880 | |
6 | The Coca-Cola Co., | ||
0.140%, 3/24/15 | 50,000 | 49,990 | |
6 | The Coca-Cola Co., | ||
0.160%, 4/24/15 | 74,500 | 74,467 | |
6 | The Coca-Cola Co., | ||
0.130%, 4/29/15 | 75,000 | 74,970 | |
599,277 | |||
Total Temporary Cash Investments | |||
(Cost $2,277,004) | 2,277,053 | ||
Total Investments (100.3%) | |||
(Cost $25,944,427) | 46,184,039 | ||
Other Assets and Liabilities (-0.3%) | |||
Other Assets | 111,425 | ||
Liabilities3 | (263,927) | ||
(152,502) | |||
Net Assets (100%) | 46,031,537 | ||
Amount | |||
($000) | |||
Statement of Assets and Liabilities | |||
Assets | |||
Investments in Securities, at Value | |||
Unaffiliated Issuers | 43,414,880 | ||
Affiliated Vanguard Funds | 15,426 | ||
Other Affiliated Issuers | 2,753,733 | ||
Total Investments in Securities | 46,184,039 | ||
Receivables for Capital Shares Issued | 31,164 | ||
Other Assets | 80,261 | ||
Total Assets | 46,295,464 | ||
Liabilities | |||
Payables for Investment Securities | |||
Purchased | 109,715 | ||
Securities Lending Collateral Payable | |||
to Brokers | 15,426 | ||
Other Liabilities | 138,786 | ||
Total Liabilities | 263,927 | ||
Net Assets | 46,031,537 |
19
Health Care Fund
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 24,526,339 |
Undistributed Net Investment Income | 58,681 |
Accumulated Net Realized Gains | 1,223,172 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 20,239,612 |
Forward Currency Contracts | (15,914) |
Foreign Currencies | (353) |
Net Assets | 46,031,537 |
Investor Shares—Net Assets | |
Applicable to 53,948,616 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 11,660,343 |
Net Asset Value Per Share— | |
Investor Shares | $216.14 |
Admiral Shares—Net Assets | |
Applicable to 376,986,462 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 34,371,194 |
Net Asset Value Per Share— | |
Admiral Shares | $91.17 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $14,420,000.
1 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
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 $15,426,000 of collateral received for securities on loan.
4 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
5 Securities with a value of $14,733,000 have been segregated as collateral for open forward currency contracts.
6 Security exempt from registration under Section 4(2) of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration only to dealers in that program or other “accredited investors.” At January 31, 2015, the aggregate value of these securities was $199,427,000, representing 0.4% of net assets.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Health Care Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 709,032 |
Interest | 1,529 |
Securities Lending | 932 |
Total Income | 711,493 |
Expenses | |
Investment Advisory Fees—Note B | 57,891 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 18,988 |
Management and Administrative—Admiral Shares | 39,538 |
Marketing and Distribution—Investor Shares | 1,696 |
Marketing and Distribution—Admiral Shares | 3,639 |
Custodian Fees | 978 |
Auditing Fees | 29 |
Shareholders’ Reports—Investor Shares | 161 |
Shareholders’ Reports—Admiral Shares | 79 |
Trustees’ Fees and Expenses | 69 |
Total Expenses | 123,068 |
Net Investment Income | 588,425 |
Realized Net Gain (Loss) | |
Investment Securities Sold | 4,583,171 |
Foreign Currencies and Forward Currency Contracts | 155,606 |
Realized Net Gain (Loss) | 4,738,777 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 4,580,832 |
Foreign Currencies and Forward Currency Contracts | (21,776) |
Change in Unrealized Appreciation (Depreciation) | 4,559,056 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,886,258 |
1 Dividends are net of foreign withholding taxes of $21,708,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
21
Health Care Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 588,425 | 405,185 |
Realized Net Gain (Loss) | 4,738,777 | 3,351,986 |
Change in Unrealized Appreciation (Depreciation) | 4,559,056 | 5,664,512 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,886,258 | 9,421,683 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (104,289) | (114,317) |
Admiral Shares | (322,879) | (298,735) |
Realized Capital Gain1 | ||
Investor Shares | (1,271,460) | (709,234) |
Admiral Shares | (3,584,110) | (1,636,385) |
Total Distributions | (5,282,738) | (2,758,671) |
Capital Share Transactions | ||
Investor Shares | 529,165 | (941,911) |
Admiral Shares | 6,172,299 | 4,322,361 |
Net Increase (Decrease) from Capital Share Transactions | 6,701,464 | 3,380,450 |
Total Increase (Decrease) | 11,304,984 | 10,043,462 |
Net Assets | ||
Beginning of Period | 34,726,553 | 24,683,091 |
End of Period2 | 46,031,537 | 34,726,553 |
1 Includes fiscal 2015 and 2014 short-term gain distributions totaling $302,157,000 and $146,863,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $58,681,000 and ($83,069,000). | ||
See accompanying Notes, which are an integral part of the Financial Statements.
22
Health Care Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $191.63 | $152.58 | $131.96 | $124.30 | $120.06 |
Investment Operations | |||||
Net Investment Income | 2.941 | 2.350 | 2.777 | 2.300 | 2.046 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 49.127 | 53.058 | 22.791 | 12.780 | 7.404 |
Total from Investment Operations | 52.068 | 55.408 | 25.568 | 15.080 | 9.450 |
Distributions | |||||
Dividends from Net Investment Income | (2.115) | (2.357) | (2.757) | (2.237) | (2.007) |
Distributions from Realized Capital Gains | (25.443) | (14.001) | (2.191) | (5.183) | (3.203) |
Total Distributions | (27.558) | (16.358) | (4.948) | (7.420) | (5.210) |
Net Asset Value, End of Period | $216.14 | $191.63 | $152.58 | $131.96 | $124.30 |
Total Return1 | 28.15% | 37.66% | 19.59% | 12.50% | 7.95% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $11,660 | $9,905 | $8,681 | $8,462 | $8,447 |
Ratio of Total Expenses to Average Net Assets | 0.34% | 0.35% | 0.35% | 0.35% | 0.35% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.44% | 1.33% | 1.94% | 1.72% | 1.67% |
Portfolio Turnover Rate | 20% | 21% | 8% | 8% | 9% |
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. | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
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Health Care Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $80.84 | $64.37 | $55.68 | $52.45 | $50.67 |
Investment Operations | |||||
Net Investment Income | 1.290 | 1.040 | 1.211 | 1.005 | .891 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 20.715 | 22.378 | 9.605 | 5.392 | 3.115 |
Total from Investment Operations | 22.005 | 23.418 | 10.816 | 6.397 | 4.006 |
Distributions | |||||
Dividends from Net Investment Income | (.942) | (1.042) | (1.201) | (.980) | (. 874) |
Distributions from Realized Capital Gains | (10.733) | (5.906) | (. 925) | (2.187) | (1.352) |
Total Distributions | (11.675) | (6.948) | (2.126) | (3.167) | (2.226) |
Net Asset Value, End of Period | $91.17 | $80.84 | $64.37 | $55.68 | $52.45 |
Total Return1 | 28.20% | 37.74% | 19.65% | 12.57% | 7.99% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $34,371 | $24,821 | $16,002 | $12,968 | $11,459 |
Ratio of Total Expenses to Average Net Assets | 0.29% | 0.30% | 0.30% | 0.30% | 0.30% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.49% | 1.38% | 1.99% | 1.77% | 1.72% |
Portfolio Turnover Rate | 20% | 21% | 8% | 8% | 9% |
1 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees. | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
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Health Care Fund
Notes to Financial Statements
Vanguard Health Care 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 U.S. corporations. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been 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. Forward Currency Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. The master netting arrangements provide that, in the
25
Health Care Fund
event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The 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 pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
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 notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized forward currency contract gains (losses).
During the year ended January 31, 2015, the fund’s average investment in forward currency contracts represented 2% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under 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. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counter-party’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
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 (January 31, 2012–2015), 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. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties,
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Health Care Fund
monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
9. Other: Dividend income is recorded on the ex-dividend date. Interest is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
B. Wellington Management Company LLP provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. For the year ended January 31, 2015, the investment advisory fee represented an effective annual rate of 0.14% of the fund’s average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At January 31, 2015, the fund had contributed capital of $4,227,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 1.69% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
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Health Care Fund
D. 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 market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—U.S. | 34,637,971 | — | — |
Common Stock—International | 445,854 | 8,823,161 | — |
Temporary Cash Investments | 15,426 | 2,261,627 | — |
Forward Currency Contracts—Liabilities | — | (15,914) | — |
Total | 35,099,251 | 11,068,874 | — |
At January 31, 2015, 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) | ||
Bank of America NA | 3/18/15 | USD | 446,079 | JPY | 53,262,221 | (7,723) |
UBS AG | 3/18/15 | USD | 445,611 | JPY | 53,262,221 | (8,191) |
(15,914) | ||||||
JPY—Japanese yen. | ||||||
USD—U.S. dollar. |
E. 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.
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Health Care Fund
During the year ended January 31, 2015, the fund realized net foreign currency losses of $70,000, 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 investment income for tax purposes. Passive foreign investment companies held at January 31, 2015, had unrealized appreciation of $69,005,000, of which all has been distributed and is reflected in the balance of undistributed net investment income.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $20,800,000 from undistributed net investment income, and $165,401,000 from accumulated net realized gains, to paid-in capital.
For tax purposes, at January 31, 2015, the fund had $307,756,000 of ordinary income and $1,075,366,000 of long-term capital gains available for distribution.
At January 31, 2015, the cost of investment securities for tax purposes was $26,013,432,000. Net unrealized appreciation of investment securities for tax purposes was $20,170,607,000, consisting of unrealized gains of $20,422,392,000 on securities that had risen in value since their purchase and $251,785,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2015, the fund purchased $9,197,460,000 of investment securities and sold $7,773,571,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | |||||
2015 | 2014 | ||||
Amount | Shares | Amount | Shares | ||
($000) | (000) | ($000) | (000) | ||
Investor Shares | |||||
Issued | 2,454,337 | 11,686 | 1,769,228 | 10,118 | |
Issued in Lieu of Cash Distributions | 1,312,146 | 6,295 | 784,653 | 4,547 | |
Redeemed | (3,237,318) | (15,722) | (3,495,792) | (19,870) | |
Net Increase (Decrease)—Investor Shares | 529,165 | 2,259 | (941,911) | (5,205) | |
Admiral Shares | |||||
Issued | 4,771,234 | 54,272 | 4,148,023 | 55,782 | |
Issued in Lieu of Cash Distributions | 3,593,547 | 40,722 | 1,775,274 | 24,189 | |
Redeemed | (2,192,482) | (25,060) | (1,600,936) | (21,502) | |
Net Increase (Decrease) —Admiral Shares | 6,172,299 | 69,934 | 4,322,361 | 58,469 |
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Health Care Fund
H. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the year in securities of these companies were as follows:
Current Period Transactions | ||||||
Jan. 31, | Proceeds | Jan. 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Allscripts Healthcare | ||||||
Solutions Inc. | NA 2 | 36,830 | — | — | — | 133,379 |
Alnylam Pharmaceauticals Inc. | 343,441 | 175,245 | 25,963 | — | — | 571,876 |
Forest Laboratories Inc. | 1,768,013 | — | 1,010,160 | — | — | — |
Incyte Corp. | NA2 | 278,091 | — | — | — | 810,997 |
Medicines Co. | 159,864 | 24,141 | — | — | — | 159,383 |
PAREXEL International Corp. | 234,566 | 12,150 | 57,469 | — | — | 247,370 |
Prothena Corp. plc | 41,074 | 7,544 | — | — | — | 37,629 |
UCB SA | 661,141 | 70,353 | — | 11,410 | — | 793,099 |
Vanguard Market Liquidity Fund | — | NA3 | NA 3 | — | — | 15,426 |
Total | 3,208,099 | 11,410 | — | 2,769,159 | ||
1 Includes net realized gain (loss) on affiliated investment securities sold of $561,915. | ||||||
2 Not applicable—at January 31, 2014, the issuer was not an affiliated company of the fund. | ||||||
3 Not applicable—purchases and sales are for temporary cash investment purposes. |
I. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
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Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard Health Care Fund:
In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Health Care Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodians and brokers, by agreement to the underlying ownership records of the transfer agent and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 13, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/healthcare_520x33x1.jpg)
Special 2014 tax information (unaudited) for Vanguard Health Care Fund
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $4,703,298,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.
The fund distributed $528,059,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 38.8% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
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Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Health Care Fund Investor Shares | |||
Periods Ended January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 28.15% | 20.70% | 13.19% |
Returns After Taxes on Distributions | 24.29 | 18.97 | 11.80 |
Returns After Taxes on Distributions and Sale of Fund Shares | 18.57 | 16.67 | 10.75 |
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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.
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Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Health Care Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,148.10 | $1.84 |
Admiral Shares | 1,000.00 | 1,148.32 | 1.57 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.49 | $1.73 |
Admiral Shares | 1,000.00 | 1,023.74 | 1.48 |
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 0.34% for Investor Shares and 0.29% for Admiral 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. | |||
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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 (for bonds), its actual income (for asset-backed securities), 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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
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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.
Benchmark Information
Spliced Health Care Index: S&P 500 Index through December 31, 2001; S&P Health Care Index through May 31, 2010; MSCI All Country World Health Care Index thereafter.
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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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | ||
College of Arts and Letters and of the Advisory Board | Thomas J. Higgins | |
to the Kellogg Institute for International Studies, both | Born 1957. Chief Financial Officer Since September | |
at the University of Notre Dame. | 2008. Principal Occupation(s) During the Past Five | |
Years and Other Experience: Principal of The Vanguard | ||
Mark Loughridge | Group, Inc.; Chief Financial Officer of each of the | |
Born 1953. Trustee Since March 2012. Principal | investment companies served by The Vanguard Group; | |
Occupation(s) During the Past Five Years and Other | Treasurer of each of the investment companies served | |
Experience: Senior Vice President and Chief Financial | by The Vanguard Group (1998–2008). | |
Officer (retired 2013) at IBM (information technology | ||
services); Fiduciary Member of IBM’s Retirement Plan | Kathryn J. Hyatt | |
Committee (2004–2013); Director of the Dow Chemical | Born 1955. Treasurer Since November 2008. Principal | |
Company; Member of the Council on Chicago Booth. | Occupation(s) During the Past Five Years and Other | |
Experience: Principal of The Vanguard Group, Inc.; | ||
Scott C. Malpass | Treasurer of each of the investment companies served | |
Born 1962. Trustee Since March 2012. Principal | by The Vanguard Group; Assistant Treasurer of each of | |
Occupation(s) During the Past Five Years and Other | the investment companies served by The Vanguard | |
Experience: Chief Investment Officer and Vice | Group (1988–2008). | |
President at the University of Notre Dame; Assistant | ||
Professor of Finance at the Mendoza College of | Heidi Stam | |
Business at Notre Dame; Member of the Notre Dame | Born 1956. Secretary Since July 2005. Principal | |
403(b) Investment Committee; Board Member of | Occupation(s) During the Past Five Years and Other | |
TIFF Advisory Services, Inc., and Catholic Investment | Experience: Managing Director of The Vanguard | |
Services, Inc. (investment advisors); Member of | Group, Inc.; General Counsel of The Vanguard Group; | |
the Investment Advisory Committee of Major | Secretary of The Vanguard Group and of each of the | |
League Baseball. | investment companies served by The Vanguard Group; | |
Director and Senior Vice President of Vanguard | ||
André F. Perold | Marketing Corporation. | |
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
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P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | CFA® is a registered trademark owned by CFA Institute. |
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Institutional Investor Services > 800-523-1036 | |
Text Telephone for People | |
Who Are Deaf or Hard of Hearing> 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, a | |
Thomson Reuters Company, 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 | |
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Vanguard Marketing Corporation, Distributor. | |
Q520 032015 |
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Annual Report | January 31, 2015
Vanguard Precious Metals and Mining Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisor’s Report. | 7 |
Fund Profile. | 10 |
Performance Summary. | 11 |
Financial Statements. | 13 |
Your Fund’s After-Tax Returns. | 24 |
About Your Fund’s Expenses. | 25 |
Glossary. | 27 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard Precious Metals and Mining Fund | -7.61% |
S&P Global Custom Metals and Mining Index | -12.68 |
Precious Metals Equity Funds Average | -6.85 |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Your Fund’s Performance at a Glance | ||||
January 31, 2014, Through January 31, 2015 | ||||
Distributions Per Share | ||||
Starting | Ending | |||
Share | Share | Income | Capital | |
Price | Price | Dividends | Gains | |
Vanguard Precious Metals and Mining Fund | $10.38 | $9.59 | $0.000 | $0.000 |
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Chairman’s Letter
Dear Shareholder,
For the fiscal year ended January 31, 2015, Vanguard Precious Metals and Mining Fund returned –7.61%. That compares with –12.68% for the fund’s benchmark index, the Standard & Poor’s Global Custom Metals and Mining Index, and the –6.85% average return of its peers.
In an investment environment in which the broad U.S. and international stock markets posted gains, your fund’s negative performance is undoubtedly disappointing. Its result, however, is consistent with the ups and downs that can be expected from precious metals and mining investments, which tend to be much more volatile than the broad market. These stocks can experience extended declines alternating with periods of impressive growth.
During the most recent fiscal year, a weakened demand for commodities and, more specifically, reduced metals prices weighed on the precious metals and mining sector. Your fund was not immune from these challenges.
If you hold the fund in a taxable account, you may wish to review the information on after-tax performance provided later in this report.
U.S. stocks posted strong results despite facing many challenges
Although volatility picked up toward the end of the period and flat results in December turned negative in January,
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the broad U.S. stock market returned about 13% for the 12 months. Mostly strong U.S. corporate earnings, combined with the effects of global monetary stimulus, helped domestic equities overcome worries about lofty stock valuations, plunging oil prices, and economic weakness abroad.
The Federal Reserve ended its accommodative bond-buying program in October, and investors seemed reassured when the Fed said it would take a “patient” approach in deciding when to increase short-term interest rates. The Bank of Japan, European Central Bank, and People’s Bank of China all embarked on or continued aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging markets stocks outpaced those of the developed markets of the Pacific and Europe.
Bond returns stood out, helped by global stimulus
The broad U.S. taxable bond market returned 6.61% as bond prices benefited from global stimulus programs and as many investors were drawn to the relative stability of bonds amid the volatility in equity markets.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
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directions.) The yield of the 10-year Treasury note ended January at 1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, helped by the effects of greater demand and reduced supply along with the broader bond market’s advance.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61%. Like their equity counterparts, international bonds suffered because of the strength of the U.S. dollar.
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
A downturn in metal prices hurt the fund’s performance
Vanguard Precious Metals and Mining Fund is a global sector fund that offers exposure to a niche of the market, investing in companies that are involved in mining or exploring for precious and rare metals and minerals.
It’s important to consider that if you’re invested in the broad stock market, you already have exposure to this industry, whose stocks represent less than 5% of the global stock market’s total value. If you choose to increase your exposure by investing in this fund, keep in mind the risks that go along with the potential rewards.
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Precious Metals and Mining Fund | 0.25% | 1.43% |
The fund expense ratio shown is from the prospectus dated May 27, 2014, and represents estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratio was 0.29%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014. | ||
Peer group: Precious Metals Equity Funds. |
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The most recent fiscal year is a good reminder of this point. As I mentioned earlier, declining metal prices led to negative results for your fund and the industry. Silver was among the most volatile of the precious metals, declining 10%. The fund’s exposure to silver-linked businesses detracted substantially from overall results. Platinum prices also fell 10%. Gold prices rose a modest 3%, but the fund’s holdings in some of that industry’s weakest performers weighed on returns.
Unlike many of its peers, your fund doesn’t focus exclusively on precious metals stocks. Its comparatively broader approach also allows for investments in a wider range of companies to which the fund’s peers often have little or no exposure.
Outside the precious metals and mining precincts, some diversified metals and mining holdings tumbled sharply. Those stocks felt the effects of copper’s 22% price retreat amid decreased demand from China, but the advisor’s underweighting of the industry helped relative results. Holdings in construction companies, coal and consumable fuels, and fertilizer companies added to performance.
The advisor’s decision to limit exposure to some weaker performers in diversified metals and mining helped boost returns relative to the index. Strong selections
Total Returns | |
Ten Years Ended January 31, 2015 | |
Average | |
Annual Return | |
Precious Metals and Mining Fund | 1.54% |
Spliced Global Custom Metals and Mining Index | 4.82 |
Precious Metals Equity Funds Average | 3.13 |
For a benchmark description, see the Glossary. |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.
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among precious metals and minerals stocks also contributed to the fund’s outperformance.
Disappointing periods for the fund led to muted ten-year returns
For the ten years ended January 31, 2015, Vanguard Precious Metals and Mining Fund posted an average annual return of 1.54%, weaker than that of its benchmark index (+4.82%) and peer group (+3.13%).
Disappointing returns over the past few years have weighed on the fund’s long-term performance. Funds that focus on a single sector—as yours does—tend to be more volatile than broadly diversified funds. It’s not uncommon for sector funds to soar one year and plunge the next.
Recent challenges notwithstanding, we remain confident in M&G Investment Management, a London-based firm that has managed the fund since its inception more than 30 years ago. We believe that the team’s efforts, combined with the fund’s low costs, will continue to generate competitive results over the long term.
Though volatility is inevitable, you don’t have to ‘inherit’ it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from shareholders as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer insights, and reinforce some of Vanguard’s key principles.
Not surprisingly, given that the first month of 2015 was marked by sharp fluctuations in the markets, volatility came up as a concern. The broad stock market had several daily swings of more than 1% in January. Bond yields, meanwhile, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of those key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/preciousmetals_530x8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 17, 2015
Advisor’s Report
Vanguard Precious Metals and Mining Fund returned –7.61% for the fiscal year ended January 31, 2015. The result surpassed that of the fund’s customized benchmark index (–12.68%) but slightly lagged the average return of peer funds (– 6.85%).
The markets
The fiscal year was punctuated by several global risk developments, led by Russia’s annexation of Crimea, the rise in prominence of the Islamic State, and the threat of a widespread Ebola outbreak. Investors began to worry about below-trend growth and deflation starting about midyear; this seemed to coincide with the peak in many cyclical indicators. The sharp decline in the price of oil in 2014 was a major surprise, with Brent crude (a benchmark price for oil purchases worldwide) plunging from $110 a barrel to $50. This reflected weaker global demand as well as a rise in production by non-OPEC countries, particularly from U.S. shale, and OPEC’s decision not to cut its output despite sluggish demand from China and the Eurozone.
Commodities and miners across the board experienced a sell-off during the 12 months. Most notably, the iron ore price fell more than 40%. The strengthening U.S. dollar weighed further on prices as the prospect of a reversal in sentiment diminished given the positive U.S. economic outlook. This diluted support for safe haven assets, though gold rose marginally (+3.2%) given robust demand from Asian markets. The price of silver, however, declined (–10.0%). Zinc bucked the trend (+7.9%), with solid demand amid a supply deficit that is forecast to persist for several years as more zinc mines are scheduled to close.
The fund’s performance
In a challenging environment for commodities and related miners, we were pleased to see the fund perform well relative to the benchmark. In particular, holdings in royalty miners and companies active in the diamond market added significant value. Royalty miners, including Franco-Nevada and Royal Gold, benefit from production volume without incurring many of the risks associated with mine operations. These companies have a lean operating structure and are not hindered by economic projects that do poorly, provided that operations continue.
The fund’s largest holding, Canada-listed Dominion Diamond, was its strongest contributor. The long-term market dynamics seem very favorable for diamond producers; the industry’s most significant market, the United States, remains robust, and penetration rates are still low in emerging markets even as demand keeps growing. On the supply side, global rough diamond production remains subdued, not yet surpassing 2005 levels. The industry has made significant investments, but the new projects appear able only to maintain current supply.
Elsewhere, two long-standing holdings that were targets of takeover bids added significant value. Aquila Resources, an Australian coal and iron ore miner, was the subject of a bid by Chinese steel
7
manufacturer Baosteel and Australian-listed Aurizon. Aquila’s share price rose on that news, courting further attention by other interested parties. We sold our sizable stake in Aquila for a higher price than that paid by the consortium.
