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 | |
Name of Registrant: | Vanguard Specialized Funds | |
Address of Registrant: | P.O. Box 2600 | |
Valley Forge, PA 19482 | ||
Name and address of agent for service: | Anne E. Robinson, Esquire | |
P.O. Box 876 | ||
Valley Forge, PA 19482 | ||
Registrant’s telephone number, including area code: (610) 669-1000 | ||
Date of fiscal year end: January 31 | ||
Date of reporting period: February 1, 2016 – January 31, 2017 | ||
Item 1: Reports to Shareholders |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx1x1.jpg)
Annual Report | January 31, 2017
Vanguard Energy Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Advisors’ Report. | 7 |
Fund Profile. | 11 |
Performance Summary. | 13 |
Financial Statements. | 15 |
Your Fund’s After-Tax Returns. | 30 |
About Your Fund’s Expenses. | 31 |
Glossary. | 33 |
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the year ended January 31, 2017, Vanguard Energy Fund returned nearly 33%, ahead of its benchmark index and the average return of global natural resources funds.
• Energy stocks generally posted strong results during the second half of the year as oil prices recovered after historic lows. A strengthening global economy and efforts by oil-producing nations to limit production aided the turnaround.
• Natural gas prices tumbled about 18% in January because of a global supply glut.
The uncertain price environment did not dampen production, as natural gas continues to supplant coal for energy production.
• The fund benefited from strong stock selection and overweight positions among oil and gas drillers as well as exploration and production companies. An underweight position in oil and gas storage and transportation companies detracted.
• For the ten years ended January 31, the fund’s average annual return exceeded those of its benchmark and peer funds.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard Energy Fund | |
Investor Shares | 32.73% |
Admiral™ Shares | 32.83 |
MSCI ACWI Energy Index | 28.54 |
Global Natural Resources Funds Average | 31.99 |
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. |
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
Energy Fund Investor Shares | 2.73% |
Spliced Energy Index | 1.15 |
Global Natural Resources Funds Average | -1.05 |
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.
1
Expense Ratios | |||
Your Fund Compared With Its Peer Group | |||
Investor | Admiral | Peer Group | |
Shares | Shares | Average | |
Energy Fund | 0.37% | 0.31% | 1.43% |
The fund expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratios were 0.41% for Investor Shares and 0.33% 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 2016.
Peer group: Global Natural Resources Funds.
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
3
In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
4
The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
5
read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
6
Advisors’ Report
Vanguard Energy Fund returned 32.73% for Investor Shares and 32.83% for Admiral Shares for the 12 months ended January 31, 2017, ahead of its benchmark index and the average return of global natural resources peer funds. Your fund is managed by two advisors, a strategy that enhances fund 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 also have 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 10, 2017.
Wellington Management Company llp
Portfolio Manager:
Gregory LeBlanc, CFA,
Senior Managing Director,
Global Industry Analyst
The investment environment
U.S. and global oil prices experienced bouts of volatility during the fiscal year, with West Texas Intermediate crude oil ending January at $53 per barrel. The fund’s benchmark, the MSCI All Country
Vanguard Energy Fund Investment Advisors | |||
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Wellington Management | 94 | 10,065 | 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 Quantitative Equity | 4 | 387 | 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 | 2 | 231 | 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. |
7
World Energy Index, returned 28.5%, outpacing global equities, as measured by the MSCI All Country World Index, which returned 18.6%.
The oil market has been rebalancing—albeit slowly—and demand remains robust. For much of the year, inventory levels in the United States remained above the five-year average. We continued to see U.S. production decline as a result of massive capital retrenchment in 2015 and 2016. At the November 30 OPEC meeting, member and nonmember countries agreed to cut production. Looking ahead, the focus will remain on inventory levels and whether countries will follow through with the reductions.
Our successes
Security selection drove relative results during the period. Our ability to capture opportunities stemming from the increasing quality dispersion in upstream assets continues to be an important source of returns. This was evidenced by our overweight exposure to Pioneer Natural Resources and Energen, which were among the top contributors to relative outperformance. We trimmed both positions on strength.
Our underweight exposure to benchmark constituent Exxon Mobil also was beneficial. We believe that the company will be challenged to increase production over the next few years, especially in a range-bound price environment.
Our shortfalls
We continue to focus the portfolio’s natural gas exposure on low-cost, high-quality assets in the lowest-cost basins, such as Antero Resources, EQT, and Cabot Oil & Gas. Unfortunately, these positions were among the portfolio’s top relative detractors during the period.
During the first quarter of 2016, natural gas prices collapsed on the back of unseasonably weak demand due to a strong El Niño, resilient Northeast production, and high inventory levels. This weighed on the share price of our natural gas-related holdings. Fundamentals have also been improving with lower associated gas production, Marcellus pipeline delays, and strong power demand. We remain constructive on the outlook for the names we hold, given their attractive cost structures.
The fund’s positioning
The portfolio’s overweight allocation to exploration and production focuses on the most cost-efficient North American shale companies. Not only can these businesses survive in an environment where oil prices are less than $60 per barrel, they can grow—and they stand to benefit even more if prices increase. We believe that the market continues to underestimate the productivity gains that the most innovative exploration and production companies can make, and we hope to take advantage of that in 2017.
8
Vanguard Quantitative Equity Group
Portfolio Managers:
James P. Stetler, Principal
Michael R. Roach, CFA
Binbin Guo, Principal, Head of Equity
Research and Portfolio Strategies
Global energy markets enjoyed strong results over the fiscal year as the MSCI All Country World Energy Index returned more than 28%, easily beating the 19% return of global equities as measured by the MSCI All Country World Index.
The investment environment
Although the past 12 months have been turbulent for the energy sector, oil company fundamentals improved, helping to stabilize prices over the latter half of the year. Crude oil prices recovered from historic lows as OPEC, Russia, and other oil-producing nations coordinated to limit production following a massive buildup of inventories and production capacity. Many companies that had reduced capital spending and idled rigs to adapt to the lower price environment began increasing operational rig counts during the summer.
Natural gas prices fell at times in response to low oil prices at the beginning of 2016 and a global supply glut. But natural gas companies made less significant efforts to limit production as liquefied natural gas exports increased in response to growing demand in Mexico and overseas.
Investment objective and strategy
Although it’s important to understand how our overall performance is affected by the macro factors we’ve described, our approach to investing focuses on specific fundamentals—not on technical analysis of stock price movements. We compare all stocks in our investment universe within the same industry groups in order to identify those with characteristics that we believe will outperform over the long run.
To do this, we use a strict quantitative process that systematically focuses on several key fundamental factors. We believe that attractive stocks exhibit four key themes: (1) high quality—healthy balance sheets and consistent cash-flow generation; (2) effective use of capital—sound investment policies that favor internal over external funding; (3) strong market sentiment—market confirmation of our view; and (4) reasonable valuation—avoidance of overpriced stocks. Using these results, we construct our portfolio with the goal of maximizing expected return and minimizing exposure to risks that our research indicates do not improve returns.
Our successes and shortfalls
For the 12 months, the results from our combined model were positive. Our valuation and management decisions models contributed significantly, while our sentiment model and, to a much lesser extent, our quality model, hurt relative performance.
9
Our positions in sub-industries further upstream in the production process (oil and gas drilling, oil and gas exploration and production, and oil and gas equipment and services) posted the strongest results and drove performance.
We also benefited from overweight positions in several U.S. drilling companies and in international oil service companies. Security selection among integrated energy companies also aided performance.
An underweight position in oil and gas storage and transportation companies detracted. And our overweight allocation to refiners based on attractive valuations hurt performance, as many of these companies tend to lag when oil prices rise.
Our most successful overweight holdings included Seadrill, Worleyparsons, Subsea 7, Idemitsu Kosan, and Hindustan Petroleum. Our results were dragged down by underweighting Valero Energy, Marathon Petroleum, Anadarko Petroleum, and Halliburton.