U.S.-listed AMCOL International—which mines bentonite, a clay with unique absorption properties—also added value. It was the subject of a bidding war as two companies sought to add to, and diversify, their portfolios. The share price materially increased on U.S.-based Minerals Technologies’ successful bid.
U.K.-listed Hochschild Mining was the largest detractor. We have reduced our shares, which lost value because of silver price volatility, costs involving a major building project in Peru, and a stretched balance sheet. U.S.-listed Kinross Gold also detracted. Nearly a quarter of Kinross’ gold production is in Russia, hurting the company in the wake of the annexation of Crimea and international pressure over the Russia-Ukraine military conflict.
Purchases and sales
Although the thirst for resources remains robust by historical standards, weaker prices are challenging an industry that is working toward the bottom of a cycle from which to consolidate and return to growth. That process requires management discipline through cutting costs, stabilizing margins, and bolstering financial strength.
Identifying segments that are ahead on the cost-cutting curve was instrumental in our decision to increase our precious metals and minerals exposure to more than 70% of the fund. Portfolio turnover increased during the period because of several factors. At the company level, precious metals miners have acted more swiftly to get their house in order and rebuild margins by shelving projects, decreasing capital spending, and reducing exploration expenses—actions that place them on a more secure platform for growth. Both absolutely and relatively, these companies are attractively valued and are the most compelling candidates for the fund. We have been active in this industry, adding to holdings in North American companies such as Eldorado Gold, Agnico Eagle Mines, New Gold, Yamana Gold, and the royalty companies. We believe these companies are making tangible progress with cost discipline and productivity. They also have high-pedigree management teams able to convert resources to reserves while growing margin and yield in a challenging price environment.
We funded these purchases primarily from two sources. First, we sold positions in several early stage exploration companies more dependent on capital markets than their own operations for cash flow. We then reduced the fund’s exposure to potash by selling our holdings in Mosaic, and we removed exposure to mineral sands by selling Iluka Resources.
We are also introducing a focused, albeit longer, tail. We intend to invest in a group of smaller holdings that have compelling risk–reward characteristics without compromising the fund’s liquidity. An example is Kaminak Gold, which we
8
recently bought. The company has identified a significant gold resource with highly favorable metallurgical properties underpinning sound economics. Its well-led management team and geopolitically safe operations combine to make this an attractive long-term investment.
Our underlying silver exposure rose through new positions in U.K.-listed Fresnillo and Canada-based First Majestic Silver. At these levels, both miners’ intrinsic value may be underappreciated by the market given their long-life, high-grade, low-cost assets that have been able to generate significant cash flows despite the material fall in the silver price.
Reflecting our positive view of the diamond market, we also initiated a new position in U.K.-listed Petra Diamonds. Since 2008, the company has focused on building up its portfolio of mines and has undertaken major capital programs to develop them. Petra is now benefiting from rising volumes and falling costs. With the added boost from strong diamond prices, those should translate into expanding cash flows and the potential to initiate dividends.
Looking ahead
Mining is a cyclical industry. Periods of excess are often followed by retrenchment and consolidation as weaker commodity prices squeeze out marginal, high-cost producers, redressing oversupply. This inevitability sets the stage for the next cycle. The marked change in management and strategy of precious metals miners in particular may represent a new phase for the industry. As capital spending is curtailed and exploration reduced, supply will become constrained, once again supporting prices, improving margins, and generating positive returns.
Recent years have been challenging, but we remain confident in our investment philosophy and process: maintaining our long-term approach of identifying high-caliber management teams extracting the greatest value from best-in-class assets, positioned at the lower end of the cost curve. Critically, we are focusing on the most favorable commodities through miners at the end of their structural transition of reducing all-in sustaining costs. This approach, we believe, will drive value both in the current environment and going forward.
Portfolio Managers:
Randeep Somel, CFA
Jamie J. Horvat
M&G Investment Management Limited
February 24, 2015
Precious Metals and Mining Fund
Fund Profile
As of January 31, 2015
Portfolio Characteristics | |||
S&P | DJ | ||
Global | U.S. | ||
Custom | Total | ||
Metals and | Market | ||
Mining | FA | ||
Fund | Index | Index | |
Number of Stocks | 59 | 261 | 3,752 |
Median Market Cap | $3.9B | $9.0B | $47.6B |
Price/Earnings Ratio | 388.2x | 232.4x | 20.2x |
Price/Book Ratio | 1.3x | 1.3x | 2.7x |
Return on Equity | 7.7% | 9.0% | 17.8% |
Earnings Growth | |||
Rate | -0.2% | 2.1% | 15.1% |
Dividend Yield | 1.4% | 2.2% | 1.9% |
Foreign Holdings | 84.2% | 88.3% | 0.0% |
Turnover Rate | 62% | — | — |
Ticker Symbol | VGPMX | — | — |
Expense Ratio1 | 0.25% | — | — |
Short-Term Reserves | 7.3% | — | — |
Subindustry Diversification (% of equity | ||
exposure) | ||
S&P | ||
Global | ||
Custom | ||
Metals and | ||
Mining | ||
Fund | Index | |
Aluminum | 0.0% | 4.5% |
Diversified Metals & Mining | 20.9 | 39.8 |
Fertilizers & Agricultural | ||
Chemicals | 2.6 | 0.0 |
Gold | 52.8 | 43.5 |
Precious Metals & Minerals | 13.7 | 7.6 |
Silver | 5.6 | 4.6 |
Specialty Chemicals | 4.4 | 0.0 |
Volatility Measures | ||
S&P | ||
Global | ||
Custom | DJ | |
Metals and | U.S. Total | |
Mining | Market | |
Index | FA Index | |
R-Squared | 0.87 | 0.07 |
Beta | 0.93 | 0.66 |
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) | ||
Dominion Diamond | Precious Metals & | |
Corp. | Minerals | 6.4% |
Nevsun Resources Ltd. | Diversified Metals & | |
Mining | 6.3 | |
Goldcorp Inc. | Gold | 5.8 |
BHP Billiton | Diversified Metals & | |
Mining | 5.4 | |
Randgold Resources Ltd. | Gold | 5.4 |
Royal Gold Inc. | Gold | 5.0 |
Agnico Eagle Mines Ltd. | Gold | 4.9 |
Acacia Mining plc | Gold | 4.1 |
Anglo American plc | Diversified Metals & | |
Mining | 3.6 | |
Franco-Nevada Corp. | Gold | 3.4 |
Top Ten | 50.3% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
1 The expense ratio shown is from the prospectus dated May 27, 2014, and represents estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratio was 0.29%.
10
Precious Metals and Mining Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2005, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/preciousmetals_530x13x1.jpg)
Average Annual Total Returns | ||||
Periods Ended January 31, 2015 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
-7.61% | -9.28% | 1.54% | $11,656 | |
•••••••• Spliced Global Custom Metals and | ||||
Mining Index | -12.68 | -6.34 | 4.82 | 16,007 |
– – – – Precious Metals Equity Funds Average | -6.85 | -8.96 | 3.13 | 13,604 |
Float Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 |
For a benchmark description, see the Glossary. | ||||
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
See Financial Highlights for dividend and capital gains information.
11
Precious Metals and Mining Fund
Fiscal-Year Total Returns (%): January 31, 2005, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/preciousmetals_530x14x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2014 | ||||
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 | |
Precious Metals and Mining Fund | 5/23/1984 | -11.41% | -11.66% | 0.94% |
12
Precious Metals and Mining Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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 (92.8%) | |||
Diversified Metals & Mining (19.4%) | |||
*,1 | Nevsun Resources Ltd. | 37,839,800 | 130,729 |
BHP Billiton plc | 5,210,000 | 113,164 | |
Anglo American plc | |||
London Shares | 4,470,000 | 74,666 | |
* | Lundin Mining Corp. | 11,441,191 | 40,697 |
Boliden AB | 2,580,000 | 40,304 | |
*,2 | Balmoral | ||
Resources Ltd. | 4,900,000 | 3,262 | |
* | True Gold Mining Inc. | 14,319,500 | 1,916 |
* | Bougainville Copper Ltd. | 323,438 | 60 |
404,798 | |||
Fertilizers & Agricultural Chemicals (2.4%) | |||
Potash Corp. of | |||
Saskatchewan Inc. | 1,356,629 | 49,388 | |
Gold (49.0%) | |||
Goldcorp Inc. | |||
(NYSE Shares) | 4,822,458 | 115,884 | |
Randgold Resources | |||
Ltd. ADR | 1,309,380 | 111,638 | |
Royal Gold Inc. | 1,430,154 | 103,629 | |
Acacia Mining plc | 20,100,627 | 85,394 | |
Agnico Eagle Mines | |||
Ltd. (NYSE Shares) | 2,241,335 | 75,578 | |
Franco-Nevada Corp. | 1,241,602 | 71,516 | |
* | B2Gold Corp. | ||
(AMEX Shares) | 28,838,821 | 56,524 | |
^ | Eldorado Gold Corp. | ||
(NYSE Shares) | 10,364,400 | 49,542 | |
Newmont Mining Corp. | 1,869,816 | 47,026 | |
* | New Gold Inc. | 9,195,000 | 40,305 |
* | SEMAFO Inc. | 9,467,000 | 33,154 |
Yamana Gold Inc. | |||
(NYSE Shares) | 7,832,232 | 32,190 | |
Yamana Gold Inc. | 7,291,086 | 30,181 |
Market | |||
Value• | |||
Shares | ($000) | ||
* | Primero Mining Corp. | 7,230,000 | 29,018 |
* | Agnico Eagle Mines Ltd. | 814,545 | 27,461 |
* | Alamos Gold Inc. | 3,627,542 | 19,355 |
^ | Osisko Gold | ||
Royalties Ltd. | 1,121,345 | 15,081 | |
Alacer Gold Corp. | 5,752,073 | 13,490 | |
*,2 | Roxgold Inc. | 25,375,000 | 12,401 |
* | Torex Gold | ||
Resources Inc. | 9,452,838 | 10,787 | |
* | Kinross Gold Corp. | 3,067,649 | 10,399 |
*,^ | Kirkland Lake Gold Inc. | 1,860,000 | 6,602 |
* | Asanko Gold Inc. | 3,300,000 | 5,194 |
* | Goldcorp Inc. | 183,500 | 4,432 |
* | Premier Gold | ||
Mines Ltd. | 2,362,349 | 3,811 | |
* | B2Gold Corp. | 1,860,800 | 3,661 |
Eldorado Gold Corp. | 710,600 | 3,411 | |
* | Continental Gold Ltd. | 1,700,000 | 2,836 |
Gold Resource Corp. | 500,000 | 1,750 | |
* | Mundoro Capital Inc. | 1,000,000 | 114 |
*,1 | Apex Minerals NL | 55,654,166 | — |
1,022,364 | |||
Precious Metals & Minerals (12.7%) | |||
*,1 | Dominion Diamond Corp. | 8,093,473 | 134,456 |
Tahoe Resources Inc. | 2,797,081 | 38,180 | |
Fresnillo plc | 2,637,666 | 35,628 | |
* | Stillwater Mining Co. | 2,049,580 | 28,018 |
* | Mountain Province | ||
Diamonds Inc. | 3,000,000 | 11,946 | |
* | Petra Diamonds Ltd. | 3,540,000 | 8,162 |
*,^ | Lucara Diamond Corp. | 2,900,000 | 4,793 |
* | Kaminak Gold Corp. | ||
Class A | 3,660,000 | 3,024 | |
*,2 | Mountain Province | ||
Diamonds Inc.- | |||
Private Placement | 400,000 | 1,434 | |
265,641 |
13
Precious Metals and Mining Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Silver (5.2%) | |||
*,1 Hochschild Mining plc | 36,992,555 | 50,458 | |
*,^ | First Majestic | ||
Silver Corp. | 4,513,000 | 27,935 | |
* | Fortuna Silver Mines Inc. | 3,855,375 | 18,690 |
* | MAG Silver Corp. | 1,424,523 | 10,560 |
* | Endeavour Silver Corp. | 520,000 | 1,428 |
109,071 | |||
Specialty Chemicals (4.1%) | |||
Umicore SA | 1,346,979 | 56,413 | |
Johnson Matthey plc | 587,079 | 28,721 | |
85,134 | |||
Total Common Stocks | |||
(Cost $2,318,155) | 1,936,396 | ||
Precious Metals (0.1%) | |||
* | Platinum Bullion | ||
(In Troy Ounces) | 2,009 | 2,491 | |
Total Precious Metals | |||
(Cost $1,213) | 2,491 | ||
Temporary Cash Investment (10.9%) | |||
Money Market Fund (10.9%) | |||
3,4 | Vanguard Market | ||
Liquidity Fund, 0.133% | |||
(Cost $226,429) | 226,428,780 | 226,429 | |
Total Investments (103.8%) | |||
(Cost $2,545,797) | 2,165,316 | ||
Other Assets and Liabilities (-3.8%) | |||
Other Assets | 16,840 | ||
Liabilities3 | (95,608) | ||
(78,768) | |||
Net Assets (100%) | |||
Applicable to 217,481,534 outstanding | |||
$.001 par value shares of beneficial | |||
interest (unlimited authorization) | 2,086,548 | ||
Net Asset Value Per Share | $9.59 |
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers5 | 1,623,244 |
Affiliated Vanguard Funds | 226,429 |
Other Affiliated Issuers | 315,643 |
Total Investments in Securities | 2,165,316 |
Receivables for | |
Investment Securities Sold | 11,885 |
Other Assets | 4,955 |
Total Assets | 2,182,156 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 21,263 |
Securities Lending Collateral Payable | |
to Brokers | 63,875 |
Other Liabilities | 10,470 |
Total Liabilities | 95,608 |
Net Assets | 2,086,548 |
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 4,076,605 |
Overdistributed Net Investment Income | (137,508) |
Accumulated Net Realized Losses | (1,473,025) |
Unrealized Appreciation (Depreciation) | |
Investment Securities5 | (380,481) |
Foreign Currencies | 957 |
Net Assets | 2,086,548 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $54,057,000.
1 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
2 Restricted securities totaling $17,097,000, representing 0.8% of net assets.
3 Includes $63,875,000 of collateral received for securities on loan.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Includes precious metals.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Precious Metals and Mining Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 37,483 |
Interest | 131 |
Securities Lending | 850 |
Total Income | 38,464 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 3,329 |
Performance Adjustment | (1,917) |
The Vanguard Group—Note C | |
Management and Administrative | 4,611 |
Marketing and Distribution | 573 |
Custodian Fees | 156 |
Auditing Fees | 25 |
Shareholders’ Reports | 99 |
Trustees’ Fees and Expenses | 6 |
Total Expenses | 6,882 |
Net Investment Income | 31,582 |
Realized Net Gain (Loss) | |
Investment Securities Sold | (688,610) |
Foreign Currencies | (12) |
Realized Net Gain (Loss) | (688,622) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities2 | 481,651 |
Foreign Currencies | 936 |
Change in Unrealized Appreciation (Depreciation) | 482,587 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (174,453) |
1 Dividends are net of foreign withholding taxes of $3,040,000. | |
2 Includes precious metals. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Precious Metals and Mining Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 31,582 | 52,446 |
Realized Net Gain (Loss) | (688,622) | (537,734) |
Change in Unrealized Appreciation (Depreciation) | 482,587 | (575,290) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (174,453) | (1,060,578) |
Distributions | ||
Net Investment Income | — | (1,513) |
Realized Capital Gain | — | — |
Return of Capital | — | (113) |
Total Distributions | — | (1,626) |
Capital Share Transactions | ||
Issued | 661,167 | 1,113,198 |
Issued in Lieu of Cash Distributions | — | 1,497 |
Redeemed | (702,662) | (861,854) |
Net Increase (Decrease) from Capital Share Transactions | (41,495) | 252,841 |
Total Increase (Decrease) | (215,948) | (809,363) |
Net Assets | ||
Beginning of Period | 2,302,496 | 3,111,859 |
End of Period1 | 2,086,548 | 2,302,496 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($137,508,000) and ($169,135,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Precious Metals and Mining Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $10.38 | $15.46 | $22.14 | $24.15 | $18.74 |
Investment Operations | |||||
Net Investment Income | .130 | . 2431 | .292 | .3342 | .181 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments 3 | (. 920) | (5.315) | (5.962) | (.760) | 6.521 |
Total from Investment Operations | (.790) | (5.072) | (5.670) | (.426) | 6.702 |
Distributions | |||||
Dividends from Net Investment Income | — | (.007) | (.710) | (.123) | (1.101) |
Distributions from Realized Capital Gains | — | — | (.300) | (1.461) | (.191) |
Return of Capital | — | (.001) | — | — | — |
Total Distributions | — | (.008) | (1.010) | (1.584) | (1.292) |
Net Asset Value, End of Period | $9.59 | $10.38 | $15.46 | $22.14 | $24.15 |
Total Return4 | -7.61% | -32.82% | -26.13% | -0.97% | 35.35% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,087 | $2,302 | $3,112 | $4,415 | $5,030 |
Ratio of Total Expenses to | |||||
Average Net Assets5 | 0.29% | 0.25% | 0.26% | 0.29% | 0.27% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.33% | 2.10% | 1.62% | 1.54%2 | 0.61% |
Portfolio Turnover Rate | 62% | 34% | 30% | 22% | 34% |
1 Calculated based on average shares outstanding. 2 Net investment income per share and the ratio of net investment income to average net assets include $.103 and 0.40%, respectively, resulting from a special dividend from OZ Minerals Ltd. in May 2011. 3 Includes increases from redemption fees of $.00, $.00, $.00, $.01, and $.01. Effective May 23, 2012, the redemption fee was eliminated. 4 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. 5 Includes performance-based investment advisory fee increases (decreases) of (0.08%), (0.09%), (0.07%), (0.03%), and (0.05%). | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
17
Precious Metals and Mining Fund
Notes to Financial Statements
Vanguard Precious Metals and Mining 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. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been 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. Precious metals are valued at the latest quoted bid prices. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset 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. 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 (January 31, 2012–2015), 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.
18
Precious Metals and Mining Fund
5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counter-parties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counter-party risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
6. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
7. 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.
B. M&G Investment Management Limited provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance for the preceding three years relative to the S&P Global Custom Metals and Mining Index. For the year ended January 31, 2015, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before a decrease of $1,917,000 (0.08%) based on performance.
19
Precious Metals and Mining Fund
C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At January 31, 2015, the fund had contributed capital of $187,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.07% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. 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 market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 1,423,305 | 513,091 | — |
Precious Metals | — | 2,491 | — |
Temporary Cash Investments | 226,429 | — | — |
Total | 1,649,734 | 515,582 | — |
E. 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; such differences are primarily attributed to the tax treatment of unrealized appreciation on passive foreign investment companies. 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 year ended January 31, 2015, the fund realized net foreign currency losses of $12,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to overdistributed net investment income. Certain of the fund’s investments are in securities considered to be passive foreign investment companies, for
20
Precious Metals and Mining Fund
which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended January 31, 2015, the fund realized gains on the sale of passive foreign investment companies of $57,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to overdistributed net investment income. Passive foreign investment companies held at January 31, 2015, had unrealized appreciation of $163,003,000, of which all has been distributed and is reflected in the balance of overdistributed net investment income.
For tax purposes, at January 31, 2015, the fund had $32,309,000 of ordinary income available for distribution. The fund had available capital losses totaling $1,473,057,000 that may be carried forward indefinitely to offset future net capital gains.
At January 31, 2015, the cost of investment securities for tax purposes was $2,708,800,000. Net unrealized depreciation of investment securities for tax purposes was $543,484,000, consisting entirely of unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2015, the fund purchased $1,412,843,000 of investment securities and sold $1,400,172,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2015 | 2014 | |
Shares | Shares | |
(000) | (000) | |
Issued | 62,814 | 95,795 |
Issued in Lieu of Cash Distributions | — | 108 |
Redeemed | (67,254) | (75,233) |
Net Increase (Decrease) in Shares Outstanding | (4,440) | 20,670 |
21
Precious Metals and Mining Fund
H. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the year in securities of these companies were as follows:
Current Period Transactions | ||||||
Jan. 31, | Proceeds | Jan. 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Acacia Mining plc 2 | 82,897 | — | 10,189 | 762 | — | — |
AMCOL International Corp. | 102,142 | — | 137,159 | 600 | — | — |
Apex Minerals NL | — | — | — | — | — | — |
Aquila Resources Ltd. | 52,981 | — | 86,585 | — | — | — |
Belo Sun Mining Corp. | 7,093 | — | 3,877 | — | — | — |
Dominion Diamond Corp. | 165,650 | — | 56,554 | — | — | 134,456 |
Equatorial Resources Ltd. | 5,118 | — | 2,968 | — | — | — |
Galaxy Resources Ltd. | 5,066 | — | 2,084 | — | — | — |
Glory Resources Ltd. | 4,912 | — | 5,132 | — | — | — |
Hochschild Mining plc | 98,261 | — | 5,744 | — | — | 50,458 |
Nevsun Resources Ltd. | 138,958 | — | — | 4,662 | — | 130,729 |
OZ Minerals Ltd. | 92,430 | — | 95,072 | 5,153 | — | — |
Panoramic Resources Ltd. | 4,509 | — | 8,194 | — | — | — |
Petropavlovsk plc | 15,010 | — | 12,189 | — | — | — |
Reed Resources Ltd. | 3,377 | — | 1,505 | — | — | — |
St. Barbara Ltd. | 16,588 | — | 6,473 | — | — | — |
Vanguard Market Liquidity Fund | 161,852 | NA3 | NA 3 | 131 | — | 226,429 |
Total | 956,844 | 11,308 | — | 542,072 | ||
1 Includes net realized gain (loss) on affiliated investment securities sold of ($580,549,000). 2 In March 2014, African Barrick Gold plc changed its name to Acacia Mining plc. 3 Not applicable—purchases and sales are for temporary cash investment purposes. | ||||||
I. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
22
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard Precious Metals and Mining Fund:
In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Precious Metals and Mining Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodian, by agreement to the underlying ownership records of the transfer agent and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/preciousmetals_530x25x1.jpg)
Special 2014 tax information (unaudited) for Vanguard Precious Metals and Mining Fund
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 23.3% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
23
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Precious Metals and Mining Fund | |||
Periods Ended January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | -7.61% | -9.28% | 1.54% |
Returns After Taxes on Distributions | -7.61 | -9.99 | 0.30 |
Returns After Taxes on Distributions and Sale of Fund Shares | -4.31 | -6.14 | 2.33 |
24
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.
25
Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Precious Metals and Mining Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | $1,000.00 | $821.77 | $1.33 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.74 | 1.48 |
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 0.29%. 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. | |||
26
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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
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.
27
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.
Benchmark Information
Spliced Global Custom Metals and Mining Index: S&P/Citigroup World Equity Gold Index through June 30, 2005; S&P Global Custom Metals and Mining Index thereafter.
28
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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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | ||
College of Arts and Letters and of the Advisory Board | Thomas J. Higgins | |
to the Kellogg Institute for International Studies, both | Born 1957. Chief Financial Officer Since September | |
at the University of Notre Dame. | 2008. Principal Occupation(s) During the Past Five | |
Years and Other Experience: Principal of The Vanguard | ||
Mark Loughridge | Group, Inc.; Chief Financial Officer of each of the | |
Born 1953. Trustee Since March 2012. Principal | investment companies served by The Vanguard Group; | |
Occupation(s) During the Past Five Years and Other | Treasurer of each of the investment companies served | |
Experience: Senior Vice President and Chief Financial | by The Vanguard Group (1998–2008). | |
Officer (retired 2013) at IBM (information technology | ||
services); Fiduciary Member of IBM’s Retirement Plan | Kathryn J. Hyatt | |
Committee (2004–2013); Director of the Dow Chemical | Born 1955. Treasurer Since November 2008. Principal | |
Company; Member of the Council on Chicago Booth. | Occupation(s) During the Past Five Years and Other | |
Experience: Principal of The Vanguard Group, Inc.; | ||
Scott C. Malpass | Treasurer of each of the investment companies served | |
Born 1962. Trustee Since March 2012. Principal | by The Vanguard Group; Assistant Treasurer of each of | |
Occupation(s) During the Past Five Years and Other | the investment companies served by The Vanguard | |
Experience: Chief Investment Officer and Vice | Group (1988–2008). | |
President at the University of Notre Dame; Assistant | ||
Professor of Finance at the Mendoza College of | Heidi Stam | |
Business at Notre Dame; Member of the Notre Dame | Born 1956. Secretary Since July 2005. Principal | |
403(b) Investment Committee; Board Member of | Occupation(s) During the Past Five Years and Other | |
TIFF Advisory Services, Inc., and Catholic Investment | Experience: Managing Director of The Vanguard | |
Services, Inc. (investment advisors); Member of | Group, Inc.; General Counsel of The Vanguard Group; | |
the Investment Advisory Committee of Major | Secretary of The Vanguard Group and of each of the | |
League Baseball. | investment companies served by The Vanguard Group; | |
Director and Senior Vice President of Vanguard | ||
André F. Perold | Marketing Corporation. | |
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
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P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | CFA® is a registered trademark owned by CFA Institute. |
Direct Investor Account Services > 800-662-2739 | |
Institutional Investor Services > 800-523-1036 | |
Text Telephone for People | |
Who Are Deaf or Hard of Hearing> 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, a | |
Thomson Reuters Company, 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. | |
© 2015 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q530 032015 |
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x1x1.jpg)
Annual Report | January 31, 2015
Vanguard Dividend Growth Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisor’s Report. | 7 |
Fund Profile. | 10 |
Performance Summary. | 11 |
Financial Statements. | 13 |
Your Fund’s After-Tax Returns. | 24 |
About Your Fund’s Expenses. | 25 |
Trustees Approve Advisory Arrangement. | 27 |
Glossary. | 29 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard Dividend Growth Fund | 13.69% |
NASDAQ US Dividend Achievers Select Index | 12.04 |
Large-Cap Core Funds Average | 11.62 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Your Fund’s Performance at a Glance | ||||
January 31, 2014, Through January 31, 2015 | ||||
Distributions Per Share | ||||
Starting | Ending | |||
Share | Share | Income | Capital | |
Price | Price | Dividends | Gains | |
Vanguard Dividend Growth Fund | $20.45 | $22.47 | $0.440 | $0.348 |
1
Chairman’s Letter
Dear Shareholder,
U.S. stocks overcame worries about lofty equity valuations, plunging oil prices, and economic weakness abroad during the 12 months ended January 31, 2015.
Vanguard Dividend Growth Fund returned 13.69% for the fiscal year, nearly 2 percentage points ahead of its benchmark index. The fund’s result surpassed that of the broad U.S. stock market as well as the average return of its peers.
Eight of the fund’s nine industry sectors posted positive results. The information technology, financial, and industrial sectors contributed most to the fund’s outperformance.
The fund’s 30-day SEC yield rose from 2.05% at the start of the fiscal year to 2.10% at the end.
U.S. stocks posted strong results despite facing many challenges
Although volatility picked up toward the end of the period and flat results in December turned negative in January, the broad U.S. stock market returned about 13% for the 12 months.
The Federal Reserve ended its accommodative bond-buying program in October, and investors seemed reassured when the Fed said it would take a “patient” approach in deciding when to increase short-term interest rates. The Bank of Japan, European
2
Central Bank, and People’s Bank of China all embarked on or continued aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging markets stocks outpaced those of the developed markets of the Pacific and Europe.
Bond returns stood out, helped by global stimulus
The broad U.S. taxable bond market returned 6.61% as bond prices benefited from global stimulus programs and as many investors were drawn to the relative stability of bonds amid the volatility in equity markets.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite directions.) The yield of the 10-year Treasury note ended January at 1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, helped by the effects of greater demand and reduced supply along with the broader bond market’s advance.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61%. Like their equity counterparts, international bonds suffered because of the strength of the U.S. dollar.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
3
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
The advisor’s stock selection helped the fund beat its index
The Dividend Growth Fund invests in companies that have the ability and commitment to raise their dividends over time. Unlike advisors of other dividend-oriented funds, Dividend Growth’s advisor, Wellington Management Company, is less interested in stocks with high current yield. Instead, it strives to identify stocks that have the potential for growing their dividends. And the fund, unlike its benchmark, is not limited to stocks that have consistently raised their dividends for ten or more years. This flexibility gives the advisor more leeway in choosing top-performing stocks that for one reason or another fall short of the benchmark’s stringent guidelines.
During the fiscal year, the Dividend Growth Fund benefited from the strong performance of large-capitalization stocks and investors’ affinity, given the low-interest-rate environment, for dividend-oriented investments. The advisor’s selections within the information technology, financial, and industrial sectors were especially rewarding.
It was a challenging year for some blue-chip tech services providers. But the advisor’s selection among tech stocks limited exposure to poor performers,
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Dividend Growth Fund | 0.31% | 1.12% |
The fund expense ratio shown is from the prospectus dated May 27, 2014, and represents estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratio was 0.32%. The peer group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014. | ||
Peer group: Large-Cap Core Funds. |
4
helping the fund deliver a 12% return for the sector—much better than the negative result for its benchmark counterpart.
Within financials, the advisor’s selections among insurance companies, real estate investment trusts (REITs), asset managers, and banks stood out. The fund’s return for the sector was more than double that of the benchmark. The advisor took advantage of its ability to veer from the benchmark’s mandate, which, among other things, excludes REITs because they generally may not be considered tax-efficient.
The industrial sector also helped power the fund’s result. Aerospace and defense manufacturers continued to benefit from cost-cutting and technological improvements despite cutbacks in government contracts. Investors in defense contractors seemed optimistic about increased demand for those companies’ products amid the growing number of global conflicts.
The fund’s significantly larger-than-benchmark allocation to health care stocks also aided performance. Every segment within health care produced double-digit returns, with the portfolio’s positions in health care providers and services companies supplying the biggest boost.
Energy was the only sector to post a negative return. The sharp decline in oil prices took a toll on energy stocks in both the fund and its benchmark.
Total Returns | |
Ten Years Ended January 31, 2015 | |
Average | |
Annual Return | |
Dividend Growth Fund | 9.05% |
Dividend Growth Spliced Index | 7.02 |
Dividend Growth Spliced Average | 6.37 |
For a benchmark description, see the Glossary. | |
Dividend Growth Spliced Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.
5
The fund outpaced its benchmark and peer average over ten years
For the ten years ended January 31, 2015, the Dividend Growth Fund had an average annual return of 9.05%, more than 2 percentage points ahead of both its benchmark index and the average return of its peers.
Over the past decade, the advisor has steered the Dividend Growth Fund through challenging times. Credit for the fund’s admirable performance goes to Wellington Management Company and its team of experienced and skilled advisors. The fund’s low costs have also helped you keep more of the market’s returns.
While volatility is inevitable, you don’t have to ‘inherit’ it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from shareholders as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer insights, and reinforce Vanguard’s key principles.
Not surprisingly, given that the first month of 2015 was marked by sharp fluctuations in the markets, volatility came up as a concern. The broad stock market had several daily swings of more than 1% in January. Bond yields, meanwhile, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of those key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 13, 2015
6
Advisor’s Report
Vanguard Dividend Growth Fund gained 13.69% for the 12 months ended January 31, 2015, outperforming the 12.04% return of its benchmark, the NASDAQ US Dividend Achievers Select Index.
The investment environment
As we reflect on the year, we are pleased with the fund’s performance—not only because of the results, but also because the results were in line with our expectations. The year was volatile globally from both an economic and a geopolitical perspective. In such an environment, we would expect the portfolio to do relatively well.
Our expectation for 2015 is for more of the same. The global backdrop of much of the last three years—a relatively healthy United States, a messy Europe, and a very uncertain China—appears to be intact. The difference now is that it’s possible all three of these conditions could change, which means that they could be overly discounted in the markets.
For example, conditions in the United States seem very good (at least relatively), but the U.S. market seems to have more than adequately priced for that. Should the Federal Reserve act decisively on either interest rates or its balance sheet, the market might react strongly, as underlying economic performance seems insufficiently strong to fight through. The consensus view is that Europe is in trouble. Although that seems most likely true, aggressive action by the European Central Bank might provide enough liquidity to turn the tide and markets. Finally, China is fighting various challenges, the most profound being the slowing of its economy. How its government manages the economy will be critical.
The fund’s successes
All sectors except energy boosted absolute performance for the period. The fund’s holdings in the health care, industrial, consumer staples, and financial sectors were the biggest absolute contributors. Energy detracted, as its stocks were hurt by the sharp drop in oil prices near the end of 2014.
Among the fund’s top absolute contributors were UnitedHealth Group (health care), Lowe’s (consumer discretionary), and CVS Health (consumer staples).
The leading contributor, U.S.-based insurer UnitedHealth, maintains a positive long-term outlook and strong fundamentals as its focus on quality and value of service creates more opportunity for revenue and earnings growth. It should also benefit from U.S. health care reform, which should translate to more demand for insurance and a rise in the number of people who are insured. We believe UnitedHealth will be a long-term winner in the insurance industry. It currently has a low payout ratio, with a stated desire to grow the dividend. Lowe’s, a leading home improvement
7
retailer, is benefiting from the continued recovery in home improvement spending and from tight cost controls.
On a “run-rate” basis, the portfolio is expected to produce asset-weighted dividend growth of 6.9% for calendar 2015. Our run-rate calculation is a rough estimate of potential dividend growth; it takes a company’s current declared dividend rate, annualizes it, and compares it with the previous year’s actual dividend rate. This calculation does not accurately reflect dividend increases that may be announced later in the year, nor does it take into account the dollar amounts of the increases. Therefore, companies in the early stages of dividend growth tend to show large percentage increases—yet the absolute cash dividend may be small. Despite these shortcomings, we view this estimate as a reasonable report card.
Among the more notable dividend run-rate increases thus far in 2015 were those of Lowe’s and Schlumberger.
The fund’s shortfalls
On an absolute basis, our holdings in energy detracted, and materials and information technology produced the smallest contributions. Our biggest absolute detractors included Mattel (consumer discretionary), Schlumberger (energy), and BG Group (energy). The biggest detractor, Mattel, is a leading toy maker with deteriorating fundamentals; we decided it was appropriate to eliminate our position. Traditional toy categories have experienced some secular headwinds in recent years, such as the use of more sophisticated digital toys, and these trends have affected Mattel.
A recent leadership change at the company also created some uncertainty about the prospects for continued dividend growth, which is a critical component of our investment philosophy.
Although we would prefer that all stocks in the fund perform well at all times, some will inevitably hinder performance over a given period. We assess a stock’s contribution over a longer time frame and with an eye consistently focused on dividend action.
The fund’s positioning and investment strategy
Our primary objective is to identify companies that we believe will steadily and reliably grow their dividend payments. We seek to fulfill this objective by carefully building Vanguard Dividend Growth Fund one stock at a time, giving central consideration to each company’s dividend growth prospects. Our industry and sector weightings are a result of this process. As of the end of the period, the fund had significant allocations to the health care, industrial, and consumer staples sectors and less exposure (below 5% allocation) to utilities and materials. We hold no stocks in telecommunication services.
8
Since our last report, there has been some modest change to the fund’s positioning, but certainly no change in our investment strategy. Additions were made to the fund over the 12 months, driven largely by price opportunity. We also continue to manage the fund by constantly assessing the weightings of our positions and adjusting them accordingly. We remain true to our process and believe that the Dividend Growth Fund is well-positioned to deliver superior dividend growth and solid capital appreciation for shareholders over time.
Donald J. Kilbride
Senior Managing Director and
Equity Portfolio Manager
Wellington Management Company llp February 18, 2015
9
Dividend Growth Fund
Fund Profile
As of January 31, 2015
Portfolio Characteristics | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Number of Stocks | 47 | 163 | 3,752 |
Median Market Cap | $81.0B | $57.7B | $47.6B |
Price/Earnings Ratio | 19.2x | 18.3x | 20.2x |
Price/Book Ratio | 3.5x | 3.4x | 2.7x |
Return on Equity | 23.3% | 21.5% | 17.8% |
Earnings Growth Rate | 9.9% | 10.8% | 15.1% |
Dividend Yield | 2.3% | 2.2% | 1.9% |
Foreign Holdings | 11.5% | 0.0% | 0.0% |
Turnover Rate | 23% | — | — |
Ticker Symbol | VDIGX | — | — |
Expense Ratio1 | 0.31% | — | — |
30-Day SEC Yield | 2.10% | — | — |
Short-Term Reserves | 3.7% | — | — |
Sector Diversification (% of equity exposure) | |||
NASDAQ | DJ | ||
US | U.S. | ||
Dividend | Total | ||
Achievers | Market | ||
Select | FA | ||
Fund | Index | Index | |
Consumer Discretionary | 11.5% | 9.8% | 12.9% |
Consumer Staples | 14.8 | 23.3 | 8.6 |
Energy | 10.5 | 7.5 | 7.5 |
Financials | 13.1 | 6.8 | 17.5 |
Health Care | 18.4 | 11.3 | 14.5 |
Industrials | 16.9 | 21.3 | 11.2 |
Information Technology | 9.2 | 10.4 | 18.9 |
Materials | 4.5 | 8.7 | 3.5 |
Telecommunication | |||
Services | 0.0 | 0.1 | 2.0 |
Utilities | 1.1 | 0.8 | 3.4 |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 0.93 | 0.92 |
Beta | 0.89 | 0.86 |
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) | ||
UnitedHealth Group Inc. | Managed Health | |
Care | 2.8% | |
TJX Cos. Inc. | Apparel Retail | 2.8 |
United Parcel Service | Air Freight & | |
Inc. | Logistics | 2.7 |
United Technologies | Aerospace & | |
Corp. | Defense | 2.7 |
Cardinal Health Inc. | Health Care | |
Distributors | 2.6 | |
Coca-Cola Co. | Soft Drinks | 2.6 |
NIKE Inc. | Footwear | 2.5 |
Praxair Inc. | Industrial Gases | 2.5 |
Lockheed Martin Corp. | Aerospace & | |
Defense | 2.5 | |
Johnson & Johnson | Pharmaceuticals | 2.5 |
Top Ten | 26.2% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
Investment Focus
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x12x1.jpg)
1 The expense ratio shown is from the prospectus dated May 27, 2014, and represents estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratio was 0.32%.
10
Dividend 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.
Cumulative Performance: January 31, 2005, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x13x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2015 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Dividend Growth Fund* | 13.69% | 14.63% | 9.05% | $23,792 | |
•••••••• | Dividend Growth Spliced Index | 12.04 | 13.89 | 7.02 | 19,711 |
– – – – | Dividend Growth Spliced Average | 11.62 | 13.60 | 6.37 | 18,541 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 | |
For a benchmark description, see the Glossary. | |||||
Dividend Growth Spliced Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
See Financial Highlights for dividend and capital gains information.
11
Dividend Growth Fund
Fiscal-Year Total Returns (%): January 31, 2005, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x14x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2014 | ||||
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 | |
Dividend Growth Fund | 5/15/1992 | 11.85% | 14.64% | 9.12% |
12
Dividend Growth Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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 (95.3%) | ||
Consumer Discretionary (10.9%) | ||
TJX Cos. Inc. | 9,678,723 | 638,215 |
NIKE Inc. Class B | 6,193,931 | 571,390 |
McDonald’s Corp. | 5,762,403 | 532,677 |
Lowe’s Cos. Inc. | 6,892,423 | 467,031 |
Walt Disney Co. | 3,445,221 | 313,377 |
2,522,690 | ||
Consumer Staples (14.1%) | ||
Coca-Cola Co. | 14,394,918 | 592,639 |
Wal-Mart Stores Inc. | 6,077,016 | 516,425 |
Anheuser-Busch | ||
InBev NV | 3,723,857 | 454,187 |
Procter & Gamble Co. | 5,279,966 | 445,048 |
Diageo plc | 14,705,883 | 435,305 |
CVS Health Corp. | 4,293,277 | 421,428 |
Colgate-Palmolive Co. | 5,833,440 | 393,874 |
3,258,906 | ||
Energy (10.1%) | ||
Chevron Corp. | 5,390,185 | 552,656 |
Exxon Mobil Corp. | 6,062,953 | 530,023 |
BG Group plc | 36,255,627 | 483,574 |
Schlumberger Ltd. | 5,099,158 | 420,120 |
Enbridge Inc. | 6,812,601 | 329,934 |
2,316,307 | ||
Financials (12.5%) | ||
ACE Ltd. | 5,187,054 | 559,994 |
Marsh & McLennan | ||
Cos. Inc. | 9,421,953 | 506,618 |
BlackRock Inc. | 1,180,158 | 401,856 |
Chubb Corp. | 4,001,085 | 391,706 |
Wells Fargo & Co. | 6,834,822 | 354,864 |
PNC Financial Services | ||
Group Inc. | 4,166,294 | 352,219 |
Public Storage | 1,544,699 | 310,237 |
2,877,494 |
Market | ||
Value | ||
Shares | ($000) | |
Health Care (17.6%) | ||
UnitedHealth Group Inc. | 6,135,631 | 651,911 |
Cardinal Health Inc. | 7,152,681 | 595,032 |
Johnson & Johnson | 5,653,308 | 566,122 |
Merck & Co. Inc. | 9,360,642 | 564,260 |
Medtronic plc | 7,253,863 | 517,926 |
Roche Holding AG | 1,822,878 | 491,297 |
Amgen Inc. | 2,544,649 | 387,448 |
Pfizer Inc. | 8,982,622 | 280,707 |
4,054,703 | ||
Industrials (16.1%) | ||
United Parcel Service Inc. | ||
Class B | 6,341,053 | 626,750 |
United Technologies Corp. | 5,378,582 | 617,354 |
Lockheed Martin Corp. | 3,017,281 | 568,365 |
Honeywell | ||
International Inc. | 4,793,185 | 468,582 |
Canadian National | ||
Railway Co. | 7,064,545 | 465,447 |
Northrop Grumman Corp. | 2,679,028 | 420,473 |
General Dynamics Corp. | 2,116,301 | 281,913 |
Emerson Electric Co. | 4,719,798 | 268,745 |
3,717,629 | ||
Information Technology (8.8%) | ||
Automatic Data | ||
Processing Inc. | 6,718,262 | 554,458 |
Accenture plc Class A | 6,171,490 | 518,590 |
Microsoft Corp. | 12,473,712 | 503,938 |
Oracle Corp. | 10,829,841 | 453,662 |
2,030,648 | ||
Materials (4.2%) | ||
Praxair Inc. | 4,737,565 | 571,303 |
Ecolab Inc. | 3,914,193 | 406,176 |
977,479 |
13
Dividend Growth Fund
Market | ||
Value | ||
Shares | ($000) | |
Utilities (1.0%) | ||
Dominion Resources | ||
Inc. | 3,010,836 | 231,503 |
Total Common Stocks | ||
(Cost $15,930,656) | 21,987,359 | |
Face | ||
Amount | ||
($000) | ||
Temporary Cash Investments (3.7%) | ||
Repurchase Agreements (2.7%) | ||
RBS Securities, Inc. | ||
0.060%, 2/2/15 (Dated | ||
1/30/15, Repurchase | ||
Value $334,402,000, | ||
collateralized by U.S. | ||
Treasury Note/Bond, | ||
2.125%–2.375%, | ||
1/31/21–8/15/24, | ||
with a value of | ||
$341,088,000) | 334,400 | 334,400 |
Societe Generale | ||
0.060%, 2/2/15 (Dated | ||
1/30/15, Repurchase | ||
Value $117,001,000, | ||
collateralized by U.S. | ||
Treasury Note/Bond, | ||
0.000%–5.500%, | ||
10/15/15–11/15/43, | ||
with a value of | ||
$119,340,000) | 117,000 | 117,000 |
Face | Market | ||
Amount | Value | ||
($000) | ($000) | ||
Morgan Stanley & | |||
Co., Inc. 0.080%, 2/2/15 | |||
(Dated 1/30/15, Repurchase | |||
Value $167,601,000, | |||
collateralized by Federal | |||
National Mortgage Assn. | |||
3.000%–7.250%, | |||
5/1/19–1/1/45, Federal Farm | |||
Credit Bank, 2.730%–3.750%, | |||
10/22/25–7/9/29, U.S. | |||
Treasury Note/Bond, | |||
3.625%–6.000%, | |||
2/15/26–2/15/44, Federal Home | |||
Loan Mortgage Corp. 4.000%, | |||
4/1/34 and Government | |||
National Mortgage Assn. | |||
4.000%, 11/20/44–12/20/44, | |||
with a value of | |||
$170,952,000) | 167,600 | 167,600 | |
619,000 | |||
U.S. Government and Agency Obligations (1.0%) | |||
1 | Fannie Mae | ||
Discount Notes, | |||
0.070%, 2/17/15 | 62,700 | 62,698 | |
2 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.087%, 3/25/15 | 124,000 | 124,000 | |
2 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.080%, 4/1/15 | 50,000 | 49,999 | |
236,697 | |||
Total Temporary Cash Investments | |||
(Cost $855,676) | 855,697 | ||
Total Investments (99.0%) | |||
(Cost $16,786,332) | 22,843,056 | ||
Other Assets and Liabilities (1.0%) | |||
Other Assets | 273,495 | ||
Liabilities | (49,480) | ||
224,015 | |||
Net Assets (100%) | |||
Applicable to 1,026,351,818 outstanding | |||
$.001 par value shares of beneficial | |||
interest (unlimited authorization) | 23,067,071 | ||
Net Asset Value Per Share | $22.47 |
14
Dividend Growth Fund
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 16,648,468 |
Overdistributed Net Investment Income | (9,617) |
Accumulated Net Realized Gains | 371,561 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 6,056,724 |
Foreign Currencies | (65) |
Net Assets | 23,067,071 |
See Note A in Notes to Financial Statements.
1 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have bee managed by the Federal Housing Finance agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.
2 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Growth Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 484,997 |
Interest | 321 |
Securities Lending | 1,821 |
Total Income | 487,139 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 23,949 |
Performance Adjustment | 6,775 |
The Vanguard Group—Note C | |
Management and Administrative | 33,019 |
Marketing and Distribution | 4,314 |
Custodian Fees | 267 |
Auditing Fees | 27 |
Shareholders’ Reports | 253 |
Trustees’ Fees and Expenses | 39 |
Total Expenses | 68,643 |
Net Investment Income | 418,496 |
Realized Net Gain (Loss) | |
Investment Securities Sold | 727,962 |
Foreign Currencies | (1,772) |
Realized Net Gain (Loss) | 726,190 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 1,518,150 |
Foreign Currencies | (204) |
Change in Unrealized Appreciation (Depreciation) | 1,517,946 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,662,632 |
1 Dividends are net foreign witholding taxes of $6,350,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Dividend Growth Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 418,496 | 330,187 |
Realized Net Gain (Loss) | 726,190 | 223,809 |
Change in Unrealized Appreciation (Depreciation) | 1,517,946 | 2,176,752 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,662,632 | 2,730,748 |
Distributions | ||
Net Investment Income | (428,918) | (329,157) |
Realized Capital Gain1 | (344,452) | (93,833) |
Total Distributions | (773,370) | (422,990) |
Capital Share Transactions | ||
Issued | 4,456,080 | 6,120,018 |
Issued in Lieu of Cash Distributions | 694,537 | 378,204 |
Redeemed | (3,110,104) | (2,372,492) |
Net Increase (Decrease) from Capital Share Transactions | 2,040,513 | 4,125,730 |
Total Increase (Decrease) | 3,929,775 | 6,433,488 |
Net Assets | ||
Beginning of Period | 19,137,296 | 12,703,808 |
End of Period2 | 23,067,071 | 19,137,291 6 |
1 Includes fiscal 2015 and 2014 short-term gain distributions totaling $83,860,000 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. | ||
2 Net Assets--End of Period includes undistributed (overdistributed) net investment income of ($9,617,000) and $2,5777,000. | ||
See accompanying Notes, which are an integral part of the Financial Statements.