10
Energy Fund
Fund Profile
As of January 31, 2017
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGENX | VGELX |
Expense Ratio1 | 0.37% | 0.31% |
30-Day SEC Yield | 1.73% | 1.82% |
Portfolio Characteristics | |||
DJ | |||
MSCI | U.S. Total | ||
ACWI | Market | ||
Fund | Energy | FA Index | |
Number of Stocks | 141 | 139 | 3,825 |
Median Market Cap | $37.7B | $55.9B | $56.7B |
Price/Earnings Ratio -3,727.3x | -257.8x | 24.1x | |
Price/Book Ratio | 1.8x | 1.6x | 2.9x |
Return on Equity | 5.6% | 9.1% | 16.4% |
Earnings Growth | |||
Rate | -21.5% | -21.5% | 8.5% |
Dividend Yield | 2.2% | 3.3% | 1.9% |
Foreign Holdings | 29.3% | 46.6% | 0.0% |
Turnover Rate | 29% | — | — |
Short-Term Reserves | 3.0% | — | — |
Volatility Measures | ||
DJ | ||
MSCI | U.S. Total | |
ACWI | Market | |
Energy | FA Index | |
R-Squared | 0.96 | 0.32 |
Beta | 1.04 | 1.07 |
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 | 8.5% |
Pioneer Natural | Oil & Gas Exploration | |
Resources Co. | & Production | 5.2 |
Chevron Corp. | Integrated Oil & Gas | 4.6 |
Royal Dutch Shell plc | Integrated Oil & Gas | 4.0 |
Schlumberger Ltd. | Oil & Gas Equipment | |
& Services | 3.7 | |
TOTAL SA | Integrated Oil & Gas | 3.4 |
EOG Resources Inc. | Oil & Gas Exploration | |
& Production | 3.1 | |
Baker Hughes Inc. | Oil & Gas Equipment | |
& Services | 2.3 | |
Diamondback Energy | Oil & Gas Exploration | |
Inc. | & Production | 2.2 |
BP plc | Integrated Oil & Gas | 2.2 |
Top Ten | 39.2% | |
The holdings listed exclude any temporary cash investments and equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2017, the expense ratios were 0.41% for Investor Shares and 0.33% for Admiral Shares.
11
Energy Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Fund | Energy | |
Coal & Consumable Fuels | 0.0% | 0.9% |
Industrials | 0.3 | 0.0 |
Information Technology | 0.4 | 0.0 |
Integrated Oil & Gas | 35.1 | 51.4 |
Oil & Gas Drilling | 1.6 | 0.4 |
Oil & Gas Equipment & | ||
Services | 9.1 | 9.1 |
Oil & Gas Exploration & | ||
Production | 37.3 | 20.6 |
Oil & Gas Refining & | ||
Marketing | 7.2 | 7.8 |
Oil & Gas Storage & | ||
Transportation | 3.8 | 9.8 |
Utilities | 3.7 | 0.0 |
Other | 1.5 | 0.0 |
Market Diversification (% of equity exposure) | |
Europe | |
United Kingdom | 6.4% |
France | 3.6 |
Italy | 2.2 |
Portugal | 1.7 |
Other | 0.9 |
Subtotal | 14.8% |
Pacific | |
Japan | 1.0% |
Australia | 0.6 |
Other | 0.1 |
Subtotal | 1.7% |
Emerging Markets | |
Russia | 2.7% |
India | 2.3 |
Other | 1.6 |
Subtotal | 6.6% |
North America | |
United States | 70.2% |
Canada | 6.7 |
Subtotal | 76.9% |
12
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, 2007, Through January 31, 2017
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx15x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2017 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Energy Fund Investor Shares | 32.73% | 0.44% | 2.73% | $13,096 | |
• • • • • • • • | Spliced Energy Index | 28.54 | -1.29 | 1.15 | 11,209 |
– – – – | Global Natural Resources Funds Average | 31.99 | -2.89 | -1.05 | |
Dow Jones U.S. Total Stock Market | 9,002 | ||||
Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 | |
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 | 32.83% | 0.50% | 2.80% | $65,914 |
Spliced Energy Index | 28.54 | -1.29 | 1.15 | 56,046 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 100,058 |
See Financial Highlights for dividend and capital gains information.
13
Energy Fund
Fiscal-Year Total Returns (%): January 31, 2007, Through January 31, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/energyfundx16x1.jpg)
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2016
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 | 33.10% | 1.67% | 2.75% |
Admiral Shares | 11/12/2001 | 33.18 | 1.74 | 2.82 |
14
Energy Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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 (95.6%)1 | |||
United States (66.4%) | |||
Electric Utilities (1.1%) | |||
OGE Energy Corp. | 3,435,596 | 115,230 | |
Energy Equipment & Services (9.7%) | |||
Schlumberger Ltd. | 4,681,316 | 391,873 | |
Baker Hughes Inc. | 3,900,743 | 246,059 | |
Halliburton Co. | 3,976,740 | 224,964 | |
Patterson-UTI Energy Inc. | 5,939,010 | 166,530 | |
* | Transocean Ltd. | 190,632 | 2,663 |
1,032,089 | |||
Multi-Utilities (0.7%) | |||
Sempra Energy | 688,347 | 70,480 | |
Oil, Gas & Consumable Fuels (54.4%) | |||
Integrated Oil & Gas (15.1%) | |||
Exxon Mobil Corp. | 10,862,836 | 911,283 | |
Chevron Corp. | 4,413,290 | 491,420 | |
Occidental | |||
Petroleum Corp. | 3,102,603 | 210,263 | |
Oil & Gas Exploration & Production (31.6%) | |||
Pioneer Natural | |||
Resources Co. | 3,080,472 | 555,193 | |
EOG Resources Inc. | 3,264,366 | 331,594 | |
* | Diamondback Energy Inc. | 2,257,703 | 237,443 |
Cimarex Energy Co. | 1,305,074 | 176,459 | |
* | Newfield Exploration Co. | 4,377,645 | 175,456 |
Anadarko Petroleum Corp. 2,479,024 | 172,366 | ||
EQT Corp. | 2,799,713 | 169,747 | |
* | Concho Resources Inc. | 1,191,392 | 166,128 |
Cabot Oil & Gas Corp. | 6,812,373 | 146,330 | |
* | Energen Corp. | 2,703,483 | 145,691 |
* | Antero Resources Corp. | 5,383,070 | 131,401 |
ConocoPhillips | 2,587,303 | 126,157 |
Hess Corp. | 2,136,350 | 115,747 | |
Devon Energy Corp. | 2,234,839 | 101,775 | |
* | QEP Resources Inc. | 5,705,543 | 99,505 |
Marathon Oil Corp. | 4,750,381 | 79,569 | |
Noble Energy Inc. | 1,980,651 | 78,751 | |
* | Callon Petroleum Co. | 4,550,935 | 69,538 |
* | Rice Energy Inc. | 2,960,072 | 58,698 |
* | Parsley Energy Inc. | ||
Class A | 1,383,710 | 48,734 | |
*,2 | Centennial Resource | ||
Development Inc. | 2,014,206 | 33,120 | |
* | WPX Energy Inc. | 2,244,609 | 31,267 |
Apache Corp. | 521,198 | 31,178 | |
* | Continental | ||
Resources Inc. | 536,758 | 26,065 | |
* | PDC Energy Inc. | 346,551 | 25,624 |
* | Resolute Energy Corp. | 495,703 | 22,797 |
*,^ | Synergy Resources Corp. | 2,132,719 | 18,363 |
* | Extraction Oil & Gas Inc. | 179,920 | 3,224 |
Murphy Oil Corp. | 6,035 | 174 | |
Oil & Gas Refining & Marketing (5.1%) | |||
Valero Energy Corp. | 3,420,389 | 224,925 | |
Phillips 66 | 2,077,984 | 169,605 | |
Marathon Petroleum Corp. 3,205,046 | 154,002 | ||
Oil & Gas Storage & Transportation (2.6%) | |||
Kinder Morgan Inc. | 6,842,681 | 152,866 | |
Targa Resources Corp. | 801,934 | 46,208 | |
Spectra Energy Corp. | 1,035,279 | 43,119 | |
* | Cheniere Energy Inc. | 687,242 | 32,747 |
Williams Cos. Inc. | 39,712 | 1,145 | |
5,815,677 | |||
Other (0.5%) | |||
^,3 | Vanguard Energy ETF | 578,000 | 58,407 |
Total United States | 7,091,883 |
15
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
International (29.2%) | |||
Australia (0.6%) | |||
Oil Search Ltd. | 10,747,434 | 56,129 | |
Santos Ltd. | 1,007,037 | 3,064 | |
* | WorleyParsons Ltd. | 313,054 | 2,354 |
Woodside Petroleum Ltd. | 15,530 | 372 | |
61,919 | |||
Austria (0.0%) | |||
OMV AG | 80,402 | 2,814 | |
Brazil (0.8%) | |||
*,^ | Petroleo Brasileiro SA | ||
ADR | 7,714,948 | 79,155 | |
* | Petroleo Brasileiro SA | 882,832 | 4,537 |
* | Petroleo Brasileiro SA | ||
Preference Shares | 635,900 | 3,032 | |
86,724 | |||
Canada (6.6%) | |||
Suncor Energy Inc. | |||
(New York Shares) | 5,265,751 | 163,449 | |
TransCanada Corp. | |||
(New York Shares) | 2,069,451 | 97,719 | |
Canadian Natural | |||
Resources Ltd. | |||
(New York Shares) | 2,995,938 | 90,567 | |
* | Seven Generations | ||
Energy Ltd. Class A | 4,112,763 | 82,208 | |
Encana Corp. | |||
(New York Shares) | 4,610,474 | 58,830 | |