17
Dividend Growth Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $20.45 | $17.52 | $15.81 | $14.68 | $12.82 |
Investment Operations | |||||
Net Investment Income | . 430 | .385 | .357 | .317 | .283 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 2.378 | 3.033 | 1.721 | 1.126 | 1.850 |
Total from Investment Operations | 2.808 | 3.418 | 2.078 | 1.443 | 2.133 |
Distributions | |||||
Dividends from Net Investment Income | (.440) | (. 384) | (.368) | (.313) | (.273) |
Distributions from Realized Capital Gains | (.348) | (.104) | — | — | — |
Total Distributions | (.788) | (.488) | (.368) | (.313) | (.273) |
Net Asset Value, End of Period | $22.47 | $20.45 | $17.52 | $15.81 | $14.68 |
Total Return1 | 13.69% | 19.60% | 13.36% | 9.90% | 16.85% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $23,067 | $19,137 | $12,704 | $8,829 | $4,995 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | 0.32% | 0.31% | 0.29% | 0.31% | 0.34% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.94% | 2.03% | 2.22% | 2.28% | 2.25% |
Portfolio Turnover Rate | 23% | 18% | 11% | 13% | 17% |
1 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. | |||||
2 Includes performance-based investment advisory fee increases (decreases) of 0.03%, 0.02%, 0.00%, 0.00%, and 0.03%. | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
18
Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend 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. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been 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. 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. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under 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. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (January 31, 2012–2015), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
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Dividend Growth Fund
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
8. Other: Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
B. Wellington Management Company LLP provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance for the preceding three years relative to the NASDAQ US Dividend Achievers Select Index. For the year ended January 31, 2015, the investment advisory fee represented an effective annual basic rate of 0.11% of the fund’s average net assets before an increase of $6,775,000 (0.03%) 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 based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard.
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Dividend Growth Fund
At January 31, 2015, the fund had contributed capital of $2,220,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.89% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. 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 market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 20,122,995 | 1,864,364 | — |
Temporary Cash Investments | — | 855,697 | — |
Total | 20,122,995 | 2,720,061 | — |
E. 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 year ended January 31, 2015, the fund realized net foreign currency losses of $1,772,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to overdistributed net investment income.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from realized capital gains. Accordingly, the fund has reclassified $34,295,000 from accumulated net realized gains to paid-in capital.
For tax purposes, at January 31, 2015, the fund had $62,694,000 of ordinary income and $319,187,000 of long-term capital gains available for distribution.
At January 31, 2015, the cost of investment securities for tax purposes was $16,786,472,000. Net unrealized appreciation of investment securities for tax purposes was $6,056,584,000, consisting of unrealized gains of $6,320,540,000 on securities that had risen in value since their purchase and $263,956,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2015, the fund purchased $6,109,170,000 of investment securities and sold $4,929,045,000 of investment securities, other than temporary cash investments.
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Dividend Growth Fund
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2015 | 2014 | |
Shares | Shares | |
(000) | (000) | |
Issued | 200,627 | 311,805 |
Issued in Lieu of Cash Distributions | 30,279 | 18,932 |
Redeemed | (140,286) | (120,255) |
Net Increase (Decrease) in Shares Outstanding | 90,620 | 210,482 |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard Dividend
Growth Fund:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Dividend Growth Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodians and brokers and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/dividendgrowth_570x25x1.jpg)
Special 2014 tax information (unaudited) for Vanguard Dividend Growth Fund
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $288,628,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.
The fund distributed $462,017,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 75.4% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
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Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Dividend Growth Fund | |||
Periods Ended January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 13.69% | 14.63% | 9.05% |
Returns After Taxes on Distributions | 12.73 | 14.09 | 8.62 |
Returns After Taxes on Distributions and Sale of Fund Shares | 8.46 | 11.79 | 7.42 |
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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.
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Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Growth Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | $1,000.00 | $1,060.30 | $1.61 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.64 | 1.58 |
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 0.31%. 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. | |||
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Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Dividend Growth Fund has renewed the fund’s investment advisory arrangement and approved an amended investment advisory agreement with Wellington Management Company LLP (Wellington Management), effective February 1, 2015. The amended agreement contains a new base fee schedule; however, other terms of the existing agreement have not changed. The board determined that renewing the fund’s advisory arrangement and amending the fee schedule 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 services over both the short and long term, and took into account the organizational depth and stability of the advisor. The board noted that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional managers. The firm has advised the fund since its inception in 1992. The board also noted that the portfolio manager of the fund has over two decades of investment industry experience. Wellington Management seeks to invest in companies with a history of paying a stable or growing dividend and the ability to continue increasing their dividend over the long term. Utilizing fundamental research, Wellington Management focuses on a company’s ability to create value and the ability and willingness to distribute that value to shareholders in a sustainable manner. Valuation is also an important input to the investment process, as the firm seeks to purchase these businesses when short-term dislocations have made the share price attractive. The board noted that the new fee arrangement would help Wellington Management to continue to attract and retain top investment talent, and thereby support enhanced organizational depth and stability, which would benefit the fund and its shareholders.
The board concluded that Wellington Management’s experience, stability, depth, and performance, among other factors, warranted approval and continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance relative to a benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue. 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 (and will remain) 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, which also includes information about the advisory fee rate.
The board did not consider profitability of Wellington Management in determining whether to approve the advisory fee, because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
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The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
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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 (for bonds), its actual income (for asset-backed securities), 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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
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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.
Benchmark Information
Dividend Growth Spliced Average: Based on the Utility Funds Average through December 6, 2002, and the Large-Cap Core Funds Average thereafter. Derived from data provided by Lipper, a Thomson Reuters Company.
Dividend Growth Spliced Index: Russell 1000 Index through January 31, 2010; NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index) thereafter. Prior to December 6, 2002, the comparative benchmark was known as the Utilities Composite Index. The index weightings were: 40% S&P Utilities Index, 40% S&P Telephone Index, and 20% Lehman Brothers Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Brothers Utility Bond Index through March 31, 2000; 75% S&P Utilities Index and 25% S&P Telephone Index through December 31, 2001; and 75% S&P Utilities Index and 25% S&P Integrated Telecommunication Services Index through December 6, 2002.
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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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | ||
College of Arts and Letters and of the Advisory Board | Thomas J. Higgins | |
to the Kellogg Institute for International Studies, both | Born 1957. Chief Financial Officer Since September | |
at the University of Notre Dame. | 2008. Principal Occupation(s) During the Past Five | |
Years and Other Experience: Principal of The Vanguard | ||
Mark Loughridge | Group, Inc.; Chief Financial Officer of each of the | |
Born 1953. Trustee Since March 2012. Principal | investment companies served by The Vanguard Group; | |
Occupation(s) During the Past Five Years and Other | Treasurer of each of the investment companies served | |
Experience: Senior Vice President and Chief Financial | by The Vanguard Group (1998–2008). | |
Officer (retired 2013) at IBM (information technology | ||
services); Fiduciary Member of IBM’s Retirement Plan | Kathryn J. Hyatt | |
Committee (2004–2013); Director of the Dow Chemical | Born 1955. Treasurer Since November 2008. Principal | |
Company; Member of the Council on Chicago Booth. | Occupation(s) During the Past Five Years and Other | |
Experience: Principal of The Vanguard Group, Inc.; | ||
Scott C. Malpass | Treasurer of each of the investment companies served | |
Born 1962. Trustee Since March 2012. Principal | by The Vanguard Group; Assistant Treasurer of each of | |
Occupation(s) During the Past Five Years and Other | the investment companies served by The Vanguard | |
Experience: Chief Investment Officer and Vice | Group (1988–2008). | |
President at the University of Notre Dame; Assistant | ||
Professor of Finance at the Mendoza College of | Heidi Stam | |
Business at Notre Dame; Member of the Notre Dame | Born 1956. Secretary Since July 2005. Principal | |
403(b) Investment Committee; Board Member of | Occupation(s) During the Past Five Years and Other | |
TIFF Advisory Services, Inc., and Catholic Investment | Experience: Managing Director of The Vanguard | |
Services, Inc. (investment advisors); Member of | Group, Inc.; General Counsel of The Vanguard Group; | |
the Investment Advisory Committee of Major | Secretary of The Vanguard Group and of each of the | |
League Baseball. | investment companies served by The Vanguard Group; | |
Director and Senior Vice President of Vanguard | ||
André F. Perold | Marketing Corporation. | |
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, 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 | |
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Institutional Investor Services > 800-523-1036 | |
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Who Are Deaf or Hard of Hearing> 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, a | |
Thomson Reuters Company, 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. | |
© 2015 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q570 032015 |
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Annual Report | January 31, 2015
Vanguard Dividend Appreciation Index Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Fund Profile. | 8 |
Performance Summary. | 9 |
Financial Statements. | 12 |
Your Fund’s After-Tax Returns. | 27 |
About Your Fund’s Expenses. | 28 |
Glossary. | 30 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard Dividend Appreciation Index Fund | |
Investor Shares | 11.86% |
Admiral™ Shares | 11.94 |
ETF Shares | |
Market Price | 11.98 |
Net Asset Value | 11.97 |
NASDAQ US Dividend Achievers Select Index | 12.04 |
Large-Cap Core Funds Average | 11.62 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
| |
The Vanguard ETF® Shares shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. | |
For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV. | |
Your Fund’s Performance at a Glance | ||||
January 31, 2014, Through January 31, 2015 | ||||
Distributions Per Share | ||||
Starting | Ending | |||
Share | Share | Income | Capital | |
Price | Price | Dividends | Gains | |
Vanguard Dividend Appreciation Index Fund | ||||
Investor Shares | $28.59 | $31.37 | $0.603 | $0.000 |
Admiral Shares | 19.40 | 21.28 | 0.430 | 0.000 |
ETF Shares | 71.47 | 78.42 | 1.585 | 0.000 |
1
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Chairman’s Letter
Dear Shareholder,
U.S. stocks advanced during the fiscal year ended January 31, 2015, despite market volatility at the middle and end of the period. In a low-interest-rate environment, investors continued to seek out stocks that steadily increase their dividends.
Vanguard Dividend Appreciation Index Fund, which includes stocks that have raised their dividends for ten or more years, returned about 12% for the 12 months. The fund closely tracked its benchmark, the NASDAQ US Dividend Achievers Select Index, and was slightly ahead of the average return of large-capitalization core funds.
The fund’s 30-day SEC yield for Investor Shares fell from 2.05% at the start of the period to 1.97% at the end.
U.S. stocks posted strong results despite facing many challenges
Although volatility picked up and flat results in December turned negative in January, the broad U.S. stock market returned about 13% for the fiscal year. Mostly strong U.S. corporate earnings combined with the effects of global monetary stimulus helped domestic equities overcome worries about lofty stock valuations, plunging oil prices, and economic weakness abroad.
The Federal Reserve ended its bond-buying program in October, and investors seemed reassured when it said it would be “patient” in deciding when to increase short-term interest rates. The Bank of
Japan, the European Central Bank, and the People’s Bank of China all embarked on aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging markets stocks outpaced those of the developed markets of the Pacific and Europe.
Bond returns stood out, helped by global stimulus
The broad U.S. taxable bond market returned 6.61% as bond prices benefited from global stimulus programs. Many investors were drawn to the relative stability of bonds amid the volatility in equity markets.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite directions.) The yield of the 10-year Treasury note ended January at 1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, helped by the effects of greater demand and reduced supply along with the broader bond market’s advance.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
3
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61%. Like their equity counterparts, international bonds suffered because of the strength of the U.S. dollar.
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
Consumer-related stocks bolstered the fund’s result
The Dividend Appreciation Index Fund benefited from the strong performance of large-cap stocks during the fiscal year.
Your fund tracks a benchmark that includes companies that are steadily increasing their dividends, which isn’t necessarily synonymous with a high current dividend yield. (See the box on page 6 for more about your fund’s strategy.)
Six of the fund’s ten industry sectors produced positive results. Consumer services, consumer goods, and industrials—three of the largest sector holdings—contributed most.
Improvements in the U.S. economy, including the employment and housing markets, lifted consumer confidence. Investors were willing to spend more money, which in turn drove consumer-related stocks. Together, consumer services and consumer goods stocks accounted for more than half of the fund’s overall return. Discount retail
Expense Ratios | ||||
Your Fund Compared With Its Peer Group | ||||
Investor | Admiral | ETF | Peer Group | |
Shares | Shares | Shares | Average | |
Dividend Appreciation Index Fund | 0.20% | 0.10% | 0.10% | 1.12% |
The fund expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratios were 0.20% for Investor Shares, 0.10% for Admiral Shares, and 0.10% for ETF Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014.
Peer group: Large-Cap Core Funds.
4
chains, home improvement stores, and apparel shops were among the standout performers.
Industrial stocks also boosted results. Makers of diversified industrial products profited from increased corporate spending Aerospace and defense manufacturers recovered from negative returns in the first half of the year. Some of these companies have restructured, developed newer models, and found more ways to cope with the decline in government contracts in recent years.
Oil and gas and technology stocks detracted most. Oil and gas stocks tumbled along with oil prices. Weak demand for software and computer services hurt technology stocks. Some semiconductor manufacturers also faced challenges as they expanded globally.
The fund has a successful record of tracking its benchmark index
Since its inception in April 2006, the Dividend Appreciation Index Fund has had an average annual return of 7.31% for Investor Shares. It has closely tracked its benchmark index and significantly outpaced the average return of its peers.
Meeting the fund’s objective of closely tracking the target index was no small achievement. The decade has seen extreme volatility, including, of course, the worst global recession since the Great Depression. Credit for the fund’s success
Total Returns | |
Inception Through January 31, 2015 | |
Average | |
Annual Return | |
Dividend Appreciation Index Fund Investor Shares (Returns since inception: 4/27/2006) | 7.31% |
NASDAQ US Dividend Achievers Select Index | 7.56 |
Large-Cap Core Funds Average | 5.84 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.
5
Not all dividend-focused equity funds are alike |
Dividend-oriented investment strategies tend to favor either current income or growth in future |
income. The difference in these strategies can be illustrated by comparing Vanguard High |
Dividend Yield Index Fund, which has a relatively high 30-day SEC yield (2.85% at the end |
of 2014), with Vanguard Dividend Appreciation Index Fund, which has a lower 30-day SEC |
yield (1.90% at the end of 2014) but focuses on companies that have both the ability and |
commitment to generate a growing dividend stream over time. |
The difference in the pace of dividend growth for the funds is clear in the chart below. The |
High Dividend Yield Index Fund’s distribution-per-share payout since 2007 roughly kept pace |
with that of the broad U.S. market (as measured by Vanguard Total Stock Market Index Fund), |
as corporate profits rebounded in the wake of the financial crisis. That pace, however, was |
well below the growth rate achieved by the Dividend Appreciation Index Fund. |
Keep in mind, however, that investing in any fund that covers only a slice of the market takes |
away some degree of diversification from your portfolio. Such funds tend to go through cycles |
of doing better—or worse—than the stock market in general. And remember, too, that |
investors should not view dividend-focused funds as an alternative to bonds, because holding |
bonds tends to be a more reliable way to diversify a portfolio, particularly during steep equity |
market declines. |
Growth in dividend distributions per share from 2007 through 2014 |
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6
goes to Vanguard Equity Investment Group. Its skilled portfolio construction and management have enabled the fund to track its benchmark while keeping the associated costs very low.
Though volatility is inevitable, you don’t have to ‘inherit’ it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from clients as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer some insights, and reinforce some of Vanguard’s key principles.
Not surprisingly in a month marked by sharp fluctuations in the markets, volatility came up as a concern. The broad stock market had several swings of more than 1% in January. Bond yields, meanwhile, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of those key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/gividendappreciationinexx9x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 12, 2015
7
Dividend Appreciation Index Fund
Fund Profile
As of January 31, 2015
Share-Class Characteristics | |||
Investor | Admiral | ETF | |
Shares | Shares | Shares | |
Ticker Symbol | VDAIX | VDADX | VIG |
Expense Ratio1 | 0.20% | 0.10% | 0.10% |
30-Day SEC Yield | 1.97% | 2.07% | 2.08% |
Portfolio Characteristics | |||
NASDAQ | DJ | ||
US | U.S. | ||
Dividend | Total | ||
Achievers | Market | ||
Select | FA | ||
Fund | Index | Index | |
Number of Stocks | 163 | 163 | 3,752 |
Median Market Cap | $57.7B | $57.7B | $47.6B |
Price/Earnings Ratio | 18.3x | 18.3x | 20.2x |
Price/Book Ratio | 3.4x | 3.4x | 2.7x |
Return on Equity | 21.6% | 21.5% | 17.8% |
Earnings Growth | |||
Rate | 10.8% | 10.8% | 15.1% |
Dividend Yield | 2.2% | 2.2% | 1.9% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 20% | — | — |
Short-Term Reserves | -0.4% | — | — |
Sector Diversification (% of equity exposure) | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Basic Materials | 5.6% | 5.6% | 2.7% |
Consumer Goods | 19.1 | 19.1 | 10.0 |
Consumer Services | 17.4 | 17.4 | 14.0 |
Financials | 6.9 | 6.8 | 18.6 |
Health Care | 10.6 | 10.6 | 13.7 |
Industrials | 23.2 | 23.3 | 12.6 |
Oil & Gas | 7.2 | 7.3 | 7.3 |
Technology | 9.0 | 8.9 | 15.6 |
Telecommunications | 0.1 | 0.1 | 2.0 |
Utilities | 0.9 | 0.9 | 3.5 |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 1.00 | 0.91 |
Beta | 1.00 | 0.92 |
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) | ||
Wal-Mart Stores Inc. | Broadline Retailers | 4.3% |
PepsiCo Inc. | Soft Drinks | 4.1 |
Johnson & Johnson | Pharmaceuticals | 4.1 |
Coca-Cola Co. | Soft Drinks | 4.1 |
Exxon Mobil Corp. | Integrated Oil & Gas | 3.4 |
CVS Health Corp. | Drug Retailers | 3.3 |
International Business | ||
Machines Corp. | Computer Services | 3.1 |
3M Co. | Diversified Industrials | 3.1 |
QUALCOMM Inc. | Semiconductors | 3.0 |
United Technologies | ||
Corp. | Aerospace | 3.0 |
Top Ten | 35.5% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
Investment Focus
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1 The expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratios were 0.20% for Investor Shares, 0.10% for Admiral Shares, and 0.10% for ETF Shares.
8
Dividend Appreciation Index Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: April 27, 2006, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/gividendappreciationinex11x1.jpg)
Average Annual Total Returns | ||||
Periods Ended January 31, 2015 | ||||
Since | Final Value | |||
One | Five | Inception | of a $10,000 | |
Year | Years | (4/27/2006) | Investment | |
Fund*Investor Shares | 11.86% | 13.66% | 7.31% | $18,551 |
••••••• NASDAQ US Dividend Achievers Select | ||||
Index | 12.04 | 13.89 | 7.56 | 18,945 |
– – – – Large-Cap Core Funds Average | 11.62 | 13.60 | 5.84 | 16,441 |
Float Adjusted Index | 12.87 | 15.86 | 7.40 | 18,693 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | ||||
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards. |
Since | Final Value | ||
One | Inception | of a $10,000 | |
Year | (12/19/2013) | Investment | |
Dividend Appreciation Index Fund Admiral | |||
Shares | 11.94% | 7.65% | $10,858 |
NASDAQ US Dividend Achievers Select Index | 12.04 | 7.71 | 10,866 |
Dow Jones U.S. Total Stock Market Float | |||
Adjusted Index | 12.87 | 10.63 | 11,196 |
"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards. |
See Financial Highlights for dividend and capital gains information.