Cenovus Energy Inc. | |||
(New York Shares) | 3,422,194 | 46,644 | |
^ | ARC Resources Ltd. | 2,839,500 | 44,188 |
Keyera Corp. | 1,419,497 | 41,671 | |
^ | Crescent Point | ||
Energy Corp. | 3,198,628 | 37,290 | |
^ | PrairieSky Royalty Ltd. | ||
(Toronto Shares) | 605,648 | 14,196 | |
Suncor Energy Inc. | 175,442 | 5,442 | |
Encana Corp. | 300,257 | 3,833 | |
TransCanada Corp. | 80,028 | 3,775 | |
Enbridge Inc. | 86,183 | 3,669 | |
Canadian Natural | |||
Resources Ltd. | 96,937 | 2,931 | |
* | Husky Energy Inc. | 199,506 | 2,574 |
PrairieSky Royalty Ltd. | 93,253 | 2,184 | |
701,170 | |||
China (0.6%) | |||
PetroChina Co. Ltd. ADR | 637,495 | 50,675 | |
China Petroleum | |||
& Chemical Corp. | 6,223,600 | 4,916 |
China Longyuan Power | |||
Group Corp. Ltd. | 3,038,000 | 2,482 | |
Kunlun Energy Co. Ltd. | 2,880,000 | 2,287 | |
Huaneng Renewables | |||
Corp. Ltd. | 6,816,000 | 2,115 | |
CNOOC Ltd. | 785,717 | 981 | |
PetroChina Co. Ltd. | 394,000 | 313 | |
63,769 | |||
Colombia (0.0%) | |||
* | Ecopetrol SA ADR | 94,911 | 892 |
Denmark (0.0%) | |||
Vestas Wind Systems A/S | 63,255 | 4,436 | |
Finland (0.0%) | |||
Neste Oyj | 69,202 | 2,408 | |
France (3.5%) | |||
TOTAL SA ADR | 6,941,523 | 350,963 | |
TOTAL SA | 344,051 | 17,408 | |
* | TechnipFMC plc | 90,524 | 2,967 |
371,338 | |||
Germany (0.7%) | |||
*,4 | Innogy SE | 2,116,919 | 72,409 |
Greece (0.0%) | |||
Motor Oil Hellas Corinth | |||
Refineries SA | 117,039 | 1,679 | |
Hungary (0.0%) | |||
MOL Hungarian | |||
Oil & Gas plc | 36,638 | 2,582 | |
India (2.2%) | |||
Power Grid Corp. | |||
of India Ltd. | 37,239,710 | 113,934 | |
Reliance Industries Ltd. | 7,233,938 | 111,578 | |
Oil & Natural Gas | |||
Corp. Ltd. | 1,093,639 | 3,274 | |
Indian Oil Corp. Ltd. | 565,163 | 3,060 | |
Bharat Petroleum | |||
Corp. Ltd. | 292,049 | 2,940 | |
Hindustan Petroleum | |||
Corp. Ltd. | 340,596 | 2,624 | |
* | Mangalore Refinery | ||
& Petrochemicals Ltd. | 926,191 | 1,338 | |
GAIL India Ltd. | 73,165 | 505 | |
Cairn India Ltd. | 63,882 | 261 | |
239,514 |
16
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Israel (0.0%) | |||
Oil Refineries Ltd. | 4,243,229 | 1,493 | |
Italy (2.2%) | |||
Eni SPA ADR | 5,334,119 | 164,878 | |
Tenaris SA ADR | 1,833,162 | 64,234 | |
Eni SPA | 221,461 | 3,405 | |
232,517 | |||
Japan (1.0%) | |||
Inpex Corp. | 9,581,000 | 94,020 | |
JX Holdings Inc. | 813,100 | 3,835 | |
Idemitsu Kosan Co. Ltd. | 86,200 | 2,665 | |
Cosmo Energy | |||
Holdings Co. Ltd. | 133,100 | 2,303 | |
Showa Shell Sekiyu KK | 27,300 | 268 | |
103,091 | |||
Norway (0.1%) | |||
*,^ | DNO ASA | 12,136,636 | 12,703 |
* | Subsea 7 SA | 149,591 | 2,035 |
Statoil ASA | 23,000 | 429 | |
15,167 | |||
Poland (0.1%) | |||
Polski Koncern Naftowy | |||
ORLEN SA | 151,412 | 3,072 | |
* | Grupa Lotos SA | 241,174 | 2,273 |
5,345 | |||
Portugal (1.7%) | |||
Galp Energia SGPS SA | 12,013,856 | 177,016 | |
Russia (2.6%) | |||
Rosneft Oil Co. | |||
PJSC GDR | 25,131,272 | 166,641 | |
Lukoil PJSC ADR | 1,781,028 | 100,369 | |
Gazprom PJSC ADR | 949,310 | 4,710 | |
AK Transneft OAO | |||
Preference Shares | 811 | 2,757 | |
Tatneft PJSC ADR | 61,525 | 2,508 | |
Gazprom PJSC | 489,734 | 1,219 | |
Tatneft PAO | 136,690 | 924 | |
Lukoil PJSC | 16,448 | 923 | |
Rosneft Oil Co. PJSC | 60,170 | 400 | |
280,451 | |||
South Korea (0.1%) | |||
SK Innovation Co. Ltd. | 23,419 | 3,173 | |
Doosan Heavy Industries | |||
& Construction Co. Ltd. | 96,077 | 2,276 | |
GS Holdings Corp. | 48,837 | 2,150 | |
7,599 |
Spain (0.1%) | |||
* | Repsol SA | 290,111 | 4,300 |
Gamesa Corp. | |||
Tecnologica SA | 132,105 | 2,778 | |
7,078 | |||
Taiwan (0.0%) | |||
Formosa Petrochemical | |||
Corp. | 797,000 | 2,722 | |
Thailand (0.1%) | |||
* | PTT Exploration and | ||
Production PCL (Local) | 961,000 | 2,676 | |
PTT PCL (Foreign) | 220,000 | 2,525 | |
* | PTT PCL | 166,300 | 1,909 |
* | Thai Oil PCL | 808,300 | 1,647 |
Thai Oil PCL (Foreign) | 282,500 | 576 | |
9,333 | |||
Turkey (0.0%) | |||
Tupras Turkiye Petrol | |||
Rafinerileri AS | 111,731 | 2,429 | |
KOC Holding AS | 598,910 | 2,413 | |
4,842 | |||
United Kingdom (6.2%) | |||
Royal Dutch Shell | |||
plc ADR | 7,344,521 | 399,469 | |
BP plc ADR | 6,183,393 | 222,478 | |
BP plc | 2,386,484 | 14,253 | |
Royal Dutch Shell plc | |||
Class B | 495,727 | 14,002 | |
Royal Dutch Shell plc | |||
Class A | 331,089 | 8,980 | |
Royal Dutch Shell plc | |||
Class A (Amsterdam | |||
Shares) | 247,382 | 6,701 | |
Petrofac Ltd. | 221,665 | 2,567 | |
668,450 | |||
Total International | 3,126,758 | ||
Total Common Stocks | |||
(Cost $6,861,655) | 10,218,641 | ||
Temporary Cash Investments (5.9%)1 | |||
Money Market Fund (2.8%) | |||
5,6 | Vanguard Market | ||
Liquidity Fund, 0.856% | 2,920,695 | 292,099 |
17
Energy Fund
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
Repurchase Agreements (2.3%) | |||
RBS Securities, Inc. 0.530%, | |||
2/1/17 (Dated 1/31/17, | |||
Repurchase Value | |||
$145,702,000, collateralized | |||
by U.S. Treasury Note/Bond | |||
3.500%, 5/15/20, with a | |||
value of $148,617,000) | 145,700 | 145,700 | |
Societe Generale 0.530%, | |||
2/1/17 (Dated 1/31/17, | |||
Repurchase Value | |||
$100,501,000, collateralized | |||
by Federal Home Loan | |||
Mortgage Corp. 2.773%– | |||
5.966%, 9/1/20–5/1/35, and | |||
U.S. Treasury Note/Bond | |||
2.125%–7.875%, 2/15/21– | |||
12/31/22, with a value of | |||
$102,510,000) | 100,500 | 100,500 | |
246,200 | |||
U.S. Government and Agency Obligations (0.8%) | |||
7 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.390%, 2/1/17 | 5,000 | 5,000 | |
7 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.525%, 3/8/17 | 75,000 | 74,960 | |
United States Treasury | |||
Bill, 0.395%, 2/2/17 | 1,500 | 1,500 | |
8 | United States Treasury | ||
Bill, 0.501%, 3/16/17 | 100 | 100 | |
8 | United States Treasury | ||
Bill, 0.491%–0.501%, | |||
5/4/17 | 5,300 | 5,293 | |
8 | United States Treasury | ||
Bill, 0.592%, 7/13/17 | 2,000 | 1,995 | |
88,848 | |||
Total Temporary Cash Investments | |||
(Cost $627,141) | 627,147 | ||
Total Investments (101.5%) | |||
(Cost $7,488,796) | 10,845,788 |
Amount | |
($000) | |
Other Assets and Liabilities (-1.5%) | |
Other Assets | |
Investment in Vanguard | 799 |
Receivables for Investment Securities Sold 1,572 | |
Receivables for Accrued Income | 3,183 |
Receivables for Capital Shares Issued | 5,953 |
Other Assets | 1,789 |
Total Other Assets | 13,296 |
Liabilities | |
Payables for Investment | |
Securities Purchased | (10,461) |
Payables to Investment Advisor | (4,190) |
Collateral for Securities on Loan | (122,404) |
Payables for Capital Shares Redeemed | (16,473) |
Payables to Vanguard | (21,480) |
Other Liabilities | (721) |
Total Liabilities | (175,729) |
Net Assets (100%) | 10,683,355 |
18
Energy Fund
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 8,270,144 |
Overdistributed Net Investment Income | (25,571) |
Accumulated Net Realized Losses | (918,723) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 3,356,992 |
Futures Contracts | 543 |
Foreign Currencies | (30) |
Net Assets | 10,683,355 |
Investor Shares—Net Assets | |
Applicable to 65,500,280 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 3,451,959 |
Net Asset Value Per Share— | |
Investor Shares | $52.70 |
Amount | |
($000) | |
Admiral Shares—Net Assets | |
Applicable to 73,130,021 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 7,231,396 |
Net Asset Value Per Share— | |
Admiral Shares | $98.88 |
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $105,768,000.