9
Dividend Appreciation Index Fund
Average Annual Total Returns | ||||
Periods Ended January 31, 2015 | ||||
Since | Final Value | |||
One | Five | Inception | of a $10,000 | |
Year | Years | (4/21/2006) | Investment | |
Dividend Appreciation Index Fund | ||||
ETF Shares Net Asset Value | 11.97% | 13.78% | 7.44% | $18,785 |
NASDAQ US Dividend Achievers Select Index | 12.04 | 13.89 | 7.58 | 18,999 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 7.35 | 18,642 |
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards. |
Cumulative Returns of ETF Shares: April 21, 2006, Through January 31, 2015 | |||
Since | |||
One | Five | Inception | |
Year | Years | (4/21/2006) | |
Dividend Appreciation Index Fund ETF Shares | |||
Market Price | 11.98% | 90.78% | 87.86% |
Dividend Appreciation Index Fund ETF Shares Net | |||
Asset Value | 11.97 | 90.68 | 87.85 |
NASDAQ US Dividend Achievers Select Index | 12.04 | 91.61 | 89.99 |
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards. |
Fiscal-Year Total Returns (%): April 27, 2006, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/gividendappreciationinex12x1.jpg)
10
Dividend Appreciation Index Fund
Average Annual Total Returns: Periods Ended December 31, 2014
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 | Since | |
Date | Year | Years | Inception | |
Investor Shares | 4/27/2006 | 9.98% | 13.93% | 7.81% |
Admiral Shares | 12/19/2013 | 10.04 | — | 11.99 |
ETF Shares | 4/21/2006 | |||
Market Price | 10.06 | 14.05 | 7.95 | |
Net Asset Value | 10.06 | 14.05 | 7.95 |
11
Dividend Appreciation Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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 (99.2%)1 | ||
Basic Materials (5.6%) | ||
Praxair Inc. | 2,106,490 | 254,022 |
Ecolab Inc. | 2,155,195 | 223,645 |
PPG Industries Inc. | 992,486 | 221,205 |
Air Products & | ||
Chemicals Inc. | 1,516,799 | 220,861 |
Sigma-Aldrich Corp. | 855,862 | 117,698 |
Nucor Corp. | 2,281,052 | 99,568 |
International Flavors & | ||
Fragrances Inc. | 582,378 | 61,796 |
Airgas Inc. | 530,022 | 59,702 |
RPM International Inc. | 954,064 | 45,661 |
Royal Gold Inc. | 461,854 | 33,466 |
Albemarle Corp. | 569,575 | 27,488 |
HB Fuller Co. | 358,717 | 14,761 |
Stepan Co. | 160,177 | 6,151 |
1,386,024 | ||
Consumer Goods (19.0%) | ||
PepsiCo Inc. | 10,909,022 | 1,023,048 |
Coca-Cola Co. | 24,501,537 | 1,008,728 |
NIKE Inc. Class B | 5,069,702 | 467,680 |
Colgate-Palmolive Co. | 6,584,571 | 444,590 |
Monsanto Co. | 3,760,951 | 443,717 |
Archer-Daniels- | ||
Midland Co. | 4,717,573 | 219,980 |
VF Corp. | 3,155,667 | 218,909 |
Stanley Black & | ||
Decker Inc. | 1,114,934 | 104,414 |
Genuine Parts Co. | 1,101,497 | 102,373 |
Hormel Foods Corp. | 1,889,147 | 96,762 |
Bunge Ltd. | 1,056,990 | 94,632 |
Brown-Forman Corp. | ||
Class B | 922,443 | 81,978 |
Church & Dwight Co. Inc. | 982,909 | 79,537 |
JM Smucker Co. | 742,881 | 76,628 |
Polaris Industries Inc. | 470,838 | 68,078 |
McCormick & Co. Inc. | 852,774 | 60,880 |
Market | ||
Value• | ||
Shares | ($000) | |
Hasbro Inc. | 937,992 | 51,515 |
Flowers Foods Inc. | 1,494,944 | 29,241 |
Lancaster Colony Corp. | 195,526 | 17,584 |
Nu Skin Enterprises Inc. | ||
Class A | 326,340 | 13,373 |
Andersons Inc. | 202,050 | 9,088 |
Tootsie Roll | ||
Industries Inc. | 271,453 | 8,467 |
4,721,202 | ||
Consumer Services (17.3%) | ||
Wal-Mart Stores Inc. | 12,529,540 | 1,064,760 |
CVS Health Corp. | 8,472,520 | 831,663 |
Walgreens Boots | ||
Alliance Inc. | 7,810,061 | 575,992 |
Lowe’s Cos. Inc. | 7,380,372 | 500,094 |
TJX Cos. Inc. | 5,096,038 | 336,033 |
Target Corp. | 4,535,197 | 333,836 |
Cardinal Health Inc. | 2,456,982 | 204,396 |
Ross Stores Inc. | 1,539,822 | 141,217 |
Tiffany & Co. | 917,524 | 79,494 |
Family Dollar Stores Inc. | 815,226 | 62,039 |
FactSet Research | ||
Systems Inc. | 306,588 | 44,023 |
Rollins Inc. | 1,046,740 | 34,595 |
Casey’s General | ||
Stores Inc. | 275,734 | 25,174 |
Cracker Barrel | ||
Old Country Store Inc. | 170,753 | 22,968 |
John Wiley & Sons Inc. | ||
Class A | 354,259 | 21,950 |
Aaron’s Inc. | 515,759 | 16,329 |
Matthews International | ||
Corp. Class A | 235,038 | 10,889 |
4,305,452 | ||
Financials (6.7%) | ||
ACE Ltd. | 2,412,125 | 260,413 |
Franklin Resources Inc. | 4,520,256 | 232,929 |
Aflac Inc. | 3,265,819 | 186,413 |
12
Dividend Appreciation Index Fund
Market | ||
Value• | ||
Shares | ($000) | |
McGraw Hill | ||
Financial Inc. | 1,941,837 | 173,678 |
Chubb Corp. | 1,759,664 | 172,271 |
T. Rowe Price Group Inc. | 1,878,830 | 147,901 |
SEI Investments Co. | 1,214,108 | 48,771 |
WR Berkley Corp. | 920,800 | 45,110 |
PartnerRe Ltd. | 370,076 | 42,337 |
Axis Capital Holdings Ltd. | 802,807 | 40,863 |
HCC Insurance | ||
Holdings Inc. | 715,088 | 38,143 |
Eaton Vance Corp. | 868,677 | 34,964 |
Brown & Brown Inc. | 1,042,125 | 32,150 |
Commerce | ||
Bancshares Inc. | 722,061 | 28,882 |
RenaissanceRe | ||
Holdings Ltd. | 298,669 | 28,562 |
Cullen/Frost Bankers Inc. | 354,740 | 22,100 |
StanCorp Financial | ||
Group Inc. | 313,211 | 19,432 |
Bank of the Ozarks Inc. | 528,660 | 17,144 |
Prosperity Bancshares Inc. | 365,739 | 16,747 |
UMB Financial Corp. | 323,910 | 15,716 |
RLI Corp. | 308,065 | 14,451 |
American Equity | ||
Investment Life | ||
Holding Co. | 511,369 | 13,045 |
Community Bank | ||
System Inc. | 268,560 | 9,032 |
Westamerica | ||
Bancorporation | 175,937 | 7,157 |
BancFirst Corp. | 109,650 | 6,322 |
Infinity Property & | ||
Casualty Corp. | 82,254 | 5,780 |
1st Source Corp. | 174,000 | 5,173 |
Community Trust | ||
Bancorp Inc. | 124,666 | 3,937 |
Westwood Holdings | ||
Group Inc. | 59,280 | 3,497 |
1,672,920 | ||
Health Care (10.5%) | ||
Johnson & Johnson | 10,160,184 | 1,017,441 |
Medtronic plc | 7,153,536 | 510,763 |
Abbott Laboratories | 11,056,692 | 494,898 |
Stryker Corp. | 2,707,407 | 246,509 |
Becton Dickinson | ||
and Co. | 1,383,148 | 190,985 |
CR Bard Inc. | 555,901 | 95,076 |
West Pharmaceutical | ||
Services Inc. | 504,096 | 24,857 |
Healthcare Services | ||
Group Inc. | 502,318 | 15,828 |
Owens & Minor Inc. | 452,100 | 15,475 |
2,611,832 |
Market | ||
Value• | ||
Shares | ($000) | |
Industrials (23.1%) | ||
3M Co. | 4,748,430 | 770,670 |
United Technologies | ||
Corp. | 6,557,999 | 752,727 |
FedEx Corp. | 2,237,228 | 378,338 |
Caterpillar Inc. | 4,570,268 | 365,484 |
General Dynamics Corp. | 2,452,397 | 326,684 |
Emerson Electric Co. | 5,037,237 | 286,820 |
Automatic Data | ||
Processing Inc. | 3,452,489 | 284,934 |
Illinois Tool Works Inc. | 3,044,391 | 283,402 |
Northrop Grumman Corp. | 1,553,083 | 243,756 |
Norfolk Southern Corp. | 2,219,300 | 226,302 |
Deere & Co. | 2,649,124 | 225,679 |
Sherwin-Williams Co. | 718,670 | 194,954 |
Parker-Hannifin Corp. | 1,068,498 | 124,437 |
WW Grainger Inc. | 492,922 | 116,251 |
Roper Industries Inc. | 713,310 | 110,092 |
Fastenal Co. | 2,126,371 | 94,411 |
Pentair plc | 1,332,842 | 82,383 |
Dover Corp. | 1,145,503 | 80,231 |
CH Robinson | ||
Worldwide Inc. | 1,086,335 | 77,369 |
Cintas Corp. | 858,838 | 67,591 |
Expeditors International | ||
of Washington Inc. | 1,451,866 | 63,418 |
Valspar Corp. | 611,957 | 51,056 |
Carlisle Cos. Inc. | 457,533 | 41,032 |
Lincoln Electric | ||
Holdings Inc. | 580,447 | 39,418 |
Donaldson Co. Inc. | 1,041,005 | 38,059 |
Jack Henry & | ||
Associates Inc. | 612,496 | 37,589 |
Nordson Corp. | 461,174 | 33,601 |
AO Smith Corp. | 559,142 | 33,219 |
Bemis Co. Inc. | 728,720 | 32,282 |
Graco Inc. | 436,110 | 31,068 |
AptarGroup Inc. | 469,598 | 29,636 |
Toro Co. | 407,103 | 26,425 |
MDU Resources | ||
Group Inc. | 1,136,339 | 25,693 |
CLARCOR Inc. | 361,212 | 22,587 |
ITT Corp. | 585,580 | 20,970 |
MSC Industrial Direct | ||
Co. Inc. Class A | 277,171 | 20,807 |
Valmont Industries Inc. | 150,096 | 18,030 |
Franklin Electric Co. Inc. | 341,352 | 11,678 |
MSA Safety Inc. | 266,650 | 11,642 |
ABM Industries Inc. | 399,393 | 11,530 |
Tennant Co. | 132,502 | 8,640 |
^ Lindsay Corp. | 92,647 | 8,007 |
Badger Meter Inc. | 103,055 | 6,169 |
McGrath RentCorp | 184,675 | 5,610 |
13
Dividend Appreciation Index Fund
Market | ||
Value• | ||
Shares | ($000) | |
Gorman-Rupp Co. | 187,798 | 5,354 |
Brady Corp. Class A | 160,502 | 4,200 |
Cass Information | ||
Systems Inc. | 82,530 | 3,616 |
Mesa Laboratories Inc. | 24,686 | 1,880 |
Raven Industries Inc. | 61,675 | 1,322 |
5,737,053 | ||
Oil & Gas (7.2%) | ||
Exxon Mobil Corp. | 9,722,290 | 849,923 |
Occidental | ||
Petroleum Corp. | 5,703,617 | 456,289 |
EOG Resources Inc. | 3,857,313 | 343,416 |
Murphy Oil Corp. | 1,312,261 | 58,934 |
Helmerich & Payne Inc. | 686,629 | 40,896 |
Energen Corp. | 520,799 | 33,029 |
^ CARBO Ceramics Inc. | 10,357 | 339 |
1,782,826 | ||
Technology (8.8%) | ||
International Business | ||
Machines Corp. | 5,054,677 | 774,932 |
QUALCOMM Inc. | 12,117,134 | 756,836 |
Texas Instruments Inc. | 7,768,810 | 415,243 |
Analog Devices Inc. | 2,239,269 | 116,677 |
Linear Technology Corp. | 1,690,156 | 75,956 |
Harris Corp. | 765,330 | 51,377 |
2,191,021 | ||
Telecommunications (0.1%) | ||
Telephone & Data | ||
Systems Inc. | 727,978 | 16,926 |
Atlantic Tele-Network Inc. | 112,920 | 7,501 |
24,427 | ||
Utilities (0.9%) | ||
ONEOK Inc. | 1,370,696 | 60,352 |
UGI Corp. | 1,233,097 | 45,612 |
National Fuel Gas Co. | 600,193 | 38,070 |
Aqua America Inc. | 1,266,027 | 34,246 |
MGE Energy Inc. | 248,331 | 11,398 |
American States Water Co. | 277,524 | 11,001 |
California Water | ||
Service Group | 342,122 | 8,396 |
Chesapeake Utilities Corp. | 103,394 | 5,042 |
Connecticut Water | ||
Service Inc. | 78,812 | 2,834 |
216,951 | ||
Total Common Stocks | ||
(Cost $19,466,686) | 24,649,708 |
Market | |||
Value• | |||
Shares | ($000) | ||
Temporary Cash Investments (0.4%)1 | |||
Money Market Fund (0.4%) | |||
2,3 | Vanguard Market | ||
Liquidity Fund, | |||
0.133% | 84,409,985 | 84,410 | |
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (0.0%) | |||
4,5 | Fannie Mae | ||
Discount Notes, | |||
0.170%, 6/17/15 | 1,500 | 1,499 | |
5,6 | Federal Home | ||
Loan Bank | |||
Discount Notes, | |||
0.100%, 4/24/15 | 1,500 | 1,500 | |
5,6 | Federal Home | ||
Loan Bank | |||
Discount Notes, | |||
0.130%, 7/24/15 | 4,000 | 3,997 | |
6,996 | |||
Total Temporary Cash Investments | |||
(Cost $91,406) | 91,406 | ||
Total Investments (99.6%) | |||
(Cost $19,558,092) | 24,741,114 | ||
Other Assets and Liabilities (0.4%) | |||
Other Assets | 181,432 | ||
Liabilities3 | (87,007) | ||
94,425 | |||
Net Assets (100%) | 24,835,539 |
14
Dividend Appreciation Index Fund
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 19,641,166 |
Undistributed Net Investment Income | 38,261 |
Accumulated Net Realized Losses | (24,693) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 5,183,022 |
Futures Contracts | (2,217) |
Net Assets | 24,835,539 |
Investor Shares—Net Assets | |
Applicable to 46,209,587 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 1,449,577 |
Net Asset Value Per Share— | |
Investor Shares | $31.37 |
Admiral Shares—Net Assets | |
Applicable to 130,464,757 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 2,776,320 |
Net Asset Value Per Share— | |
Admiral Shares | $21.28 |
ETF Shares—Net Assets | |
Applicable to 262,819,380 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 20,609,642 |
Net Asset Value Per Share— | |
ETF Shares | $78.42 |
• See Note A in Notes to Financial Statements.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $1,961,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 100.0% and -0.4%, 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 $2,037,000 of collateral received for securities on loan.
4 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.
5 Securities with a value of $5,297,000 have been segregated as initial margin for open futures contracts.
6 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Appreciation Index Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends | 537,483 |
Interest1 | 24 |
Securities Lending | 207 |
Total Income | 537,714 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 2,354 |
Management and Administrative—Investor Shares | 2,969 |
Management and Administrative—Admiral Shares | 1,733 |
Management and Administrative—ETF Shares | 12,964 |
Marketing and Distribution—Investor Shares | 551 |
Marketing and Distribution—Admiral Shares | 239 |
Marketing and Distribution—ETF Shares | 4,341 |
Custodian Fees | 192 |
Auditing Fees | 30 |
Shareholders’ Reports—Investor Shares | 49 |
Shareholders’ Reports—Admiral Shares | 8 |
Shareholders’ Reports—ETF Shares | 459 |
Trustees’ Fees and Expenses | 18 |
Total Expenses | 25,907 |
Net Investment Income | 511,807 |
Realized Net Gain (Loss) | |
Investment Securities Sold | 1,431,844 |
Futures Contracts | 22 |
Realized Net Gain (Loss) | 1,431,866 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 626,197 |
Futures Contracts | (2,151) |
Change in Unrealized Appreciation (Depreciation) | 624,046 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,567,719 |
1 Interest income from an affiliated company of the fund was $22,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 511,807 | 414,487 |
Realized Net Gain (Loss) | 1,431,866 | 242,192 |
Change in Unrealized Appreciation (Depreciation) | 624,046 | 2,075,258 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,567,719 | 2,731,937 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (34,944) | (65,045) |
Admiral Shares | (47,026) | — |
ETF Shares | (410,307) | (337,724) |
Realized Capital Gain | ||
Investor Shares | — | — |
Admiral Shares | — | — |
ETF Shares | — | — |
Total Distributions | (492,277) | (402,769) |
Capital Share Transactions | ||
Investor Shares | (1,742,875) | (265,587) |
Admiral Shares | 1,876,153 | 789,364 |
ETF Shares | 389,703 | 3,461,648 |
Net Increase (Decrease) from Capital Share Transactions | 522,981 | 3,985,425 |
Total Increase (Decrease) | 2,598,423 | 6,314,593 |
Net Assets | ||
Beginning of Period | 22,237,116 | 15,922,523 |
End of Period1 | 24,835,539 | 22,237,116 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $38,261,000 and $18,731,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Dividend Appreciation Index Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $28.59 | $25.23 | $22.42 | $21.33 | $18.33 |
Investment Operations | |||||
Net Investment Income | . 627 | .540 | .538 | .445 | .392 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 2.756 | 3.350 | 2.812 | 1.089 | 3.006 |
Total from Investment Operations | 3.383 | 3.890 | 3.350 | 1.534 | 3.398 |
Distributions | |||||
Dividends from Net Investment Income | (. 603) | (. 530) | (. 540) | (.444) | (.398) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (. 603) | (. 530) | (. 540) | (.444) | (.398) |
Net Asset Value, End of Period | $31.37 | $28.59 | $25.23 | $22.42 | $21.33 |
Total Return1 | 11.86% | 15.51% | 15.15% | 7.34% | 18.75% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $1,450 | $2,966 | $2,804 | $2,206 | $1,421 |
Ratio of Total Expenses to Average Net Assets | 0.20% | 0.20% | 0.20% | 0.25% | 0.30% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.04% | 1.98% | 2.32% | 2.14% | 2.13% |
Portfolio Turnover Rate2 | 20% | 3% | 15% | 14% | 15% |
1 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. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
18
Dividend Appreciation Index Fund
Financial Highlights
Admiral Shares | ||
Year | Dec. 19, | |
Ended | 20131 to | |
Jan. 31, | Jan. 31, | |
For a Share Outstanding Throughout Each Period | 2015 | 2014 |
Net Asset Value, Beginning of Period | $19.40 | $20.00 |
Investment Operations | ||
Net Investment Income | . 445 | .030 |
Net Realized and Unrealized Gain (Loss) on Investments | 1.865 | (.630) |
Total from Investment Operations | 2.310 | (.600) |
Distributions | ||
Dividends from Net Investment Income | (.430) | — |
Distributions from Realized Capital Gains | — | — |
Total Distributions | (.430) | — |
Net Asset Value, End of Period | $21.28 | $19.40 |
Total Return2 | 11.94% | -3.00% |
Ratios/Supplemental Data | ||
Net Assets, End of Period (Millions) | $2,776 | $760 |
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.10%3 |
Ratio of Net Investment Income to Average Net Assets | 2.14% | 2.08%3 |
Portfolio Turnover Rate 4 | 20% | 3% |
1 Inception. 2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. 3 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.
19
Dividend Appreciation Index Fund
Financial Highlights
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $71.47 | $63.08 | $56.04 | $53.32 | $45.81 |
Investment Operations | |||||
Net Investment Income | 1.645 | 1.421 | 1.401 | 1.173 | 1.034 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 6.890 | 8.357 | 7.049 | 2.719 | 7.524 |
Total from Investment Operations | 8.535 | 9.778 | 8.450 | 3.892 | 8.558 |
Distributions | |||||
Dividends from Net Investment Income | (1.585) | (1.388) | (1.410) | (1.172) | (1.048) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (1.585) | (1.388) | (1.410) | (1.172) | (1.048) |
Net Asset Value, End of Period | $78.42 | $71.47 | $63.08 | $56.04 | $53.32 |
Total Return | 11.97% | 15.60% | 15.29% | 7.46% | 18.91% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $20,610 | $18,511 | $13,119 | $9,677 | $4,985 |
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.10% | 0.10% | 0.13% | 0.18% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.14% | 2.08% | 2.42% | 2.26% | 2.25% |
Portfolio Turnover Rate1 | 20% | 3% | 15% | 14% | 15% |
1 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.
20
Dividend Appreciation Index Fund
Notes to Financial Statements
Vanguard Dividend Appreciation Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers three classes of shares: Investor Shares, Admiral Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments 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 objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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).
21
Dividend Appreciation Index Fund
During the year ended January 31, 2015, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (January 31, 2012–2015), 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. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
6. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
7. 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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
22 |
Dividend Appreciation Index Fund
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.
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 based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At January 31, 2015, the fund had contributed capital of $2,421,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.97% 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).
The following table summarizes the market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 24,649,708 | — | — |
Temporary Cash Investments | 84,410 | 6,996 | — |
Futures Contracts—Liabilities1 | (2,270) | — | — |
Total | 24,731,848 | 6,996 | — |
1 Represents variation margin on the last day of the reporting period. |
23
Dividend Appreciation Index Fund
D. At January 31, 2015, 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 | March 2015 | 89 | 44,242 | 214 |
E-mini S&P 500 Index | March 2015 | 1,420 | 141,176 | (2,431) |
(2,217) |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
E. 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 year ended January 31, 2015, the fund realized $1,225,145,000 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.
For tax purposes, at January 31, 2015, the fund had $46,775,000 of ordinary income available for distribution. The fund used capital loss carryforwards of $205,636,000 to offset taxable capital gains realized during the year ended January 31, 2015. At January 31, 2015, the fund had available capital losses totaling $25,844,000 to offset future net capital gains. Of this amount, $11,128,000 may be used to offset future net capital gains through January 31, 2019. Capital losses of $14,716,000 realized beginning in fiscal 2012 may be carried forward indefinitely under the Regulated Investment Company Modernization Act of 2010, but must be used before any expiring loss carryforwards.
At January 31, 2015, the cost of investment securities for tax purposes was $19,559,158,000. Net unrealized appreciation of investment securities for tax purposes was $5,181,956,000, consisting of unrealized gains of $5,667,607,000 on securities that had risen in value since their purchase and $485,651,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2015, the fund purchased $9,791,766,000 of investment securities and sold $9,434,513,000 of investment securities, other than temporary cash investments. Purchases and sales include $4,585,538,000 and $4,665,320,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
24
Dividend Appreciation Index Fund
G. Capital share transactions for each class of shares were:
Year Ended January 31, | |||||
2015 | 2014 | ||||
Amount | Shares | Amount | Shares | ||
($000) | (000) | ($000) | (000) | ||
Investor Shares | |||||
Issued | 292,699 | 9,534 | 1,116,394 | 40,789 | |
Issued in Lieu of Cash Distributions | 26,684 | 863 | 53,392 | 1,935 | |
Redeemed | (2,062,258) | (67,915) | (1,435,373) | (50,108) | |
Net Increase (Decrease)—Investor Shares | (1,742,875) | (57,518) | (265,587) | (7,384) | |
Admiral Shares1 | |||||
Issued | 2,283,755 | 110,617 | 808,063 | 40,135 | |
Issued in Lieu of Cash Distributions | 42,295 | 1,993 | — | — | |
Redeemed | (449,897) | (21,346) | (18,699) | (935) | |
Net Increase (Decrease) —Admiral Shares | 1,876,153 | 91,264 | 789,364 | 39,200 | |
ETF Shares | |||||
Issued | 5,104,112 | 66,717 | 4,104,546 | 60,317 | |
Issued in Lieu of Cash Distributions | — | — | — | — | |
Redeemed | (4,714,409) | (62,900) | (642,898) | (9,300) | |
Net Increase (Decrease)—ETF Shares | 389,703 | 3,817 | 3,461,648 | 51,017 | |
1 Inception was December 19, 2013, for Admiral Shares. |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
25
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard Dividend
Appreciation Index Fund:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Dividend Appreciation Index Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodian and broker, by agreement to the underlying ownership records of the transfer agent and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 13, 2015
Special 2014 tax information (unaudited) for Vanguard Dividend Appreciation Index Fund
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $492,277,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 100% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
26
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Dividend Appreciation Index Fund Investor Shares | |||
Periods Ended January 31, 2015 | |||
Since | |||
One | Five | Inception | |
Year | Years | (4/27/2006) | |
Returns Before Taxes | 11.86% | 13.66% | 7.31% |
Returns After Taxes on Distributions | 11.35 | 13.23 | 6.95 |
Returns After Taxes on Distributions and Sale of Fund Shares | 7.13 | 10.99 | 5.89 |
27
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.
28
Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Appreciation Index Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,050.85 | $1.03 |
Admiral Shares | 1,000.00 | 1,051.28 | 0.52 |
ETF Shares | 1,000.00 | 1,051.30 | 0.52 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,024.20 | $1.02 |
Admiral Shares | 1,000.00 | 1,024.70 | 0.51 |
ETF Shares | 1,000.00 | 1,024.70 | 0.51 |
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 0.20% for Investor Shares, 0.10% for Admiral Shares, and 0.10% 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. | |||
29
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 (for bonds), its actual income (for asset-backed securities), 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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
30
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.
31
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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | Thomas J. Higgins | |
College of Arts and Letters and of the Advisory Board | Born 1957. Chief Financial Officer Since September | |
to the Kellogg Institute for International Studies, both | 2008. Principal Occupation(s) During the Past Five | |
at the University of Notre Dame. | Years and Other Experience: Principal of The Vanguard | |
Group, Inc.; Chief Financial Officer of each of the | ||
Mark Loughridge | investment companies served by The Vanguard Group; | |
Born 1953. Trustee Since March 2012. Principal | Treasurer of each of the investment companies served | |
Occupation(s) During the Past Five Years and Other | by The Vanguard Group (1998–2008). | |
Experience: Senior Vice President and Chief Financial | ||
Officer (retired 2013) at IBM (information technology | Kathryn J. Hyatt | |
services); Fiduciary Member of IBM’s Retirement Plan | Born 1955. Treasurer Since November 2008. Principal | |
Committee (2004–2013); Director of the Dow Chemical | Occupation(s) During the Past Five Years and Other | |
Company; Member of the Council on Chicago Booth. | Experience: Principal of The Vanguard Group, Inc.; | |
Treasurer of each of the investment companies served | ||
Scott C. Malpass | by The Vanguard Group; Assistant Treasurer of each of | |
Born 1962. Trustee Since March 2012. Principal | the investment companies served by The Vanguard | |
Occupation(s) During the Past Five Years and Other | Group (1988–2008). | |
Experience: Chief Investment Officer and Vice | ||
President at the University of Notre Dame; Assistant | Heidi Stam | |
Professor of Finance at the Mendoza College of | Born 1956. Secretary Since July 2005. Principal | |
Business at Notre Dame; Member of the Notre Dame | Occupation(s) During the Past Five Years and Other | |
403(b) Investment Committee; Board Member of | Experience: Managing Director of The Vanguard | |
TIFF Advisory Services, Inc., and Catholic Investment | Group, Inc.; General Counsel of The Vanguard Group; | |
Services, Inc. (investment advisors); Member of | Secretary of The Vanguard Group and of each of the | |
the Investment Advisory Committee of Major | investment companies served by The Vanguard Group; | |
League Baseball. | Director and Senior Vice President of Vanguard | |
Marketing Corporation. | ||
André F. Perold | ||
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, 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 | “Dividend Achievers” is a trademark of The NASDAQ |
Direct Investor Account Services > 800-662-2739 | OMX Group, Inc. (collectively, with its affiliates |
Institutional Investor Services > 800-523-1036 | “NASDAQ OMX”), and has been licensed for use by The |
Text Telephone for People | Vanguard Group, Inc. Vanguard mutual funds are not |
Who Are Deaf or Hard of Hearing> 800-749-7273 | sponsored, endorsed, sold, or promoted by NASDAQ |
OMX and NASDAQ OMX makes no representation | |
This material may be used in conjunction | regarding the advisability of investing in the funds. |
with the offering of shares of any Vanguard | NASDAQ OMX makes no warranties and bears no |
fund only if preceded or accompanied by | liability with respect to the Vanguard mutual funds. |
the fund’s current prospectus. | |
All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, 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. | |
© 2015 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q6020 032015 |
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Annual Report | January 31, 2015
Vanguard REIT Index Fund
The mission continues
On May 1, 1975, Vanguard began operations, a fledgling company based on the simple but revolutionary idea that a mutual fund company should be managed solely in the interest of its investors.