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 97.3% and 4.2%, respectively,
of net assets.
2 Restricted security represents 0.3% of net assets.
3 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
4 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, 2017, the value of this security represented 0.7% of net assets.
5 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
6 Includes $122,404,000 of collateral received for securities on loan.
7 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.
8 Securities with a value of $6,999,000 and cash of $1,151,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
19
Energy Fund
Statement of Operations
Year Ended | |
January 31, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 224,212 |
Interest2 | 1,748 |
Securities Lending—Net | 8,854 |
Total Income | 234,814 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 14,000 |
Performance Adjustment | 2,757 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 6,376 |
Management and Administrative—Admiral Shares | 8,688 |
Marketing and Distribution—Investor Shares | 684 |
Marketing and Distribution—Admiral Shares | 588 |
Custodian Fees | 1,580 |
Auditing Fees | 37 |
Shareholders’ Reports—Investor Shares | 93 |
Shareholders’ Reports—Admiral Shares | 41 |
Trustees’ Fees and Expenses | 20 |
Total Expenses | 34,864 |
Expenses Paid Indirectly | (109) |
Net Expenses | 34,755 |
Net Investment Income | 200,059 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | (382,241) |
Futures Contracts | 28,623 |
Foreign Currencies | (3,583) |
Realized Net Gain (Loss) | (357,201) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 2,822,434 |
Futures Contracts | 1,338 |
Foreign Currencies | 43 |
Change in Unrealized Appreciation (Depreciation) | 2,823,815 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,666,673 |
1 Dividends are net of foreign withholding taxes of $15,144,000. | |
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $1,395,000, $751,000, and $16,000, respectively. |
See accompanying Notes, which are an integral part of the Financial Statements.
20
Energy Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 200,059 | 216,759 |
Realized Net Gain (Loss) | (357,201) | (510,522) |
Change in Unrealized Appreciation (Depreciation) | 2,823,815 | (1,688,529) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 2,666,673 | (1,982,292) |
Distributions | ||
Net Investment Income | ||
Investor Shares | (63,588) | (69,234) |
Admiral Shares | (137,420) | (145,041) |
Realized Capital Gain | ||
Investor Shares | — | — |
Admiral Shares | — | — |
Total Distributions | (201,008) | (214,275) |
Capital Share Transactions | ||
Investor Shares | (63,208) | 74,549 |
Admiral Shares | 159,725 | 340,406 |
Net Increase (Decrease) from Capital Share Transactions | 96,517 | 414,955 |
Total Increase (Decrease) | 2,562,182 | (1,781,612) |
Net Assets | ||
Beginning of Period | 8,121,173 | 9,902,785 |
End of Period1 | 10,683,355 | 8,121,173 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($25,571,000) and ($21,516,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
21
Energy Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $40.43 | $51.53 | $63.85 | $62.66 | $62.60 |
Investment Operations | |||||
Net Investment Income | .982 | 1.096 | 1.276 | 1.291 | 1.336 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 12.275 | (11.118) | (9.436) | 2.413 | 1.098 |
Total from Investment Operations | 13.257 | (10.022) | (8.160) | 3.704 | 2.434 |
Distributions | |||||
Dividends from Net Investment Income | (.987) | (1.078) | (1.206) | (1.277) | (1.340) |
Distributions from Realized Capital Gains | — | — | (2.954) | (1.237) | (1.034) |
Total Distributions | (.987) | (1.078) | (4.160) | (2.514) | (2.374) |
Net Asset Value, End of Period | $52.70 | $40.43 | $51.53 | $63.85 | $62.66 |
Total Return1 | 32.73% | -19.53% | -13.16% | 5.88% | 4.07% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $3,452 | $2,693 | $3,334 | $4,138 | $5,340 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | 0.41% | 0.37% | 0.37% | 0.38% | 0.31% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.97% | 2.20% | 1.84% | 1.97% | 2.15% |
Portfolio Turnover Rate | 29% | 23% | 31% | 17% | 18% |
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%, 0.03%, 0.03%, 0.04%, and (0.02%). |
See accompanying Notes, which are an integral part of the Financial Statements.
22
Energy Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $75.85 | $96.69 | $119.83 | $117.63 | $117.52 |
Investment Operations | |||||
Net Investment Income | 1.918 | 2.113 | 2.479 | 2.530 | 2.586 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 23.035 | (20.872) | (17.726) | 4.491 | 2.060 |
Total from Investment Operations | 24.953 | (18.759) | (15.247) | 7.021 | 4.646 |
Distributions | |||||
Dividends from Net Investment Income | (1.923) | (2.081) | (2.351) | (2.500) | (2.595) |
Distributions from Realized Capital Gains | — | — | (5.542) | (2.321) | (1.941) |
Total Distributions | (1.923) | (2.081) | (7.893) | (4.821) | (4.536) |
Net Asset Value, End of Period | $98.88 | $75.85 | $96.69 | $119.83 | $117.63 |
Total Return1 | 32.83% | -19.48% | -13.11% | 5.94% | 4.14% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $7,231 | $5,428 | $6,569 | $7,540 | $6,778 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | 0.33% | 0.31% | 0.31% | 0.32% | 0.26% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.05% | 2.26% | 1.90% | 2.03% | 2.20% |
Portfolio Turnover Rate | 29% | 23% | 31% | 17% | 18% |
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%, 0.03%, 0.03%, 0.04%, and (0.02%). |
See accompanying Notes, which are an integral part of the Financial Statements.
23
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 are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. 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 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.
24
Energy Fund
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, 2017, the fund’s average investments in long and short futures contracts represented 1% 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 counter-parties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. 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, 2014–2017), 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 subject to termination by the fund at any time, and 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
25
Energy Fund
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, 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. The investment advisory firm 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 relative to the MSCI ACWI Energy Index for the preceding three years.
Vanguard provides investment advisory services to a portion of the fund as described below; the fund paid Vanguard advisory fees of $272,000 for the year ended January 31, 2017.
For the year ended January 31, 2017, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.14% of the fund’s average net assets, before an increase of $2,757,000 (0.03%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.
26
Energy Fund
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $799,000, representing 0.01% of the fund’s net assets and 0.32% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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, 2017, these arrangements reduced the fund’s expenses by $109,000 (an annual rate of 0.00% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
The following table summarizes the market value of the fund’s investments as of January 31, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—United States | 7,058,763 | 33,120 | — |
Common Stocks—International | 2,031,730 | 1,092,844 | 2,184 |
Temporary Cash Investments | 292,099 | 335,048 | — |
Futures Contracts—Liabilities1 | (125) | — | — |
Total | 9,382,467 | 1,461,012 | 2,184 |
1 Represents variation margin on the last day of the reporting period. |
F. At January 31, 2017, 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 2017 | 1,570 | 178,548 | 543 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
27
Energy Fund
G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
For tax purposes, at January 31, 2017, the fund had $4,644,000 of ordinary income available for distribution. The fund had available capital losses totaling $905,394,000 that may be carried forward indefinitely to offset future net capital gains.
At January 31, 2017, the cost of investment securities for tax purposes was $7,511,471,000. Net unrealized appreciation of investment securities for tax purposes was $3,334,317,000, consisting of unrealized gains of $3,581,024,000 on securities that had risen in value since their purchase and $246,707,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the year ended January 31, 2017, the fund purchased $2,766,620,000 of investment securities and sold $2,682,177,000 of investment securities, other than temporary cash investments.
I. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2017 | 2016 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 790,047 | 16,338 | 1,000,377 | 20,740 |
Issued in Lieu of Cash Distributions | 59,916 | 1,108 | 65,317 | 1,556 |
Redeemed | (913,171) | (18,558) | (991,145) | (20,374) |
Net Increase (Decrease)—Investor Shares | (63,208) | (1,112) | 74,549 | 1,922 |
Admiral Shares | ||||
Issued | 1,369,010 | 14,893 | 1,661,392 | 18,288 |
Issued in Lieu of Cash Distributions | 126,344 | 1,246 | 130,396 | 1,656 |
Redeemed | (1,335,629) | (14,570) | (1,451,382) | (16,322) |
Net Increase (Decrease)—Admiral Shares | 159,725 | 1,569 | 340,406 | 3,622 |
J. Management has determined that no material events or transactions occurred subsequent to January 31, 2017, that would require recognition or disclosure in these financial statements.
28
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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
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Special 2016 tax information (unaudited) for Vanguard Energy Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of the
Internal Revenue Code.
The fund distributed $160,565,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 53.9% of investment income (dividend income plus short-term gains,
if any) qualifies for the dividends-received deduction.
29
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 2017. (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, 2017
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 32.73% | 0.44% | 2.73% |
Returns After Taxes on Distributions | 32.07 | -0.50 | 1.80 |
Returns After Taxes on Distributions and Sale of Fund Shares | 18.92 | 0.30 | 2.24 |
30
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.
31
Six Months Ended January 31, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Energy Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,090.03 | $2.26 |
Admiral Shares | 1,000.00 | 1,090.54 | 1.79 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,022.97 | $2.19 |
Admiral Shares | 1,000.00 | 1,023.43 | 1.73 |
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 0.43% for Investor Shares and 0.34% 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 (184/366).
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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.
33
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.
34
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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 | 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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2017 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q510 032017 |
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Annual Report | January 31, 2017
Vanguard Precious Metals and Mining Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2017, Vanguard Precious Metals and Mining Fund returned 75.99%. That result was slightly ahead of the average return of peer funds but behind the 95.06% return of the benchmark S&P Global Custom Metals and Mining Index.
• Keep in mind that these outsized returns are indicative of a highly volatile segment of the market. The fund—which invests in companies that are involved in the mining of or exploration for precious and rare metals and minerals—had recorded negative returns for the previous five fiscal years.
• Against a backdrop of rising commodity prices in the 12-month period, mining companies experienced significant gains.
• For the ten years ended January 31, 2017, the Precious Metals and Mining Fund had an average annual return of –3.83%. That return lagged the results of the fund’s comparative standards.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard Precious Metals and Mining Fund | 75.99% |
S&P Global Custom Metals and Mining Index | 95.06 |
Precious Metals Equity Funds Average | 75.32 |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
Precious Metals and Mining Fund | -3.83% |
S&P Global Custom Metals and Mining Index | 0.03 |
Precious Metals Equity Funds Average | -1.15 |
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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Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Precious Metals and Mining Fund | 0.35% | 1.46% |
The fund expense ratio shown is from the prospectus dated May 25, 2016, and represents estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratio was 0.43%. The change from the estimated expense ratio reflects a
performance-based investment advisory fee adjustment. The peer-group expense ratio is derived from data provided by Lipper, a Thomson
Reuters Company, and captures information through year-end 2016.
Peer group: Precious Metals Equity Funds.
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Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/preciousmetalsandminingfx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
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In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
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The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/preciousmetalsandminingfx7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
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read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/preciousmetalsandminingfx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
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Advisor’s Report
Vanguard Precious Metals and Mining Fund returned about 76% for the fiscal year ended January 31, 2017. This lagged the customized benchmark index, which returned about 95%, but was slightly ahead of the average return of 75% for the precious metals-oriented funds peer group.
Market environment
Initial concerns about the health of the global economy, weak commodity prices, and the timing of a rise in U.S. interest rates gave way to a sustained rally from mid-February 2016 as China’s economy appeared to stabilize. The U.S. economy also started to regain momentum at this time and commodity prices rebounded. After initial panic in the immediate aftermath of Brexit, the United Kingdom’s shocking vote in June to leave the European Union, investor risk appetite quickly recovered and most stock markets resumed an upward trend.
For much of the review period, precious metals performed well, thanks to increased demand resulting from Brexit-related uncertainty. Also adding to the appeal of precious metals were worries about a potential European banking crisis, the prospect of persistently low or negative interest rates, and quantitative easing in a number of economies.
However, Donald Trump’s surprising victory in the U.S. presidential election in November led to a stock market rally, especially in the United States, as investors anticipated fiscal stimulus and massive infrastructure expenditure. A backdrop of Chinese stimulus measures
and global economic growth further supported investor sentiment. The final quarter of 2016 also saw diversified metals stocks rally significantly after a poor performance earlier in the year. Precious metals lagged, although they picked up a little in January 2017.
Shares in silver, copper, and diversified metals companies were the strongest performers over the full year, while precious metals and gold producers slightly lagged behind the custom benchmark. Both categories produced robust gains in absolute terms, however.
The fund’s performance
For much of the past three years, the fund’s overweight exposure to precious metals was beneficial for returns. However, over the 12-month period under review, this exposure was less helpful, as the fund’s relatively light exposure to diversified metals and miners hurt performance, particularly during the rally in these assets in the days just after the U.S. election and into the end of the year. The fund’s overweight exposure to precious metals held back relative returns, although stock selection was beneficial.
Precious metals companies featured prominently among top contributors to performance, including Hochschild Mining, B2Gold, Kaminak Gold, First Majestic Silver, and Alamos Gold. Hochschild Mining is a recovery story; the firm has been rebuilding its balance sheet over the past 18 months and investors have lately started to recognize its solid fundamentals. The share price of Kaminak Gold, a junior miner, was boosted by a takeover
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approach from Goldcorp, one of the world’s largest gold producers, which is also held in the portfolio.
In contrast, given the strong rally in diversified metals in late 2016, the fund’s performance was hurt by its relatively light presence in these assets. More specifically, not holding some of the largest companies in this area—such as Antofagasta, U.K.-listed mining company Anglo American, First Quantum Minerals, Teck Resources, Freeport-McMoRan, and U.K. miner Glencore—was detrimental for returns.
Stock selection within miners specializing solely in gold cost some performance; detractors included Randgold Resources, Primero Mining, and Barrick Gold. We sold the position in Primero Mining after the Canadian gold miner failed to deliver on its business plan strategy.
Other detractors included Dominion Diamond, because of weakness in the diamond market, and Canadian copper miner Nevsun Resources, because of its acquisition of Reservoir Minerals during the year.
Portfolio activity
We started a number of new positions over the review period, with all holdings meeting a set of criteria based on our framework of quality, growth, and valuation. We continue to focus on companies’ management teams, their business plan strategy, and their execution. We also look for firms that have the potential to grow into a mid- or large-capitalization concern over time. Such firms are likely to have good management teams with a strong track record as well as the right technical team in place to put assets into production. The willingness and ability of management to reassess geology is also deemed important.
New holdings include Americas Silver, Barkerville Gold Mines, and Beadell Resources. Americas Silver is attractively valued, growing well, and has good exposure to zinc. Furthermore, the firm focuses on return on investor capital. In our view, gold miners Barkerville and Beadell have exploration potential and the ability to become major players in time.
We also added to our copper exposure by initiating holdings in Grupo Mexico and Southern Copper. We are optimistic about prospects for copper, and the move increases diversification in the portfolio.