Four decades later, that revolutionary spirit continues to animate the enterprise. Vanguard remains on a mission to give investors the best chance of investment success.
As we mark our 40th anniversary, we thank you for entrusting your assets to Vanguard and giving us the opportunity to help you reach your financial goals in the decades to come.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Fund Profile. | 7 |
Performance Summary. | 8 |
Financial Statements. | 11 |
Your Fund’s After-Tax Returns. | 33 |
About Your Fund’s Expenses. | 34 |
Glossary. | 36 |
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Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Since our founding, Vanguard has drawn inspiration from the enterprise and valor demonstrated by British naval hero Horatio Nelson and his command at the Battle of the Nile in 1798. The photograph displays a replica of a merchant ship from the same era as Nelson’s flagship, the HMS Vanguard.
Your Fund’s Total Returns
Fiscal Year Ended January 31, 2015 | |
Total | |
Returns | |
Vanguard REIT Index Fund | |
Investor Shares | 33.29% |
Admiral™ Shares | 33.46 |
Institutional Shares | 33.43 |
ETF Shares | |
Market Price | 33.60 |
Net Asset Value | 33.41 |
MSCI US REIT Index | 33.52 |
Real Estate Funds Average | 30.41 |
Real Estate Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
| |
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. | |
For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV. | |
Your Fund’s Performance at a Glance | |||||
January 31, 2014, Through January 31, 2015 | |||||
Distributions Per Share | |||||
Starting | Ending | ||||
Share | Share | Income | Capital | Return of | |
Price | Price | Dividends | Gains | Capital | |
Vanguard REIT Index Fund | |||||
Investor Shares | $22.37 | $28.73 | $0.624 | $0.000 | $0.311 |
Admiral Shares | 95.46 | 122.58 | 2.758 | 0.000 | 1.377 |
Institutional Shares | 14.78 | 18.97 | 0.430 | 0.000 | 0.214 |
ETF Shares | 67.36 | 86.49 | 1.947 | 0.000 | 0.972 |
1
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x4x1.jpg)
Chairman’s Letter
Dear Shareholder,
The real estate investment trust (REIT) market turned in a robust performance for the 12 months ended January 31, 2015. Healthy demand for real estate and the steady income that REITs provide helped them easily outperform the broad U.S. stock market.
Vanguard REIT Index Fund returned 33.29% for Investor Shares, in line with its benchmark index and about 3 percentage points ahead of the average return of its peers.
The strong performance marked a turnaround from the previous fiscal year, when REITs’ tepid returns were far behind those of the broader market.
Please note that the fund’s Signal Shares® were converted to Admiral Shares in October 2014 as part of a year-long plan to streamline Vanguard’s share-class offerings.
U.S. stocks posted strong results despite facing many challenges
Although volatility picked up and flat results in December turned negative in January, the broad U.S. stock market returned about 13% for the 12 months. Mostly strong U.S. corporate earnings, combined with the effects of global monetary stimulus, helped domestic equities overcome worries about lofty stock valuations, plunging oil prices, and economic weakness abroad.
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The Federal Reserve ended its bond-buying program in October, and investors seemed reassured when it said it would be “patient” in deciding when to increase short-term interest rates. The Bank of Japan, the European Central Bank, and the People’s Bank of China all embarked on aggressive stimulus actions during the fiscal year.
International stocks returned about 1% in U.S. dollar terms as numerous geopolitical difficulties and the strength of the dollar hindered performance. Emerging markets stocks outpaced those of the developed markets of the Pacific and Europe.
Bond returns stood out, helped by global stimulus
The broad U.S. taxable bond market returned 6.61% as bond prices benefited from global stimulus programs. Many investors were drawn to the relative stability of bonds amid the volatility in equity markets.
Even as the Fed phased out its bond purchases, bond prices rose and yields fell. (Bond prices and yields move in opposite directions.) The yield of the 10-year Treasury note ended January at 1.75%, down from 2.70% at the close of January 2014. Municipal bonds returned 8.86%, helped by the effects of greater demand and reduced supply along with the broader bond market’s advance.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2015 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 13.76% | 17.62% | 15.84% |
Russell 2000 Index (Small-caps) | 4.41 | 15.27 | 15.66 |
Russell 3000 Index (Broad U.S. market) | 12.99 | 17.43 | 15.83 |
FTSE All-World ex US Index (International) | 1.31 | 6.97 | 5.82 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 6.61% | 3.07% | 4.57% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 8.86 | 4.12 | 5.42 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.03 | 0.04 | 0.06 |
CPI | |||
Consumer Price Index | -0.09% | 1.03% | 1.52% |
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International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned –5.61%. Like their equity counterparts, international bonds suffered because of the strength of the U.S. dollar.
The Fed’s target of 0%–0.25% for short-term interest rates continued to hold down returns for money market funds and savings accounts.
REITs soared in responseto falling interest rates
As I mentioned, bond yields unexpectedly reversed course over the past 12 months The drop in interest rates helped REITs rebound from their decline in the fund’s previous fiscal year.
Falling rates often boost REITs because lower capital costs in a growing economy can help their profit margins. REITs are required to pay out at least 90% of their income as dividends to investors, making them attractive in low-interest-rate environments. As equity investments, REITs carry higher risks than fixed-income securities, but the bullish sentiment in the U.S. stock market during the period muted that concern.
All subsets of the REIT market rose by double digits, and retail and residential REITs led the way with returns of about 39% each. Retail REITs benefited from falling vacancy rates, which allowed landlords to raise rents on choice properties. Residential REITs were helped by the
Expense Ratios | |||||
Your Fund Compared With Its Peer Group | |||||
Investor | Admiral | Institutional | ETF | Peer Group | |
Shares | Shares | Shares | Shares | Average | |
REIT Index Fund | 0.24% | 0.10% | 0.08% | 0.10% | 1.33% |
The fund expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the fund’s expense ratios were 0.26% for Investor Shares, 0.12% for Admiral Shares, 0.10% for Institutional Shares, and 0.12% for ETF Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2014. | |||||
Peer group: Real Estate Funds. |
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improving job market, along with rising demand for apartments as home sales continued to be sluggish.
Returns from health care, office, and hotel and resort REITs were not far behind, thanks to increased business in these industries.
Industrial and diversified REITs, two of the smaller subsectors, recorded more modest returns.
REITs’ long-term success should be assessed cautiously
For the ten years ended January 31, 2015, the REIT Index Fund posted an average annual return of 10.09% for Investor Shares. This performance closely tracked the fund’s benchmark index, a tribute to the experience of the portfolio’s advisor, Vanguard Equity Investment Group. The advisor’s efforts were aided by the portfolio’s low expenses.
The fund’s long-term record outdistanced the broader market by about 2 percentage points over the decade and exceeded the average for its peer group. The fund posted positive returns in eight of the ten years, with five of those exceeding 30%.
However, it’s important to remember that any fund that focuses on a single sector is often more volatile than the overall market. Although REITs have provided generous returns in recent years, in other periods the fund’s returns have significantly trailed those of the broad market.
Total Returns | |
Ten Years Ended January 31, 2015 | |
Average | |
Annual Return | |
REIT Index Fund Investor Shares | 10.09% |
REIT Spliced Index | 10.16 |
Real Estate Funds Average | 8.78 |
For a benchmark description, see the Glossary. | |
Real Estate Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. | |
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For long-term investors, the fund’s primary benefit is that it offers broad, low-cost exposure to the commercial U.S. real estate market. Consequently, it can enhance diversification when used prudently, such as when it supplements a portfolio that is concentrated in a few market segments.
Though volatility is inevitable, you don’t have to “inherit” it
In January, Tim Buckley, Vanguard’s chief investment officer, and I answered questions from shareholders as part of a live webcast. It was a great opportunity to hear what you’re thinking, offer some insights, and reinforce some of Vanguard’s key principles.
Not surprisingly, given that the first month of 2015 was marked by sharp fluctuations in the markets, volatility came up as a concern. The broad stock market had several swings of more than 1% in January. Bond yields, meanwhile, moved sharply lower as prices rallied.
Our response? Tim and I both stressed that how you react—or don’t react—to such jolts can determine how you ultimately fare as an investor. That’s why one of those key principles highlights the need to maintain perspective and long-term discipline. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)
Tim noted that the best course for long-term investors is simply to ignore daily market moves. He pointed out that investors “inherit” what would otherwise be fleeting volatility when they sell in response to a market downturn. As Tim put it, the only way to truly have a loss is to act and realize that loss.
Those are wise words to keep in mind when markets turn stormy again.
As always, thank you for investing with Vanguard.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 17, 2015
6
REIT Index Fund
Fund Profile
As of January 31, 2015
Share-Class Characteristics | ||||
Investor | Admiral | Institutional | ||
Shares | Shares | Shares | ETF Shares | |
Ticker Symbol | VGSIX | VGSLX | VGSNX | VNQ |
Expense Ratio1 | 0.24% | 0.10% | 0.08% | 0.10% |
Portfolio Characteristics | |||
DJ | |||
U.S. | |||
Total | |||
Market | |||
MSCI US | FA | ||
Fund | REIT Index | Index | |
Number of Stocks | 141 | 140 | 3,752 |
Median Market Cap | $11.4B | $11.4B | $47.6B |
Price/Earnings Ratio | 45.7x | 45.7x | 20.2x |
Price/Book Ratio | 2.6x | 2.6x | 2.7x |
Return on Equity | 5.1% | 5.1% | 17.8% |
Earnings Growth | |||
Rate | 14.6% | 14.6% | 15.1% |
Dividend Yield | 3.4% | 3.4% | 1.9% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 8% | — | — |
Short-Term Reserves | 0.0% | — | — |
Dividend Yield: This yield may include some payments that represent a return of capital, capital gains distributions, or both by the underlying REITs. These amounts are determined by each REIT at the end of its fiscal year. | |||
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI US | ||
Fund | REIT Index | |
Diversified REITs | 6.7% | 6.8% |
Health Care REITs | 14.3 | 14.3 |
Hotel & Resort REITs | 7.6 | 7.5 |
Industrial REITs | 4.5 | 4.5 |
Office REITs | 15.9 | 15.9 |
Residential REITs | 16.2 | 16.2 |
Retail REITs | 26.0 | 26.0 |
Specialized REITs | 8.8 | 8.8 |
Volatility Measures | ||
DJ | ||
U.S. Total | ||
MSCI US | Market | |
REIT Index | FA Index | |
R-Squared | 1.00 | 0.12 |
Beta | 1.00 | 0.48 |
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) | ||
Simon Property Group | ||
Inc. | Retail REITs | 8.5% |
Public Storage | Specialized REITs | 4.0 |
Equity Residential | Residential REITs | 3.7 |
Health Care REIT Inc. | Health Care REITs | 3.6 |
Ventas Inc. | Health Care REITs | 3.5 |
AvalonBay Communities | ||
Inc. | Residential REITs | 3.1 |
Prologis Inc. | Industrial REITs | 3.1 |
HCP Inc. | Health Care REITs | 3.0 |
Boston Properties Inc. | Office REITs | 2.9 |
Vornado Realty Trust | Office REITs | 2.6 |
Top Ten | 38.0% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
1 The expense ratios shown are from the prospectus dated May 27, 2014, and represent estimated costs for the current fiscal year. For the fiscal year ended January 31, 2015, the expense ratios were 0.26% for Investor Shares, 0.12% for Admiral Shares, 0.10% for Institutional Shares, and 0.12% for ETF Shares.
7
REIT Index Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2005, Through January 31, 2015
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x10x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2015 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
REIT Index Fund*Investor Shares | 33.29% | 19.67% | 10.09% | $26,146 | |
•••••••• | REIT Spliced Index | 33.52 | 19.90 | 10.16 | 26,310 |
– – – – | Real Estate Funds Average | 30.41 | 18.47 | 8.78 | 23,192 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 | |
For a benchmark description, see the Glossary. | |||||
Real Estate Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Admiral Shares | 33.46% | 19.84% | 10.22% | $26,449 |
REIT Spliced Index | 33.52 | 19.90 | 10.16 | 26,310 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 |
See Financial Highlights for dividend and capital gains information.
8
REIT Index Fund
Average Annual Total Returns | ||||
Periods Ended January 31, 2015 | ||||
Final Value | ||||
One | Five | Ten | of a $5,000,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Institutional Shares | 33.43% | 19.87% | 10.24% | $13,260,052 |
REIT Spliced Index | 33.52 | 19.90 | 10.16 | 13,154,801 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 8.08 | 10,871,509 |
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
REIT Index Fund | ||||
ETF Shares Net Asset Value | 33.41% | 19.83% | 10.21% | $26,447 |
REIT Spliced Index | 33.52 | 19.90 | 10.16 | 26,310 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 12.87 | 15.86 | 8.08 | 21,743 |
Cumulative Returns of ETF Shares: January 31, 2005, Through January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
REIT Index Fund ETF Shares Market Price | 33.60% | 147.41% | 164.62% |
REIT Index Fund ETF Shares Net Asset Value | 33.41 | 147.04 | 164.47 |
REIT Spliced Index | 33.52 | 147.79 | 163.10 |
Fiscal-Year Total Returns (%): January 31, 2005, Through January 31, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x11x1.jpg)
9
REIT Index Fund
Average Annual Total Returns: Periods Ended December 31, 2014 | ||||
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 | |
Investor Shares | 5/13/1996 | 30.13% | 16.84% | 8.41% |
Admiral Shares | 11/12/2001 | 30.32 | 17.00 | 8.54 |
Institutional Shares | 12/2/2003 | 30.28 | 17.03 | 8.56 |
ETF Shares | 9/23/2004 | |||
Market Price | 30.41 | 16.97 | 8.54 | |
Net Asset Value | 30.29 | 16.99 | 8.54 |
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REIT Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2015
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) | ||
Real Estate Investment Trusts (99.9%)1 | |||
Diversified REITs (6.7%) | |||
2 | American Realty Capital | ||
Properties Inc. | 68,844,484 | 637,844 | |
2 | Duke Realty Corp. | 25,869,079 | 564,722 |
2 | WP Carey Inc. | 6,784,104 | 487,167 |
2 | Liberty Property Trust | 11,229,985 | 452,568 |
2 | Spirit Realty Capital Inc. | 30,240,264 | 388,890 |
2 | Lexington Realty Trust | 15,791,637 | 180,183 |
2 | Cousins Properties Inc. | 15,856,369 | 175,054 |
2 | Washington REIT | 5,054,230 | 145,107 |
2 | PS Business Parks Inc. | 1,531,154 | 128,785 |
2 | American Assets | ||
Trust Inc. | 2,748,842 | 121,994 | |
Empire State Realty | |||
Trust Inc. | 4,855,661 | 88,373 | |
Select Income REIT | 2,951,951 | 73,415 | |
2 | Investors Real | ||
Estate Trust | 8,694,152 | 71,727 | |
2 | First Potomac | ||
Realty Trust | 4,461,480 | 57,107 | |
2 | RAIT Financial Trust | 6,263,299 | 44,156 |
2 | Winthrop Realty Trust | 2,623,838 | 41,981 |
2 | Whitestone REIT | 1,725,845 | 27,079 |
2 | One Liberty Properties Inc. | 979,278 | 24,002 |
3,710,154 | |||
Health Care REITs (14.3%) | |||
2 | Health Care REIT Inc. | 24,543,960 | 2,011,377 |
2 | Ventas Inc. | 24,543,852 | 1,958,845 |
2 | HCP Inc. | 34,775,403 | 1,644,529 |
^,2 | Omega Healthcare | ||
Investors Inc. | 9,648,101 | 423,166 | |
2 | Senior Housing | ||
Properties Trust | 15,450,977 | 359,853 | |
2 | Healthcare Trust of | ||
America Inc. Class A | 9,060,460 | 266,921 | |
2 | Medical Properties | ||
Trust Inc. | 15,414,191 | 236,916 |
Market | |||
Value | |||
Shares | ($000) | ||
2 | Healthcare Realty | ||
Trust Inc. | 7,390,363 | 222,376 | |
2 | National Health | ||
Investors Inc. | 2,519,917 | 188,389 | |
2 | Sabra Health Care | ||
REIT Inc. | 4,039,669 | 132,097 | |
2 | LTC Properties Inc. | 2,643,557 | 124,036 |
2 | New Senior Investment | ||
Group Inc. | 5,570,616 | 92,138 | |
2 | Physicians Realty Trust | 4,846,730 | 85,496 |
Aviv REIT Inc. | 1,970,724 | 77,509 | |
2 | Universal Health Realty | ||
Income Trust | 931,663 | 50,058 | |
2 | CareTrust REIT Inc. | 2,146,424 | 28,934 |
7,902,640 | |||
Hotel & Resort REITs (7.5%) | |||
2 | Host Hotels & | ||
Resorts Inc. | 57,341,791 | 1,312,554 | |
2 | Hospitality Properties | ||
Trust | 11,358,630 | 370,178 | |
2 | LaSalle Hotel Properties | 8,467,432 | 342,592 |
2 | RLJ Lodging Trust | 10,015,471 | 341,227 |
2 | Sunstone Hotel | ||
Investors Inc. | 15,715,945 | 267,957 | |
*,2 | Strategic Hotels & | ||
Resorts Inc. | 19,261,010 | 258,483 | |
2 | Pebblebrook Hotel Trust | 5,379,599 | 249,828 |
2 | DiamondRock | ||
Hospitality Co. | 14,839,500 | 215,618 | |
^,2 | Ryman Hospitality | ||
Properties Inc. | 3,482,363 | 191,182 | |
2 | Chesapeake | ||
Lodging Trust | 4,113,898 | 151,062 | |
2 | Hersha Hospitality Trust | ||
Class A | 15,229,916 | 101,736 | |
2 | Chatham Lodging Trust | 2,854,321 | 88,855 |
2 | FelCor Lodging Trust Inc. | 8,486,862 | 84,953 |
*,2 | Summit Hotel | ||
Properties Inc. | 6,514,790 | 83,520 |
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REIT Index Fund
Market | |||
Value | |||
Shares | ($000) | ||
2 | Ashford Hospitality | ||
Trust Inc. | 7,498,219 | 78,881 | |
2 | Ashford Hospitality | ||
Prime Inc. | 1,925,691 | 33,045 | |
4,171,671 | |||
Industrial REITs (4.5%) | |||
2 | Prologis Inc. | 37,895,840 | 1,710,618 |
2 | DCT Industrial Trust Inc. | 6,321,074 | 238,684 |
2 | First Industrial Realty | ||
Trust Inc. | 8,383,577 | 182,175 | |
2 | EastGroup Properties Inc. | 2,398,050 | 155,010 |
2 | STAG Industrial Inc. | 4,824,630 | 126,405 |
2 | Monmouth Real Estate | ||
Investment Corp. | 4,073,875 | 48,113 | |
2,461,005 | |||
Office REITs (15.9%) | |||
2 | Boston Properties Inc. | 11,603,690 | 1,610,592 |
2 | Vornado Realty Trust | 12,801,269 | 1,413,772 |
2 | SL Green Realty Corp. | 7,248,968 | 913,370 |
2 | Digital Realty Trust Inc. | 10,274,596 | 749,429 |
2 | Alexandria Real Estate | ||
Equities Inc. | 5,440,462 | 530,554 | |
2 | Kilroy Realty Corp. | 6,307,208 | 467,679 |
2 | BioMed Realty Trust Inc. | 14,797,059 | 361,788 |
2 | Highwoods Properties Inc. | 6,851,879 | 322,038 |
2 | Douglas Emmett Inc. | 10,399,557 | 296,179 |
*,2 | Equity Commonwealth | 8,794,709 | 231,741 |
2 | Piedmont Office Realty | ||
Trust Inc. Class A | 11,702,023 | 228,541 | |
2 | Brandywine Realty Trust | 13,352,568 | 221,786 |
2 | Corporate Office | ||
Properties Trust | 7,016,206 | 210,486 | |
2 | DuPont Fabros | ||
Technology Inc. | 4,993,868 | 186,072 | |
2 | Hudson Pacific | ||
Properties Inc. | 5,338,519 | 172,701 | |
2 | New York REIT Inc. | 12,300,497 | 128,294 |
2 | Mack-Cali Realty Corp. | 6,413,710 | 125,131 |
2 | Government Properties | ||
Income Trust | 5,332,717 | 121,586 | |
2 | Parkway Properties Inc. | 5,819,026 | 106,488 |
2 | Gramercy Property | ||
Trust Inc. | 13,578,902 | 93,966 | |
2 | Franklin Street | ||
Properties Corp. | 6,840,495 | 88,106 | |
2 | CyrusOne Inc. | 2,787,635 | 78,193 |
2 | CoreSite Realty Corp. | 1,638,931 | 71,802 |
QTS Realty Trust Inc. | |||
Class A | 987,734 | 37,544 | |
8,767,838 | |||
Residential REITs (16.2%) | |||
2 | Equity Residential | 26,046,680 | 2,021,483 |
2 | AvalonBay | ||
Communities Inc. | 9,943,058 | 1,720,050 | |
2 | Essex Property Trust Inc. | 4,813,061 | 1,087,992 |
Market | |||
Value | |||
Shares | ($000) | ||
2 | UDR Inc. | 19,085,476 | 634,783 |
2 | Camden Property Trust | 6,494,420 | 500,395 |
2 | Mid-America Apartment | ||
Communities Inc. | 5,701,846 | 452,270 | |
2 | Apartment Investment & | ||
Management Co. | |||
Class A | 11,287,016 | 449,901 | |
2 | American Campus | ||
Communities Inc. | 7,956,660 | 349,775 | |
2 | Equity LifeStyle | ||
Properties Inc. | 6,043,805 | 330,777 | |
2 | Home Properties Inc. | 4,348,190 | 306,547 |
2 | Post Properties Inc. | 4,125,285 | 250,611 |
2 | Sun Communities Inc. | 3,393,686 | 229,854 |
American Homes 4 Rent | |||
Class A | 11,881,524 | 198,303 | |
2 | Education Realty | ||
Trust Inc. | 3,528,962 | 122,102 | |
2 | Associated Estates | ||
Realty Corp. | 4,372,799 | 108,926 | |
2 | Starwood Waypoint | ||
Residential Trust | 2,929,064 | 71,001 | |
2 | Silver Bay Realty | ||
Trust Corp. | 2,775,784 | 43,247 | |
*,2 | American Residential | ||
Properties Inc. | 2,322,066 | 40,659 | |
2 | Campus Crest | ||
Communities Inc. | 4,921,995 | 33,913 | |
8,952,589 | |||
Retail REITs (26.0%) | |||
2 | Simon Property | ||
Group Inc. | 23,553,828 | 4,679,203 | |
General Growth | |||
Properties Inc. | 40,192,544 | 1,213,011 | |
2 | Macerich Co. | 10,669,836 | 917,713 |
^,2 | Realty Income Corp. | 16,880,734 | 916,793 |
2 | Kimco Realty Corp. | 31,168,936 | 861,821 |
2 | Federal Realty | ||
Investment Trust | 5,134,903 | 738,245 | |
2 | Regency Centers Corp. | 7,003,239 | 480,142 |
2 | DDR Corp. | 23,172,691 | 454,185 |
2 | National Retail | ||
Properties Inc. | 9,484,189 | 406,303 | |
2 | Taubman Centers Inc. | 4,801,168 | 393,456 |
2 | Weingarten Realty | ||
Investors | 8,806,076 | 330,052 | |
2 | Retail Properties of | ||
America Inc. | 17,940,511 | 317,368 | |
Brixmor Property | |||
Group Inc. | 11,272,339 | 305,480 | |
2 | Tanger Factory Outlet | ||
Centers Inc. | 7,270,423 | 286,091 | |
2 | CBL & Associates | ||
Properties Inc. | 12,910,474 | 266,214 | |
*,2 | WP GLIMCHER Inc. | 13,963,020 | 246,866 |
12
REIT Index Fund
Market | |||
Value | |||
Shares | ($000) | ||
2 | Kite Realty Group Trust | 6,306,993 | 192,742 |
2 | Acadia Realty Trust | 5,147,342 | 186,282 |
*,2 | Urban Edge Properties | 6,407,226 | 152,107 |
Equity One Inc. | 4,998,563 | 136,161 | |
2 | Pennsylvania REIT | 5,217,081 | 124,845 |
2 | Retail Opportunity | ||
Investments Corp. | 6,911,481 | 122,126 | |
2 | Ramco-Gershenson | ||
Properties Trust | 5,814,177 | 113,783 | |
Alexander’s Inc. | 174,109 | 80,759 | |
2 | Inland Real Estate Corp. | 6,834,959 | 77,782 |
2 | Excel Trust Inc. | 4,637,004 | 65,103 |
Saul Centers Inc. | 946,605 | 54,042 | |
^ | Rouse Properties Inc. | 2,632,130 | 48,931 |
2 | Agree Realty Corp. | 1,305,895 | 45,236 |
Urstadt Biddle | |||
Properties Inc. Class A | 1,902,095 | 44,699 | |
*,2 | Cedar Realty Trust Inc. | 5,439,693 | 43,300 |
2 | Getty Realty Corp. | 2,031,105 | 37,636 |
Urstadt Biddle | |||
Properties Inc. | 69,255 | 1,368 | |
14,339,845 | |||
Specialized REITs (8.8%) | |||
2 | Public Storage | 11,122,165 | 2,233,776 |
2 | Extra Space Storage Inc. | 8,357,396 | 551,588 |
*,2 | Iron Mountain Inc. | 12,446,694 | 495,876 |
2 | Corrections Corp. | ||
of America | 8,828,446 | 347,134 | |
2 | EPR Properties | 4,297,334 | 279,585 |
2 | CubeSmart | 11,267,165 | 277,623 |
2 | Geo Group Inc. | 5,507,941 | 239,706 |
2 | Sovran Self Storage Inc. | 2,523,511 | 239,103 |
2 | Gaming and Leisure | ||
Properties Inc. | 6,814,836 | 222,368 | |
4,886,759 | |||
Total Real Estate Investment Trusts | |||
(Cost $41,011,548) | 55,192,501 | ||
Temporary Cash Investments (0.3%)1 | |||
Money Market Fund (0.3%) | |||
3,4 | Vanguard Market | ||
Liquidity Fund, | |||
0.133% | 135,804,136 | 135,804 |
Face | Market | |
Amount | Value | |
($000) ($000) | ||
U.S. Government and Agency Obligations (0.0%) | ||
5 Federal Home Loan Bank | ||
Discount Notes, | ||
0.060%, 2/3/15 | 100 | 100 |
Total Temporary Cash Investments | ||
(Cost $135,904) | 135,904 | |
Total Investments (100.2%) | ||
(Cost $41,147,452) | 55,328,405 | |
Other Assets and Liabilities (-0.2%) | ||
Other Assets | 107,240 | |
Liabilities4 | (204,335) | |
(97,095) | ||
Net Assets (100%) | 55,231,310 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers | 2,359,695 | |
Affiliated Vanguard Funds | 135,804 | |
Other Affiliated Issuers | 52,832,906 | |
Total Investments in Securities | 55,328,405 | |
Receivables for Accrued Income | 49,524 | |
Receivables for Investment | ||
Securities Sold | 10,563 | |
Other Assets | 47,153 | |
Total Assets | 55,435,645 | |
Liabilities | ||
Securities Lending Collateral | ||
Payable to Brokers | 69,906 | |
Payables for Investment | ||
Securities Purchased | 66,563 | |
Other Liabilities | 67,866 | |
Total Liabilities | 204,335 | |
Net Assets | 55,231,310 |
13
REIT Index Fund
At January 31, 2015, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 41,215,284 |
Undistributed Net Investment Income | 39,241 |
Accumulated Net Realized Losses | (204,676) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 14,180,953 |
Swap Contracts | 508 |
Net Assets | 55,231,310 |
Investor Shares—Net Assets | |
Applicable to 112,475,306 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 3,231,095 |
Net Asset Value Per Share— | |
Investor Shares | $28.73 |
Admiral Shares—Net Assets | |
Applicable to 128,286,969 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 15,725,212 |
Net Asset Value Per Share— | |
Admiral Shares | $122.58 |
Amount | |
($000) | |
Institutional Shares—Net Assets | |
Applicable to 357,770,608 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 6,787,568 |
Net Asset Value Per Share— | |
Institutional Shares | $18.97 |
ETF Shares—Net Assets | |
Applicable to 340,924,635 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 29,487,435 |
Net Asset Value Per Share— | |
ETF Shares | $86.49 |
See Note A in Notes to Financial Statements.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $66,450,000.