Turning to sales, a number of holdings were removed from the portfolio after being taken over: For example, Kaminak Gold was taken over by Goldcorp, and Lake Shore Gold was taken over by Tahoe Resources. Tahoe Resources is also held in the portfolio; the position detracted over the period.
In other transactions, Newmarket Gold was bought by Kirkland Lake Gold, a previous holding in the portfolio that we closed when the firm’s chief executive was replaced. True Gold Mining exited the portfolio after being taken over by gold producer Endeavour Mining, which was added to the portfolio.
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We sold the holding in multinational materials technology firm Umicore because we felt it was fully valued. We also sold our holdings in Anglo American and Antofagasta after disappointing performance. The disposal of these stocks meant that we did not experience further weakness in mid-2016, although we were not able to benefit from the rally in diversified metals later in the year.
Portfolio positioning and outlook
We continue to have overweight exposure to precious metals and mining stocks, with a relatively light presence in diversified miners. Given the potential for volatility because of uncertainty about the implications of the Brexit decision and the new U.S. president, we expect gold prices to stay strong, in the short term at least. After the initial optimism in the wake of President Trump’s election,
a degree of caution has set in and the U.S. Federal Reserve has put policy moves on hold for the time being. The EU political cycle may well produce some upsets; the French presidential elections are just one in a range of political tests for the region this year.
We will continue to implement our investment philosophy and process: maintaining a long-term approach, and identifying high-quality companies with strong management teams, best-in-class assets, and costs that compare favorably with those of their competitors.
Jamie J. Horvat
Portfolio Manager
M&G Investment Management Limited
February 16, 2017
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Precious Metals and Mining Fund
Fund Profile
As of January 31, 2017
Portfolio Characteristics | |||
S&P | DJ | ||
Global | U.S. | ||
Custom | Total | ||
Metals and | Market | ||
Mining | FA | ||
Fund | Index | Index | |
Number of Stocks | 71 | 231 | 3,825 |
Median Market Cap | $2.9B | $12.5B | $56.7B |
Price/Earnings Ratio | -42.4x | -49.0x | 24.1x |
Price/Book Ratio | 1.6x | 1.7x | 2.9x |
Return on Equity | -1.3% | 1.5% | 16.4% |
Earnings Growth | |||
Rate | -7.5% | -12.5% | 8.5% |
Dividend Yield | 0.8% | 1.2% | 1.9% |
Foreign Holdings | 87.3% | 88.8% | 0.0% |
Turnover Rate | 29% | — | — |
Ticker Symbol | VGPMX | — | — |
Expense Ratio1 | 0.35% | — | — |
Short-Term | |||
Reserves | 2.5% | — | — |
Subindustry Diversification (% of equity | ||
exposure) | ||
S&P | ||
Global | ||
Custom | ||
Metals and | ||
Mining | ||
Fund | Index | |
Aluminum | 0.0% | 3.6% |
Agricultural Products | 1.8 | 0.0 |
Copper | 8.1 | 6.2 |
Diversified Metals & Mining | 6.0 | 40.4 |
Gold | 66.0 | 38.9 |
Precious Metals & Minerals | 9.4 | 5.7 |
Silver | 7.4 | 5.1 |
Specialty Chemicals | 0.9 | 0.0 |
Other | 0.4 | 0.1 |
Volatility Measures | ||
S&P | ||
Global | ||
Custom | DJ | |
Metals and | U.S. Total | |
Mining | Market | |
Index | FA Index | |
R-Squared | 0.92 | 0.04 |
Beta | 1.02 | 0.65 |
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) | ||
Barrick Gold Corp. | Gold | 5.8% |
Newmont Mining Corp. | Gold | 5.3 |
Agnico Eagle Mines Ltd. | Gold | 4.8 |
B2Gold Corp. | Gold | 4.6 |
Nevsun Resources Ltd. | Copper | 4.3 |
Randgold Resources Ltd. | Gold | 3.8 |
Acacia Mining plc | Gold | 3.4 |
Franco-Nevada Corp. | Gold | 3.2 |
Hochschild Mining plc | Silver | 3.2 |
SEMAFO Inc. | Gold | 3.2 |
Top Ten | 41.6% | |
The holdings listed exclude any temporary cash investments and equity index products. |
1 The expense ratio shown is from the prospectus dated May 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year
ended January 31, 2017, the expense ratio was 0.43%.
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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, 2007, Through January 31, 2017
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2017 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Precious Metals and Mining Fund* | 75.99% | -11.86% | -3.83% | $6,765 | |
S&P Global Custom Metals and | |||||
• • • • • • •• | Mining Index | 95.06 | -8.99 | 0.03 | 10,030 |
– – – – | Precious Metals Equity Funds | ||||
Average | 75.32 | -12.76 | -1.15 | 8,910 | |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 | |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
See Financial Highlights for dividend and capital gains information.
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Precious Metals and Mining Fund
Fiscal-Year Total Returns (%): January 31, 2007, Through January 31, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/preciousmetalsandminingx14x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2016
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 | 50.64% | -11.87% | -4.91% |
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Precious Metals and Mining Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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 (96.7%) | |||
Agricultural Products (1.7%) | |||
Bunge Ltd. | 644,985 | 44,639 | |
Copper (7.8%) | |||
1 | Nevsun Resources Ltd. | 35,974,070 | 113,348 |
* | Lundin Mining Corp. | 8,924,425 | 54,593 |
^ | Southern Copper Corp. | 942,526 | 36,155 |
204,096 | |||
Diversified Metals & Mining (5.8%) | |||
BHP Billiton plc | 2,530,120 | 46,144 | |
Boliden AB | 1,492,600 | 43,543 | |
Grupo Mexico SAB de | |||
CV Class B | 9,997,299 | 29,982 | |
BHP Billiton Ltd. | 1,210,990 | 24,569 | |
^,* | Balmoral Resources | ||
Ltd. | 5,552,174 | 3,755 | |
*,1 | Aguia Resources Ltd. | 38,529,412 | 2,373 |
150,366 | |||
Gold (63.9%) | |||
Barrick Gold Corp. | 8,215,076 | 151,486 | |
Newmont Mining Corp. | 3,816,694 | 138,470 | |
^,* | B2Gold Corp. | 37,190,786 | 113,804 |
^ | Randgold Resources | ||
Ltd. ADR | 1,162,627 | 98,753 | |
Acacia Mining plc | 16,431,351 | 89,105 | |
Agnico Eagle Mines | |||
Ltd. (New York Shares) | 1,832,834 | 87,426 | |
Franco-Nevada Corp. | 1,297,784 | 84,408 | |
*,1 | SEMAFO Inc. | 22,237,075 | 82,882 |
* | Kinross Gold Corp. | 18,494,618 | 72,129 |
Goldcorp Inc. | |||
(New York Shares) | 3,480,757 | 56,284 | |
Royal Gold Inc. | 723,226 | 52,195 | |
* | Endeavour Mining Corp. | 2,731,533 | 52,185 |
^,* | Pretium Resources Inc. | 4,359,290 | 47,080 |
^ | Tahoe Resources Inc. | ||
(New York Shares) | 4,678,633 | 42,763 | |
Alamos Gold Inc. | |||
(New York Shares) | 5,679,287 | 42,595 |
* | IAMGOLD Corp. | 9,044,914 | 41,845 |
Yamana Gold Inc. | |||
(New York Shares) | 12,445,517 | 41,195 | |
Agnico Eagle Mines | |||
Ltd. (Toronto Shares) | 814,545 | 38,854 | |
^,*,1Roxgold Inc. | 29,570,296 | 34,541 | |
^,*,1 Premier Gold Mines | |||
Ltd. | 14,212,168 | 32,001 | |
Alamos Gold Inc. | |||
(Toronto Shares) | 3,627,542 | 27,208 | |
* | AngloGold Ashanti Ltd. | 2,104,962 | 26,749 |
* | Torex Gold Resources | ||
Inc. | 1,197,950 | 25,409 | |
Tahoe Resources Inc. | |||
(Toronto Shares) | 2,689,463 | 24,533 | |
Yamana Gold Inc. | |||
(Toronto Shares) | 7,291,086 | 24,093 | |
* | Guyana Goldfields Inc. | 4,441,302 | 22,049 |
* | Asanko Gold Inc. | 5,329,564 | 19,537 |
Osisko Gold Royalties | |||
Ltd. | 1,634,820 | 17,941 | |
^,* | Alacer Gold Corp. | 7,759,353 | 14,311 |
OceanaGold Corp. | 4,014,735 | 13,945 | |
* | Saracen Mineral | ||
Holdings Ltd. | 16,490,693 | 13,333 | |