* Non-income-producing security.
1 The fund invests a portion of its assets in Real Estate Investment Trusts through the use of swap contracts. After giving effect to swap investments, the fund’s effective Real Estate Investment Trust and temporary cash investment positions represent 100.0% and 0.2%, respectively, of net assets.
2 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
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 $69,906,000 of collateral received for securities on loan.
5 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.
14
REIT Index Fund
Statement of Operations
Year Ended | |
January 31, 2015 | |
($000) | |
Investment Income | |
Income | |
Dividends | 1,258,784 |
Interest | 28 |
Securities Lending | 823 |
Total Income | 1,259,635 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 3,018 |
Management and Administrative—Investor Shares | 6,295 |
Management and Administrative—Admiral Shares | 10,826 |
Management and Administrative—Signal Shares | 1,228 |
Management and Administrative—Institutional Shares | 3,684 |
Management and Administrative—ETF Shares | 20,686 |
Marketing and Distribution—Investor Shares | 631 |
Marketing and Distribution—Admiral Shares | 1,560 |
Marketing and Distribution—Signal Shares | 461 |
Marketing and Distribution—Institutional Shares | 1,137 |
Marketing and Distribution—ETF Shares | 5,220 |
Custodian Fees | 425 |
Auditing Fees | 34 |
Shareholders’ Reports—Investor Shares | 85 |
Shareholders’ Reports—Admiral Shares | 55 |
Shareholders’ Reports—Signal Shares | 23 |
Shareholders’ Reports—Institutional Shares | 42 |
Shareholders’ Reports—ETF Shares | 904 |
Trustees’ Fees and Expenses | 36 |
Total Expenses | 56,350 |
Net Investment Income | 1,203,285 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received | 309,905 |
Investment Securities Sold | 1,396,600 |
Futures Contracts | 482 |
Swap Contracts | 2,529 |
Realized Net Gain (Loss) | 1,709,516 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 10,089,766 |
Swap Contracts | 508 |
Change in Unrealized Appreciation (Depreciation) | 10,090,274 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 13,003,075 |
See accompanying Notes, which are an integral part of the Financial Statements. |
15
REIT Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2015 | 2014 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 1,203,285 | 918,800 |
Realized Net Gain (Loss) | 1,709,516 | 1,351,579 |
Change in Unrealized Appreciation (Depreciation) | 10,090,274 | (1,507,158) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 13,003,075 | 763,221 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (68,973) | (73,658) |
Admiral Shares | (293,740) | (224,168) |
Signal Shares | (33,243) | (65,893) |
Institutional Shares | (137,277) | (106,402) |
ETF Shares | (633,652) | (520,883) |
Realized Capital Gain | ||
Investor Shares | — | — |
Admiral Shares | — | — |
Signal Shares | — | — |
Institutional Shares | — | — |
ETF Shares | — | — |
Return of Capital | ||
Investor Shares | (34,438) | (31,477) |
Admiral Shares | (146,663) | (95,796) |
Signal Shares | (16,598) | (28,159) |
Institutional Shares | (68,541) | (45,470) |
ETF Shares | (316,380) | (222,594) |
Total Distributions | (1,749,505) | (1,414,500) |
Capital Share Transactions | ||
Investor Shares | 49,773 | (304,730) |
Admiral Shares | 4,832,918 | 720,250 |
Signal Shares | (2,716,295) | 572,687 |
Institutional Shares | 1,514,112 | 799,400 |
ETF Shares | 4,976,714 | 1,928,162 |
Net Increase (Decrease) from Capital Share Transactions | 8,657,222 | 3,715,769 |
Total Increase (Decrease) | 19,910,792 | 3,064,490 |
Net Assets | ||
Beginning of Period | 35,320,518 | 32,256,028 |
End of Period1 | 55,231,310 | 35,320,518 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $39,241,000 and ($24,149,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
16
REIT Index Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $22.37 | $22.66 | $20.50 | $18.99 | $14.05 |
Investment Operations | |||||
Net Investment Income | . 645 | .579 | .514 | .442 | .399 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 6.650 | .025 | 2.393 | 1.722 | 5.144 |
Total from Investment Operations | 7.295 | .604 | 2.907 | 2.164 | 5.543 |
Distributions | |||||
Dividends from Net Investment Income | (.624) | (. 626) | (. 514) | (.439) | (.603) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | (. 311) | (. 268) | (. 233) | (. 215) | — |
Total Distributions | (.935) | (.894) | (.747) | (.654) | (.603) |
Net Asset Value, End of Period | $28.73 | $22.37 | $22.66 | $20.50 | $18.99 |
Total Return1 | 33.29% | 2.78% | 14.45% | 11.80% | 40.02% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $3,231 | $2,482 | $2,817 | $2,565 | $2,658 |
Ratio of Total Expenses to Average Net Assets | 0.26% | 0.24% | 0.24% | 0.24% | 0.26% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.56% | 2.51% | 2.39% | 2.30% | 2.22% |
Portfolio Turnover Rate2 | 8% | 11% | 9% | 10% | 12% |
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 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
REIT Index Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $95.46 | $96.70 | $87.47 | $81.03 | $59.95 |
Investment Operations | |||||
Net Investment Income | 2.852 | 2.569 | 2.285 | 1.960 | 1.806 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 28.403 | .148 | 10.263 | 7.385 | 21.948 |
Total from Investment Operations | 31.255 | 2.717 | 12.548 | 9.345 | 23.754 |
Distributions | |||||
Dividends from Net Investment Income | (2.758) | (2.772) | (2.283) | (1.948) | (2.674) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | (1.377) | (1.185) | (1.035) | (. 957) | — |
Total Distributions | (4.135) | (3.957) | (3.318) | (2.905) | (2.674) |
Net Asset Value, End of Period | $122.58 | $95.46 | $96.70 | $87.47 | $81.03 |
Total Return1 | 33.46% | 2.94% | 14.63% | 11.95% | 40.21% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $15,725 | $7,987 | $7,399 | $5,612 | $4,715 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.10% | 0.10% | 0.10% | 0.12% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.70% | 2.65% | 2.53% | 2.44% | 2.36% |
Portfolio Turnover Rate2 | 8% | 11% | 9% | 10% | 12% |
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 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.
18
REIT Index Fund
Financial Highlights
Signal Shares | |||||
Feb. 1, | |||||
2014, to | |||||
Oct. 24, | Year Ended January 31, | ||||
For a Share Outstanding Throughout Each Period | 20141 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $25.48 | $25.82 | $23.35 | $21.63 | $16.00 |
Investment Operations | |||||
Net Investment Income | .513 | .687 | .610 | .522 | .483 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 3.852 | .030 | 2.744 | 1.974 | 5.862 |
Total from Investment Operations | 4.365 | .717 | 3.354 | 2.496 | 6.345 |
Distributions | |||||
Dividends from Net Investment Income | (.457) | (.741) | (.608) | (.520) | (.715) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | (.228) | (.316) | (.276) | (.256) | — |
Total Distributions | (.685) | (1.057) | (.884) | (.776) | (.715) |
Net Asset Value, End of Period | $29.161 | $25.48 | $25.82 | $23.35 | $21.63 |
Total Return2 | 17.34% | 2.90% | 14.65% | 11.96% | 40.25% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $— | $2,402 | $1,873 | $1,226 | $835 |
Ratio of Total Expenses to Average Net Assets | 0.12%3 | 0.10% | 0.10% | 0.10% | 0.12% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.46%3 | 2.65% | 2.53% | 2.44% | 2.36% |
Portfolio Turnover Rate4 | 8% | 11% | 9% | 10% | 12% |
1 Net asset value as of October 24, 2014, on which date the Signal Shares were converted to Admiral Shares. 2 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees. 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.
REIT Index Fund
Financial Highlights
Institutional Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $14.78 | $14.97 | $13.54 | $12.54 | $9.28 |
Investment Operations | |||||
Net Investment Income | . 444 | .400 | .356 | .305 | .284 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 4.390 | .025 | 1.590 | 1.148 | 3.395 |
Total from Investment Operations | 4.834 | .425 | 1.946 | 1.453 | 3.679 |
Distributions | |||||
Dividends from Net Investment Income | (.430) | (.431) | (.355) | (.304) | (.419) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | (. 214) | (.184) | (.161) | (.149) | — |
Total Distributions | (.644) | (. 615) | (. 516) | (. 453) | (.419) |
Net Asset Value, End of Period | $18.97 | $14.78 | $14.97 | $13.54 | $12.54 |
Total Return1 | 33.43% | 2.97% | 14.66% | 12.01% | 40.24% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $6,788 | $3,922 | $3,185 | $2,324 | $1,614 |
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.08% | 0.08% | 0.08% | 0.08% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.72% | 2.67% | 2.55% | 2.46% | 2.40% |
Portfolio Turnover Rate2 | 8% | 11% | 9% | 10% | 12% |
1 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. | |||||
See accompanying Notes, which are an integral part of the Financial Statements.
20
REIT Index Fund
Financial Highlights
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $67.36 | $68.24 | $61.72 | $57.17 | $42.30 |
Investment Operations | |||||
Net Investment Income | 2.011 | 1.814 | 1.613 | 1.384 | 1.278 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 20.038 | .097 | 7.250 | 5.216 | 15.483 |
Total from Investment Operations | 22.049 | 1.911 | 8.863 | 6.600 | 16.761 |
Distributions | |||||
Dividends from Net Investment Income | (1.947) | (1.955) | (1.612) | (1.375) | (1.891) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | (.972) | (. 836) | (.731) | (.675) | — |
Total Distributions | (2.919) | (2.791) | (2.343) | (2.050) | (1.891) |
Net Asset Value, End of Period | $86.49 | $67.36 | $68.24 | $61.72 | $57.17 |
Total Return | 33.41% | 2.93% | 14.64% | 11.94% | 40.19% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $29,487 | $18,528 | $16,983 | $10,410 | $8,075 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.10% | 0.10% | 0.10% | 0.12% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.70% | 2.65% | 2.53% | 2.44% | 2.36% |
Portfolio Turnover Rate1 | 8% | 11% | 9% | 10% | 12% |
1 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.
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x23x1.jpg)
REIT Index Fund
Notes to Financial Statements
Vanguard REIT Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, Admiral Shares, Institutional Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker. Prior to October 24, 2014, the fund offered Signal Shares. Effective at the close of business on October 24, 2014, the Signal Shares were converted to Admiral Shares.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments 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 objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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).
22
REIT Index Fund
During the year ended January 31, 2015, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund had no open futures contracts at January 31, 2015.
3. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
The notional amounts of swap contracts are not recorded in the Statement of Net Assets. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded. A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of pre-qualified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
During the year ended January 31, 2015, the fund’s average amounts of total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (January 31, 2012–2015), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions declared by the fund are reallocated at fiscal year-end to ordinary income, capital gain, and return of capital to reflect their tax character.
23
REIT Index Fund
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group participate in a $2.89 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.06% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate equal to the higher of the federal funds rate or LIBOR reference rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2015, or at any time during the period then ended.
8. Other: Distributions received from REITs are recorded on the ex-dividend date. Each REIT reports annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the REITs, and management’s estimates of such amounts for REIT distributions for which actual information has not been reported. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
24
REIT 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 based on methods approved by the board of trustees. The fund has committed to invest up to 0.40% of its net assets in Vanguard. At January 31, 2015, the fund had contributed capital of $4,798,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 1.92% 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).
The following table summarizes the market value of the fund’s investments as of January 31, 2015, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Real Estate Investment Trusts | 55,192,501 | — | — |
Temporary Cash Investments | 135,804 | 100 | — |
Swap Contracts—Assets | — | 508 | — |
Total | 55,328,305 | 608 | — |
D. At January 31, 2015, the fund had the following open total return swap contracts:
Floating | Unrealized | ||||
Notional | Interest Rate | Appreciation | |||
Termination | Amount | Received | (Depreciation) | ||
Reference Entity | Date | Counterparty1 | ($000) | (Paid) | ($000) |
Empire State Realty Trust Inc. | 2/10/15 | GSI | 38,398 | (0.518%) | 508 |
1 GSI—Goldman Sachs International. |
At January 31, 2015, the counterparty had deposited in segregated accounts securities with a value of $778,000 in connection with amounts due to the fund for open swap contracts.
E. 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.
25
REIT Index Fund
During the year ended January 31, 2015, the fund realized $1,421,410,000 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.
Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes. Realized gains of $2,529,000 on swap contracts have been reclassified from accumulated net realized losses to undistributed net investment income. The fund has reclassified $24,461,000 from paid-in capital to undistributed net investment income, representing utilized capital loss carryforwards that are required to be included in distributable net income for tax purposes.
For tax purposes, at January 31, 2015, the fund had no ordinary income available for distribution. The fund used capital loss carryforwards of $354,193,000 to offset taxable capital gains realized during the year ended January 31, 2015. At January 31, 2015, the fund had available capital losses totaling $49,403,000 to offset future net capital gains through January 31, 2018.