* | Beadell Resources Ltd. | 42,375,053 | 9,868 |
* | Gold Road Resources | ||
Ltd. | 15,262,621 | 6,737 | |
* | Perseus Mining Ltd. | 25,753,128 | 6,581 |
* | B2Gold Corp. | ||
(Toronto Shares) | 1,860,800 | 5,649 | |
* | Nighthawk Gold Corp. | 6,316,566 | 3,010 |
^,* | Dacian Gold Ltd. | 1,660,519 | 2,944 |
^,* | Barkerville Gold Mines | ||
Ltd. (Toronto Shares) | 6,387,000 | 2,331 | |
* | Newcastle Gold Ltd. | 3,500,000 | 1,963 |
* | Integra Gold Corp. | ||
(Toronto Shares) | 2,565,149 | 1,459 | |
* | Osisko Gold Royalties | ||
Warrants Exp. | |||
02/26/2019 | 231,787 | 381 |
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Precious Metals and Mining Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | Continental Gold Inc | ||
Warrants Exp. | |||
11/27/2017 | 450,000 | 261 | |
* | Primero Mining Corp. | ||
Warrants Exp. | |||
06/25/2018 | 638,250 | 69 | |
1,670,362 | |||
Other (0.4%) | |||
*,2 | ORLA MINING Ltd CAD | ||
PP | 5,714,300 | 5,138 | |
*,2 | Integra Gold Corp. PP | 7,000,000 | 3,582 |
*,2 | Barkerville Gold Mines | ||
Ltd. PP | 3,508,771 | 1,153 | |
*,2 | Rescue Radio Corp. PP | 15,955 | — |
9,873 | |||
Precious Metals & Minerals (9.1%) | |||
^,1 | Dominion Diamond | ||
Corp. | 6,514,698 | 65,235 | |
Fresnillo plc | 2,637,666 | 48,418 | |
^,*,1 Dalradian Resources | |||
Inc. | 45,625,000 | 46,633 | |
^,*,1 Osisko Mining Inc. | 9,404,193 | 24,355 | |
* | Mountain Province | ||
Diamonds Inc. | 4,935,352 | 20,860 | |
* | Stillwater Mining Co. | 998,299 | 16,971 |
Lucara Diamond Corp. | 6,088,724 | 13,757 | |
236,229 | |||
Silver (7.1%) | |||
1 | Hochschild Mining plc | 26,649,649 | 83,056 |
^,* | First Majestic Silver | ||
Corp. | 4,513,000 | 43,325 | |
* | Fortuna Silver Mines | ||
Inc. | 6,326,871 | 39,384 | |
* | MAG Silver Corp. | 893,159 | 12,698 |
^,*,1 Americas Silver Corp. | |||
(Toronto Shares) | 2,369,444 | 8,048 | |
* | Americas Silver Corp. | ||
Warrants Exp. | |||
06/09/2021 | 7,108,333 | — | |
186,511 | |||
Specialty Chemicals (0.9%) | |||
Johnson Matthey plc | 554,463 | 22,743 | |
Total Common Stocks | |||
(Cost $2,166,051) | 2,524,819 | ||
Precious Metals (0.1%) | |||
* | Platinum Bullion | ||
(In Troy Ounces) | 2,009 | 1,999 | |
Total Precious Metals | |||
(Cost $1,213) | 1,999 |
Temporary Cash Investment (6.2%) | ||
Money Market Fund (6.2%) | ||
3,4 Vanguard Market Liquidity | ||
Fund, 0.856% | ||
(Cost $163,006) | 1,629,942 | 163,010 |
Total Investments (103.0%) | ||
(Cost $2,330,270) | 2,689,828 | |
Other Assets and Liabilities (-3.0%) | ||
Other Assets | 34,150 | |
Liabilities 4 | (111,505) | |
(77,355) | ||
Net Assets (100%) | ||
Applicable to 243,232,725 outstanding | ||
$.001 par value shares of beneficial | ||
interest (unlimited authorization) | 2,612,473 | |
Net Asset Value Per Share | $10.74 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers 5 | 2,034,346 | |
Affiliated Vanguard Funds | 163,010 | |
Other Affiliated Issuers | 492,472 | |
Total Investments in Securities | 2,689,828 | |
Investment in Vanguard | 164 | |
Receivables for Investment Securities | ||
Sold | 28,639 | |
Receivables for Accrued Income | 471 | |
Receivables for Capital Shares Issued | 4,727 | |
Other Assets | 149 | |
Total Assets | 2,723,978 | |
Liabilities | ||
Payables for Investment Securities | ||
Purchased | 2,773 | |
Collateral for Securities on Loan | 97,720 | |
Payables to Investment Advisor | 1,000 | |
Payables for Capital Shares Redeemed | 3,572 | |
Payables to Vanguard | 6,331 | |
Other Liabilities | 109 | |
Total Liabilities | 111,505 | |
Net Assets | 2,612,473 |
14
Precious Metals and Mining Fund
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 4,302,495 |
Overdistributed Net Investment Income | (143,537) |
Accumulated Net Realized Losses | (1,906,030) |
Unrealized Appreciation (Depreciation) | |
Investment Securities 5 | 359,558 |
Foreign Currencies | (13) |
Net Assets | 2,612,473 |
• 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 $88,757,000.
* Non-income-producing security.
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 $9,873,000, representing 0.4% of net assets.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
4 Includes $97,720,000 of collateral received for securities on loan.
5 Includes precious metals.
ADR—American Depositary Receipt.
PP—Private Placement.
See accompanying Notes, which are an integral part of the Financial Statements.
15
Precious Metals and Mining Fund
Statement of Operations
Year Ended | |
January 31, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 24,510 |
Interest | 294 |
Securities Lending—Net | 1,395 |
Total Income | 26,199 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 3,372 |
Performance Adjustment | 1,394 |
The Vanguard Group—Note C | |
Management and Administrative | 4,924 |
Marketing and Distribution | 469 |
Custodian Fees | 101 |
Auditing Fees | 32 |
Shareholders’ Reports | 40 |
Trustees’ Fees and Expenses | 6 |
Total Expenses | 10,338 |
Net Investment Income | 15,861 |
Realized Net Gain (Loss) | |
Investment Securities Sold | (289,061) |
Foreign Currencies | (417) |
Realized Net Gain (Loss) | (289,478) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 1,394,377 |
Foreign Currencies | 21 |
Change in Unrealized Appreciation (Depreciation) | 1,394,398 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,120,781 |
1 Dividends are net of foreign withholding taxes of $2,176,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Precious Metals and Mining Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 15,861 | 40,401 |
Realized Net Gain (Loss) | (289,478) | (134,435) |
Change in Unrealized Appreciation (Depreciation) | 1,394,398 | (655,329) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,120,781 | (749,363) |
Distributions | ||
Net Investment Income | (39,024) | (32,309) |
Realized Capital Gain | — | — |
Total Distributions | (39,024) | (32,309) |
Capital Share Transactions | ||
Issued | 1,114,214 | 631,267 |
Issued in Lieu of Cash Distributions | 36,059 | 29,970 |
Redeemed | (1,084,078) | (501,592) |
Net Increase (Decrease) from Capital Share Transactions | 66,195 | 159,645 |
Total Increase (Decrease) | 1,147,952 | (622,027) |
Net Assets | ||
Beginning of Period | 1,464,521 | 2,086,548 |
End of Period1 | 2,612,473 | 1,464,521 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($143,537,000) and ($129,612,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Precious Metals and Mining Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $6.22 | $9.59 | $10.38 | $15.46 | $22.14 |
Investment Operations | |||||
Net Investment Income | . 0661,2 | .1751,3 | .130 | .2431 | . 292 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 4.615 | (3.397) | (.920) | (5.315) | (5.962) |
Total from Investment Operations | 4.681 | (3.222) | (.790) | (5.072) | (5.670) |
Distributions | |||||
Dividends from Net Investment Income | (.161) | (.148) | — | (.007) | (.710) |
Distributions from Realized Capital Gains | — | — | — | — | (.300) |
Return of Capital | — | — | — | (.001) | — |
Total Distributions | (.161) | (.148) | — | (.008) | (1.010) |
Net Asset Value, End of Period | $10.74 | $6.22 | $9.59 | $10.38 | $15.46 |
Total Return 4 | 75.99% | -34.07% | -7.61% | -32.82% | -26.13% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,612 | $1,465 | $2,087 | $2,302 | $3,112 |
Ratio of Total Expenses to Average Net Assets5 | 0.43% | 0.35% | 0.29% | 0.25% | 0.26% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 0.65%2 | 2.22%3 | 1.33% | 2.10% | 1.62% |
Portfolio Turnover Rate | 29% | 8% | 62% | 34% | 30% |
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 $.012 and 0.12% respectively,
resulting from a special dividend from Lucara Diamond Corp. in September 2016.