At January 31, 2015, the cost of investment securities for tax purposes was $41,302,725,000. Net unrealized appreciation of investment securities for tax purposes was $14,025,680,000, consisting of unrealized gains of $14,593,656,000 on securities that had risen in value since their purchase and $567,976,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2015, the fund purchased $15,693,017,000 of investment securities and sold $7,052,193,000 of investment securities, other than temporary cash investments. Purchases and sales include $7,500,595,000 and $3,542,426,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2015 | 2014 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 738,968 | 29,122 | 690,690 | 29,921 |
Issued in Lieu of Cash Distributions | 97,718 | 3,906 | 99,859 | 4,526 |
Redeemed | (786,913) | (31,504) | (1,095,279) | (47,793) |
Net Increase (Decrease)—Investor Shares | 49,773 | 1,524 | (304,730) | (13,346) |
Admiral Shares | ||||
Issued1 | 5,995,731 | 55,276 | 2,061,271 | 20,919 |
Issued in Lieu of Cash Distributions | 395,994 | 3,684 | 287,172 | 3,054 |
Redeemed | (1,558,807) | (14,336) | (1,628,193) | (16,819) |
Net Increase (Decrease)—Admiral Shares | 4,832,918 | 44,624 | 720,250 | 7,154 |
Signal Shares | ||||
Issued | 484,643 | 17,696 | 1,307,317 | 50,253 |
Issued in Lieu of Cash Distributions | 43,664 | 1,602 | 83,873 | 3,346 |
Redeemed1 | (3,244,602) | (113,549) | (818,503) | (31,910) |
Net Increase (Decrease)—Signal Shares | (2,716,295) | (94,251) | 572,687 | 21,689 |
26
REIT Index Fund
Year Ended January 31, | ||||
2015 | 2014 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Institutional Shares | ||||
Issued | 2,211,332 | 133,106 | 1,361,402 | 90,266 |
Issued in Lieu of Cash Distributions | 182,937 | 11,052 | 136,949 | 9,423 |
Redeemed | (880,157) | (51,836) | (698,951) | (47,012) |
Net Increase (Decrease)—Institutional Shares | 1,514,112 | 92,322 | 799,400 | 52,677 |
ETF Shares | ||||
Issued | 8,521,764 | 112,270 | 5,442,281 | 78,370 |
Issued in Lieu of Cash Distributions | — | — | — | — |
Redeemed | (3,545,050) | (46,400) | (3,514,119) | (52,200) |
Net Increase (Decrease)—ETF Shares | 4,976,714 | 65,870 | 1,928,162 | 26,170 |
1 Admiral Shares Issued and Signal Shares Redeemed include $2,331,915,000 from the conversion of Signal Shares to Admiral Shares during the 2015 fiscal year. | ||||
H. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company, or the issuer is another member of The Vanguard Group. Transactions during the year in securities of these companies were as follows:
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Acadia Realty Trust | 96,367 | 58,791 | 17,850 | 3,800 | 1,709 | 186,282 |
Agree Realty Corp. | 29,034 | 13,563 | 4,694 | 1,577 | — | 45,236 |
Alexandria Real Estate | ||||||
Equities Inc. | 342,129 | 110,481 | 65,459 | 13,806 | — | 530,554 |
American Assets Trust Inc. | 78,578 | 26,469 | 11,914 | 1,574 | — | 121,994 |
American Campus | ||||||
Communities Inc. | 248,719 | 78,816 | 47,409 | 6,768 | 186 | 349,775 |
American Realty Capital | ||||||
Properties Inc. | 174,745 | 363,496 | 104,466 | 2,811 | — | 637,844 |
American Residential | ||||||
Properties Inc. | 38,557 | 9,801 | 5,424 | — | — | 40,659 |
AmREIT Inc. | 20,700 | 4,903 | 39,327 | 471 | 71 | — |
Apartment Investment & | ||||||
Management Co. Class A | 278,685 | 92,323 | 47,181 | 66 | 10,934 | 449,901 |
Ashford Hospitality Prime Inc. | 27,125 | 8,730 | 4,075 | 360 | — | 33,045 |
Ashford Hospitality Trust Inc. | 49,152 | 32,575 | 8,454 | 131 | — | 78,881 |
Associated Estates Realty Corp. | 55,026 | 27,479 | 10,757 | 1,869 | 1,443 | 108,926 |
27
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
AvalonBay Communities Inc. | 1,036,765 | 414,476 | 188,317 | 26,790 | 16,419 | 1,720,050 |
BioMed Realty Trust Inc. | 255,970 | 80,030 | 43,755 | 7,451 | 11,033 | 361,788 |
Boston Properties Inc. | 1,124,832 | 365,014 | 219,927 | 3,496 | 76,241 | 1,610,592 |
Brandywine Realty Trust | 152,490 | 70,908 | 29,614 | 5,133 | 229 | 221,786 |
BRE Properties Inc. | 311,430 | 21,820 | 11,914 | 6,102 | 19,829 | NA2 |
Camden Property Trust | 359,939 | 118,403 | 70,352 | 7,635 | 8,730 | 500,395 |
Campus Crest Communities Inc. | 38,927 | 9,418 | 5,179 | 2,752 | — | 33,913 |
CareTrust REIT Inc. | — | 39,929 | 1,773 | 9,039 | — | 28,934 |
CBL & Associates Properties Inc. | 187,272 | 68,230 | 32,858 | 12,201 | — | 266,214 |
Cedar Realty Trust Inc. | 31,995 | 11,298 | 8,349 | — | — | 43,300 |
Chatham Lodging Trust | — | 72,450 | 5,060 | 1,508 | — | 88,855 |
Chesapeake Lodging Trust | 80,802 | 38,903 | 15,243 | 4,441 | — | 151,062 |
Cole Real Estate Investment Inc. | 485,625 | 2,379 | 884 | — | — | NA3 |
CommonWealth REIT | 198,594 | 31,479 | 38,339 | — | 1,997 | NA4 |
CoreSite Realty Corp. | 44,859 | 14,168 | 8,035 | 2,296 | — | 71,802 |
Corporate Office Properties Trust | 148,243 | 56,551 | 27,608 | 4,664 | 441 | 210,486 |
Corrections Corp. of America | 265,239 | 77,390 | 45,527 | 17,229 | — | 347,134 |
Cousins Properties Inc. | 126,010 | 72,953 | 23,025 | 3,877 | 282 | 175,054 |
CubeSmart | 144,461 | 68,134 | 20,182 | 5,372 | 306 | 277,623 |
CyrusOne Inc. | 24,387 | 46,075 | 6,321 | 1,297 | — | 78,193 |
DCT Industrial Trust Inc. | 154,075 | 53,065 | 21,204 | 4,081 | 1,297 | 238,684 |
DDR Corp. | 291,170 | 133,234 | 54,649 | 2,158 | 1,879 | 454,185 |
DiamondRock Hospitality Co. | 154,574 | 49,424 | 30,038 | 4,345 | — | 215,618 |
Digital Realty Trust Inc. | 447,188 | 184,491 | 91,440 | 26,883 | 5,010 | 749,429 |
Douglas Emmett Inc. | 235,253 | 73,167 | 40,805 | 3,149 | — | 296,179 |
Duke Realty Corp. | 348,700 | 124,650 | 56,675 | 9,771 | 5,944 | 564,722 |
DuPont Fabros Technology Inc. | 114,836 | 34,991 | 18,863 | 7,004 | — | 186,072 |
EastGroup Properties Inc. | 123,371 | 38,445 | 17,880 | 4,595 | 241 | 155,010 |
Education Realty Trust Inc. | 70,800 | 7,257 | 3,539 | 1,268 | — | 122,102 |
EPR Properties | 177,081 | 74,890 | 29,564 | 12,149 | — | 279,585 |
Equity Commonwealth | NA4 | 39,166 | 13,994 | — | — | 231,741 |
Equity LifeStyle Properties Inc. | 212,567 | 69,027 | 39,990 | 7,506 | — | 330,777 |
Equity Residential | 1,294,578 | 437,517 | 263,395 | 39,133 | 10,934 | 2,021,483 |
Essex Property Trust Inc. | 411,321 | 225,101 | 110,902 | 15,716 | 5,441 | 1,087,992 |
Excel Trust Inc. | 37,565 | 26,345 | 8,629 | 1,681 | 394 | 65,103 |
Extra Space Storage Inc. | 329,463 | 121,586 | 61,340 | 14,519 | — | 551,588 |
28
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Federal Realty Investment Trust | 488,995 | 166,612 | 85,824 | 15,943 | 152 | 738,245 |
FelCor Lodging Trust Inc. | 62,250 | 20,582 | 12,227 | 184 | — | 84,953 |
First Industrial Realty Trust Inc. | 122,413 | 44,274 | 20,343 | 3,239 | — | 182,175 |
First Potomac Realty Trust | 52,345 | 13,450 | 7,511 | 1,839 | — | 57,107 |
Franklin Street Properties Corp. | 73,834 | 20,768 | 12,181 | 3,690 | — | 88,106 |
Gaming and Leisure | ||||||
Properties Inc. | — | 283,931 | 27,143 | 14,995 | 1,022 | 222,368 |
Geo Group Inc. | 164,618 | 50,173 | 29,172 | 9,888 | — | 239,706 |
Getty Realty Corp. | 34,606 | 9,052 | 5,028 | 825 | 1,053 | 37,636 |
Glimcher Realty Trust | 84,782 | 29,738 | 171,634 | 1,520 | — | NA5 |
Government Properties | ||||||
Income Trust | 92,220 | 52,306 | 14,454 | 3,055 | 211 | 121,586 |
Gramercy Property Trust Inc. | — | 87,460 | 4,927 | 1,218 | — | 93,966 |
HCP Inc. | 1,218,577 | 376,472 | 221,926 | 66,411 | 2,675 | 1,644,529 |
Health Care REIT Inc. | 1,132,528 | 548,561 | 219,549 | 41,172 | 10,827 | 2,011,377 |
Healthcare Realty Trust Inc. | 150,037 | 46,646 | 24,899 | 3,511 | — | 222,376 |
Healthcare Trust of America Inc. | ||||||
Class A | 127,369 | 100,427 | 24,294 | 5,575 | — | 266,921 |
Hersha Hospitality Trust Class A | 67,635 | 31,533 | 14,106 | 2,920 | — | 101,736 |
Highwoods Properties Inc. | 225,216 | 71,561 | 39,166 | 8,516 | 1,916 | 322,038 |
Home Properties Inc. | 216,497 | 69,160 | 39,552 | 8,479 | 3,546 | 306,547 |
Hospitality Properties Trust | 260,325 | 84,357 | 48,306 | 21,521 | — | 370,178 |
Host Hotels & Resorts Inc. | 941,903 | 322,411 | 191,386 | 31,944 | 9,380 | 1,312,554 |
Hudson Pacific Properties Inc. | 78,084 | 66,672 | 16,221 | 921 | — | 172,701 |
Inland Real Estate Corp. | 64,548 | 17,204 | 9,583 | 3,679 | — | 77,782 |
Investors Real Estate Trust | 61,446 | 20,197 | 6,309 | 1,467 | 823 | 71,727 |
Iron Mountain Inc. | — | 3,762 | 1,579 | — | — | 495,876 |
Kilroy Realty Corp. | 293,633 | 100,502 | 53,458 | 6,045 | 15 | 467,679 |
Kimco Realty Corp. | 584,925 | 188,103 | 112,807 | 10,418 | 7,328 | 861,821 |
Kite Realty Group Trust | 55,438 | 122,609 | 15,348 | 3,462 | — | 192,742 |
LaSalle Hotel Properties | 216,270 | 94,537 | 41,475 | 8,780 | 2,038 | 342,592 |
Lexington Realty Trust | 143,757 | 47,379 | 19,418 | 5,801 | — | 180,183 |
Liberty Property Trust | 355,136 | 107,393 | 51,753 | 14,716 | 3,250 | 452,568 |
LTC Properties Inc. | 90,062 | 26,390 | 15,352 | 3,760 | 932 | 124,036 |
Macerich Co. | 543,191 | 189,282 | 115,706 | 19,579 | 2,144 | 917,713 |
Mack-Cali Realty Corp. | 115,506 | 32,676 | 18,068 | 3,356 | — | 125,131 |
Medical Properties Trust Inc. | 145,055 | 85,479 | 22,170 | 6,640 | 3 | 236,916 |
29
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Mid-America Apartment | ||||||
Communities Inc. | 329,311 | 103,600 | 60,394 | 15,355 | — | 452,270 |
Monmouth Real Estate | ||||||
Investment Corp. | 24,698 | 17,721 | 4,300 | 841 | 26 | 48,113 |
National Health Investors Inc. | 118,344 | 60,418 | 18,788 | 5,360 | — | 188,389 |
National Retail Properties Inc. | 274,761 | 88,561 | 43,615 | 12,496 | 185 | 406,303 |
New Senior Investment | ||||||
Group Inc. | — | 109,453 | 3,001 | 1,255 | — | 92,138 |
New York REIT Inc. | — | 136,541 | 3,847 | 463 | — | 128,294 |
Omega Healthcare Investors Inc. | 255,531 | 96,938 | 37,493 | 17,540 | — | 423,166 |
One Liberty Properties Inc. | 17,710 | 5,128 | 2,224 | 1,017 | 371 | 24,002 |
Parkway Properties Inc. | NA6 | 36,157 | 14,505 | 3,666 | 203 | 106,488 |
Pebblebrook Hotel Trust | 126,718 | 72,089 | 26,337 | 4,384 | — | 249,828 |
Pennsylvania REIT | 86,791 | 25,338 | 14,384 | 552 | — | 124,845 |
Physicians Realty Trust | — | 78,084 | 1,590 | 1,086 | — | 85,496 |
Piedmont Office Realty Trust Inc. | ||||||
Class A | 189,405 | 55,244 | 48,611 | 3,699 | — | 228,541 |
Post Properties Inc. | 175,010 | 55,976 | 34,698 | 392 | 5,770 | 250,611 |
Prologis Inc. | 1,319,733 | 405,582 | 244,413 | 25,304 | 22,586 | 1,710,618 |
PS Business Parks Inc. | 107,244 | 31,173 | 17,194 | 4,405 | 2,617 | 128,785 |
Public Storage | 1,573,408 | 505,980 | 305,179 | 58,346 | 1,363 | 2,233,776 |
RAIT Financial Trust | 46,948 | 12,202 | 6,650 | 465 | — | 44,156 |
Ramco-Gershenson | ||||||
Properties Trust | 72,608 | 35,254 | 13,932 | 3,748 | 317 | 113,783 |
Realty Income Corp. | 546,288 | 257,853 | 107,291 | 27,154 | — | 916,793 |
Regency Centers Corp. | 303,399 | 100,789 | 61,030 | 8,840 | 2,021 | 480,142 |
Retail Opportunity | ||||||
Investments Corp. | 70,948 | 46,789 | 15,385 | 2,237 | 470 | 122,126 |
Retail Properties of America Inc. | 169,103 | 110,414 | 36,702 | 7,966 | — | 317,368 |
RLJ Lodging Trust | 188,430 | 109,906 | 40,752 | 9,609 | — | 341,227 |
Ryman Hospitality Properties Inc. 128,374 | 40,906 | 23,026 | 6,788 | 497 | 191,182 | |
Sabra Health Care REIT Inc. | 73,758 | 54,231 | 13,599 | 5,047 | — | 132,097 |
Senior Housing Properties Trust | 289,249 | 109,562 | 50,211 | 12,798 | — | 359,853 |
Silver Bay Realty Trust Corp. | 40,505 | 11,422 | 7,836 | 136 | — | 43,247 |
Simon Property Group Inc. | 3,281,268 | 1,059,586 | 647,877 | 116,211 | — | 4,679,203 |
SL Green Realty Corp. | 588,966 | 213,172 | 106,733 | 9,935 | 4,521 | 913,370 |
Sovran Self Storage Inc. | 145,817 | 51,308 | 21,534 | 6,677 | — | 239,103 |
Spirit Realty Capital Inc. | 254,720 | 118,683 | 48,510 | 3,145 | — | 388,890 |
30
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2014 | from | Capital Gain | 2015 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
STAG Industrial Inc. | 62,049 | 60,299 | 15,006 | 3,410 | — | 126,405 |
Starwood Waypoint | ||||||
Residential Trust | — | 96,737 | 10,233 | 400 | — | 71,001 |
Strategic Hotels & Resorts Inc. | 104,533 | 113,515 | 22,795 | — | — | 258,483 |
Summit Hotel Properties Inc. | 49,408 | 17,830 | 7,965 | — | — | 83,520 |
Sun Communities Inc. | 109,513 | 75,936 | 23,892 | 3,018 | 1,805 | 229,854 |
Sunstone Hotel Investors Inc. | 160,220 | 77,325 | 28,905 | 7,576 | — | 267,957 |
Tanger Factory Outlet | ||||||
Centers Inc. | 215,240 | 65,604 | 35,962 | 5,514 | — | 286,091 |
Taubman Centers Inc. | 283,451 | 91,342 | 58,430 | 8,190 | 19,143 | 393,456 |
UDR Inc. | 416,768 | 138,791 | 82,781 | 15,830 | 3,241 | 634,783 |
Universal Health Realty | ||||||
Income Trust | 34,965 | 9,827 | 4,979 | 1,316 | 928 | 50,058 |
Urban Edge Properties | — | 1,659 | 532 | — | — | 152,107 |
Vanguard Market Liquidity Fund | 232,585 | NA7 | NA7 | 26 | — | 135,804 |
Ventas Inc. | 1,249,299 | 391,896 | 232,072 | 62,573 | 5,275 | 1,958,845 |
Vornado Realty Trust | 1,055,342 | 350,427 | 211,290 | 35,143 | — | 1,413,772 |
Washington REIT | 105,809 | 32,415 | 18,972 | 2,364 | 449 | 145,107 |
Weingarten Realty Investors | 229,316 | 73,700 | 44,271 | 7,039 | 6,003 | 330,052 |
Whitestone REIT | 19,857 | 6,484 | 2,498 | 1,008 | 457 | 27,079 |
Winthrop Realty Trust | 25,639 | 10,167 | 4,640 | 5,416 | 1,144 | 41,981 |
WP Carey Inc. | NA6 | 358,405 | 59,099 | 23,590 | 309 | 487,167 |
WP GLIMCHER Inc. | NA5 | 41,900 | 852 | — | — | 246,866 |
34,275,439 | 1,202,873 | 308,006 | 52,968,710 |
1 Includes net realized gain (loss) on affiliated investment securities sold of $1,511,922,000.
2 Not applicable—In April 2014, BRE Properties Inc. merged with Essex Property Trust Inc.
3 Not Applicable—In February 2014, Cole Real Estate Investment Inc. merged with American Realty Capital Properties Inc.
4 Not applicable—In August 2014, CommonWealth REIT changed its name to Equity Commonwealth.
5 Not applicable—In January 2015, Glimcher Realty Trust merged with WP GLIMCHER Inc.
6 Not applicable—At January 31, 2014, the issuer was not an affiliated company of the fund.
7 Not applicable—Purchases and sales are for temporary cash investment purposes only.
I. Management has determined that no material events or transactions occurred subsequent to January 31, 2015, that would require recognition or disclosure in these financial statements.
31
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and the Shareholders of Vanguard REIT Index Fund:
In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard REIT Index Fund (constituting a separate portfolio of Vanguard Specialized Funds, hereafter referred to as the “Fund”) at January 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at January 31, 2015 by correspondence with the custodian and broker, by agreement to the underlying ownership records of the transfer agent and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2015
![](https://capedge.com/proxy/N-CSR/0000932471-15-005853/reit_1230x34x1.jpg)
This information for the fiscal year ended January 31, 2015, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $39,921,000 of qualified dividend income to shareholders during the fiscal year.
32
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2015. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: REIT Index Fund Investor Shares | |||
Periods Ended January 31, 2015 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 33.29% | 19.67% | 10.09% |
Returns After Taxes on Distributions | 31.90 | 18.46 | 8.82 |
Returns After Taxes on Distributions and Sale of Fund Shares | 18.75 | 15.38 | 7.63 |
33
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.
34
Six Months Ended January 31, 2015 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
REIT Index Fund | 7/31/2014 | 1/31/2015 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,180.52 | $1.43 |
Admiral Shares | 1,000.00 | 1,181.05 | 0.66 |
Institutional Shares | 1,000.00 | 1,181.33 | 0.55 |
ETF Shares | 1,000.00 | 1,180.81 | 0.66 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.89 | $1.33 |
Admiral Shares | 1,000.00 | 1,024.60 | 0.61 |
Institutional Shares | 1,000.00 | 1,024.70 | 0.51 |
ETF Shares | 1,000.00 | 1,024.60 | 0.61 |
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 0.26% for Investor Shares, 0.12% for Admiral Shares, 0.10% for Institutional Shares, and 0.12% 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. | |||
35
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. This yield may include some payments that represent a return of capital, capital gains distributions, or both by the underlying stocks.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities 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.
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.
36
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.
Benchmark Information
REIT Spliced Index: MSCI US REIT Index adjusted to include a 2% cash position (Lipper Money Market Average) through April 30, 2009; MSCI US REIT Index thereafter.
37
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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 177 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International PLC (diversified manufacturing and |
the investment companies served by The Vanguard | services), Hewlett-Packard Co. (electronic computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive PLC |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at New |
President of The Vanguard Group, and of each of | Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and | appointments in the Department of Philosophy, School |
Other Experience: Executive Chief Staff and | of Arts and Sciences, and at the Graduate School of |
Marketing Officer for North America and Corporate | Education, University of Pennsylvania; Trustee of the |
Vice President (retired 2008) of Xerox Corporation | National Constitution Center; Chair of the Presidential |
(document management products and services); | Commission for the Study of Bioethical Issues. |
Executive in Residence and 2009–2010 Distinguished | |
Minett Professor at the Rochester Institute of | JoAnn Heffernan Heisen |
Technology; Director of SPX Corporation (multi-industry | Born 1950. Trustee Since July 1998. Principal |
manufacturing), the United Way of Rochester, | Occupation(s) During the Past Five Years and Other |
Amerigroup Corporation (managed health care), the | Experience: Corporate Vice President and Chief |
University of Rochester Medical Center, Monroe | Global Diversity Officer (retired 2008) and Member |
Community College Foundation, and North Carolina | of the Executive Committee (1997–2008) of Johnson |
A&T University. | & Johnson (pharmaceuticals/medical devices/ |
consumer products); Director of Skytop Lodge | |
Corporation (hotels), the University Medical Center | |
at Princeton, the Robert Wood Johnson Foundation, | |
and the Center for Talent Innovation; Member of | |
the Advisory Board of the Institute for Women’s | |
Leadership at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Controller Since July 2010. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and Other | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Experience: Principal of The Vanguard Group, Inc.; | |
consumer services), and of Oxfam America; Director | Controller of each of the investment companies served | |
of SKF AB (industrial machinery), Hyster-Yale Materials | by The Vanguard Group; Assistant Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2001–2010). | |
Research; Member of the Advisory Council for the | ||
College of Arts and Letters and of the Advisory Board | Thomas J. Higgins | |
to the Kellogg Institute for International Studies, both | Born 1957. Chief Financial Officer Since September | |
at the University of Notre Dame. | 2008. Principal Occupation(s) During the Past Five | |
Years and Other Experience: Principal of The Vanguard | ||
Mark Loughridge | Group, Inc.; Chief Financial Officer of each of the | |
Born 1953. Trustee Since March 2012. Principal | investment companies served by The Vanguard Group; | |
Occupation(s) During the Past Five Years and Other | Treasurer of each of the investment companies served | |
Experience: Senior Vice President and Chief Financial | by The Vanguard Group (1998–2008). | |
Officer (retired 2013) at IBM (information technology | ||
services); Fiduciary Member of IBM’s Retirement Plan | Kathryn J. Hyatt | |
Committee (2004–2013); Director of the Dow Chemical | Born 1955. Treasurer Since November 2008. Principal | |
Company; Member of the Council on Chicago Booth. | Occupation(s) During the Past Five Years and Other | |
Experience: Principal of The Vanguard Group, Inc.; | ||
Scott C. Malpass | Treasurer of each of the investment companies served | |
Born 1962. Trustee Since March 2012. Principal | by The Vanguard Group; Assistant Treasurer of each of | |
Occupation(s) During the Past Five Years and Other | the investment companies served by The Vanguard | |
Experience: Chief Investment Officer and Vice | Group (1988–2008). | |
President at the University of Notre Dame; Assistant | ||
Professor of Finance at the Mendoza College of | Heidi Stam | |
Business at Notre Dame; Member of the Notre Dame | Born 1956. Secretary Since July 2005. Principal | |
403(b) Investment Committee; Board Member of | Occupation(s) During the Past Five Years and Other | |
TIFF Advisory Services, Inc., and Catholic Investment | Experience: Managing Director of The Vanguard | |
Services, Inc. (investment advisors); Member of | Group, Inc.; General Counsel of The Vanguard Group; | |
the Investment Advisory Committee of Major | Secretary of The Vanguard Group and of each of the | |
League Baseball. | investment companies served by The Vanguard Group; | |
Director and Senior Vice President of Vanguard | ||
André F. Perold | Marketing Corporation. | |
Born 1952. Trustee Since December 2004. Principal | ||
Occupation(s) During the Past Five Years and Other | Vanguard Senior ManagementTeam | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Mortimer J. Buckley | Chris D. McIsaac |
(retired 2011); Chief Investment Officer and Managing | Kathleen C. Gubanich | Michael S. Miller |
Partner of HighVista Strategies LLC (private investment | Paul A. Heller | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | |
Peter F. Volanakis | Chairman Emeritus and Senior Advisor | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | John J. Brennan | |
Experience: President and Chief Operating Officer | Chairman, 1996–2009 | |
(retired 2010) of Corning Incorporated (communications | Chief Executive Officer and President, 1996–2008 | |
equipment); Trustee of Colby-Sawyer College; | ||
Member of the Advisory Board of the Norris Cotton | Founder | |
Cancer Center and of the Advisory Board of the | ||
Parthenon Group (strategy consulting). | John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
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P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | The funds or securities referred to herein are not |
Direct Investor Account Services > 800-662-2739 | sponsored, endorsed, or promoted by MSCI, and MSCI |
bears no liability with respect to any such funds or | |
Institutional Investor Services > 800-523-1036 | securities. The prospectus or the Statement of |
Text Telephone for People | Additional Information contains a more detailed |
Who Are Deaf or Hard of Hearing> 800-749-7273 | description of the limited relationship MSCI has with |
Vanguard and any related funds. | |
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, a | |
Thomson Reuters Company, 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. | |
© 2015 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q1230 032015 |
Item 2: Code of Ethics. The Registrant has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was amended during the reporting period covered by this report to make certain technical, non-material changes.
Item 3: Audit Committee Financial Expert. The following members of the Audit Committee have been determined by the Registrant’s Board of Trustees to be Audit Committee Financial Experts serving on its Audit Committee, and to be independent: Rajiv L. Gupta, Amy Gutmann, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, Scott C. Malpass, and André F. Perold.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Audit Fees of the Registrant
Fiscal Year Ended January 31, 2015: $175,000
Fiscal Year Ended January 31, 2014: $173,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended January 31, 2015: $6,605,127
Fiscal Year Ended January 31, 2014: $5,714,113
Includes fees billed in connection with audits of the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc. and Vanguard Marketing Corporation.
(b) Audit-Related Fees.
Fiscal Year Ended January 31, 2015: $2,176,479
Fiscal Year Ended January 31, 2014: $1,552,950
Includes fees billed in connection with assurance and related services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(c) Tax Fees.
Fiscal Year Ended January 31, 2015: $316,869
Fiscal Year Ended January 31, 2014: $110,000
Includes fees billed in connection with tax compliance, planning, and advice services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(d) All Other Fees.
Fiscal Year Ended January 31, 2015: $198,163
Fiscal Year Ended January 31, 2014: $132,000
Includes fees billed for services related to tax reported information provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(e) (1) Pre-Approval Policies. The policy of the Registrant’s Audit Committee is to consider and, if appropriate, approve before the principal accountant is engaged for such services, all specific audit and non-audit services provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant. In making a determination, the Audit Committee considers whether the services are consistent with maintaining the principal accountant’s independence.
In the event of a contingency situation in which the principal accountant is needed to provide services in between scheduled Audit Committee meetings, the Chairman of the Audit Committee would be called on to consider and, if appropriate, pre-approve audit or permitted non-audit services in an amount sufficient to complete services through the next Audit Committee meeting, and to determine if such services would be consistent with maintaining the accountant’s independence. At the next scheduled Audit Committee meeting, services and fees would be presented to the Audit Committee for formal consideration, and, if appropriate, approval by the entire Audit Committee. The Audit Committee would again consider whether such services and fees are consistent with maintaining the principal accountant’s independence.
The Registrant’s Audit Committee is informed at least annually of all audit and non-audit services provided by the principal accountant to the Vanguard complex, whether such services are provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., or other entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant.
(2) No percentage of the principal accountant’s fees or services were approved pursuant to the waiver provision of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) For the most recent fiscal year, over 50% of the hours worked under the principal accountant’s engagement were not performed by persons other than full-time, permanent employees of the principal accountant.
(g) Aggregate Non-Audit Fees.
Fiscal Year Ended January 31, 2015: $515,032
Fiscal Year Ended January 31, 2014: $242,000
Includes fees billed for non-audit services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(h) For the most recent fiscal year, the Audit Committee has determined that the provision of all non-audit services was consistent with maintaining the principal accountant’s independence.
Item 5: Audit Committee of Listed Registrants.
The Registrant is a listed issuer as defined in rule 10A-3 under the Securities Exchange Act of 1934 (“Exchange Act”). The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit committee members are: Emerson U. Fullwood, Rajiv L. Gupta, Amy Gutmann, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, Scott C. Malpass, André F. Perold, and Peter F. Volanakis.
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) Code of Ethics.
(b) 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 SPECIALIZED FUNDS | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: March 19, 2015 |
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 SPECIALIZED FUNDS | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: March 19, 2015
| |
VANGUARD SPECIALIZED FUNDS | |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER | |
Date: March 19, 2015 |
* By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on April 22, 2014 see file Number 2-17620, Incorporated by Reference.