3 Net investment income per share and the ratio of net investment income to average net assets include $.037 and 0.47%, respectively,
resulting from a spin-off from BHP Billiton plc in May 2015.
4 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.
5 Includes performance-based investment advisory fee increases (decreases) of 0.06%, (0.02%), (0.08%), (0.09%), and (0.07%).
See accompanying Notes, which are an integral part of the Financial Statements.
18
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 U.S. 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, 2014–2017), 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 subject to termination by the fund at any time, and 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
19
Precious Metals and Mining Fund
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 Assets and Liabilities 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, 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.
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 relative to the S&P Global Custom Metals and Mining Index for the preceding three years. For the year ended January 31, 2017, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before an increase of $1,394,000 (0.06%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $164,000, 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 employees, respectively, of Vanguard.
20
Precious Metals and Mining 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, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 2,088,783 | 436,036 | — |
Precious Metal | — | 1,999 | — |
Temporary Cash Investments | 163,010 | — | — |
Total | 2,251,793 | 438,035 | — |
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, 2017, the fund realized net foreign currency losses of $417,000, 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 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, 2017, the fund realized gains on the sale of passive foreign investment companies of $9,705,000, 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, 2017, had unrealized appreciation of $138,223,000, all of which has been distributed and is reflected in the balance of overdistributed net investment income.
For tax purposes, at January 31, 2017, the fund had $700,000 of ordinary income available for distribution. The fund had available capital losses totaling $1,906,062,000 that may be carried forward indefinitely to offset future net capital gains.
At January 31, 2017, the cost of investment securities for tax purposes was $2,468,493,000. Net unrealized appreciation of investment securities for tax purposes was $221,335,000, consisting of unrealized gains of $432,277,000 on securities that had risen in value since their purchase and $210,942,000 in unrealized losses on securities that had fallen in value since their purchase.
21
Precious Metals and Mining Fund
F. During the year ended January 31, 2017, the fund purchased $675,712,000 of investment securities and sold $672,253,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2017 | 2016 | |
Shares | Shares | |
(000) | (000) | |
Issued | 111,872 | 82,312 |
Issued in Lieu of Cash Distributions | 4,303 | 3,349 |
Redeemed | (108,532) | (67,553) |
Net Increase (Decrease) in Shares Outstanding | 7,643 | 18,108 |
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 period in securities of these companies were as follows:
Current Period Transactions | ||||||
Jan. 31, | Proceeds | Jan. 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Aguia Resources Ltd. | 1,818 | 1,144 | — | — | — | 2,373 |
Americas Silver Corp. | — | 6,529 | — | — | — | 8,048 |
Dalradian Resources Inc. | 11,725 | 17,516 | — | — | — | 46,633 |
Dominion Diamond Corp. | 86,371 | — | 13,901 | 2,695 | — | 65,235 |
Hochschild Mining plc | 34,217 | — | 69,211 | 576 | — | 83,056 |
Kaminak Gold Corp. Class A | 15,418 | 4,225 | 20,931 | — | — | NA2 |
Nevsun Resources Ltd. | 102,912 | — | 6,249 | 4,971 | — | 113,348 |
Osisko Mining Inc. | — | 18,059 | — | — | — | 24,355 |
Premier Gold Mines Ltd. | 17,783 | 6,876 | — | — | — | 32,001 |
Roxgold Inc. | 13,223 | 4,726 | — | — | — | 34,541 |
SEMAFO Inc. | 39,824 | 24,984 | — | — | — | 82,882 |
Vanguard Market Liquidity Fund | 73,121 | NA3 | NA 3 | 292 | — | 163,010 |
Total | 396,412 | 8,534 | — | 655,482 |
1 Includes net realized gain (loss) on affiliated investment securities sold of (127,288,000).
2 Not applicable—in July 2016, Kaminak Gold Corp. Class A merged into Goldcorp Inc. At January 31, 2017, 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, 2017, 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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/preciousmetalsandminingx25x1.jpg)
Special 2016 tax information (unaudited) for Vanguard Precious Metals and Mining Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of the
Internal Revenue Code.
The fund distributed $36,757,000 of qualified dividend income to shareholders during the fiscal year.
The fund designates to shareholders foreign source income of $19,487,000 and foreign taxes
paid of $2,254,000. Shareholders received more detailed information with their Form 1099-DIV
in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.
For corporate shareholders, 36.6% 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 2017. (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, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 75.99% | -11.86% | -3.83% |
Returns After Taxes on Distributions | 75.27 | -12.24 | -4.81 |
Returns After Taxes on Distributions and Sale of Fund Shares | 43.48 | -8.37 | -2.14 |
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, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Precious Metals and Mining Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | $1,000.00 | $868.93 | $1.97 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.03 | 2.14 |
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 0.42%. 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 (184/366).
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.
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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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 | |
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This material may be used in conjunction | |
with the offering of shares of any Vanguard | |
fund only if preceded or accompanied by | |
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All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
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also available from the SEC’s website, sec.gov. In | |
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You can review and copy information about your fund at | |
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Q530 032017 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/healthcarefundx1x1.jpg)
Annual Report | January 31, 2017
Vanguard Health Care Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Advisor’s Report. | 7 |
Fund Profile. | 11 |
Performance Summary. | 13 |
Financial Statements. | 15 |
Your Fund’s After-Tax Returns. | 29 |
About Your Fund’s Expenses. | 30 |
Glossary. | 32 |
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2017, Vanguard Health Care Fund returned 2.71% for Investor Shares and 2.76% for Admiral Shares. The fund’s results trailed the return of the MSCI All Country World Health Care Index (+3.27%) and the average return of peer funds (+3.13%).
• Health care stocks were among the period’s weaker performers, as investor concerns about drug pricing took a toll on the sector.
• The fund was hurt by a sharp slide in certain pharmaceutical stocks, while strong returns from its health insurance holdings boosted results.
• For the ten years ended January 31, 2017, the Health Care Fund posted an average annual return of about 10%, well ahead of its comparative standards.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard Health Care Fund | |
Investor Shares | 2.71% |
Admiral™ Shares | 2.76 |
MSCI All Country World Health Care Index | 3.27 |
Global Health/Biotechnology Funds Average | 3.13 |
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. |
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
Health Care Fund Investor Shares | 10.22% |
Spliced Health Care Index | 7.74 |
Global Health/Biotechnology Funds Average | 8.60 |
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.
1
Expense Ratios | |||
Your Fund Compared With Its Peer Group | |||
Investor | Admiral | Peer Group | |
Shares | Shares | Average | |
Health Care Fund | 0.36% | 0.31% | 1.31% |
The fund expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratios were 0.37% for Investor Shares and 0.32% 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 2016.
Peer group: Global Health/Biotechnology Funds.
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/healthcarefundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
3
In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
4
The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/healthcarefundx7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
5
read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/healthcarefundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
6
Advisor’s Report
For the fiscal year ended January 31, 2017, Vanguard Health Care Fund returned 2.71% for Investor Shares and 2.76% for Admiral Shares. It underperformed the 3.27% return of its benchmark, the MSCI All Country World Health Care Index, and the 3.13% average return of global health/ biotechnology funds.
The investment environment
We view the health care sector through a custom lens of subsectors. We combine biotechnology and pharmaceuticals and think of them in terms of capitalization: biopharma small-cap, biopharma mid-cap, and biopharma large-cap. The other subsectors are health care services and medical technology.
For the year, the medical technology subsector was the top performer for the benchmark. Health care services came in second, and biopharma mid-caps also posted positive returns. Biopharma small-and large-caps, on the other hand, declined.
Negative sentiment and, in a handful of instances, disappointing clinical trial results pushed biopharmaceuticals down during the period. The backlash over high drug prices took a toll on the sector, with small-cap biotech companies hit particularly hard. The uncertainty leading up to the U.S. election and the subsequent lack of clarity surrounding President Trump’s health care views drove volatility broadly across the health care sector.
Major Portfolio Changes | |
Year Ended January 31, 2017 | |
Additions | Comments |
Genmab A/S | Genmab, a mid-cap biopharmaceutical company headquartered in |
Denmark, discovered a groundbreaking therapy for multiple myeloma. | |
The therapy is approved for late-stage cancers but is currently being | |
tested in clinical trials for additional multiple myeloma regimens, as | |
well as for use in combination with immuno-oncology agents for | |
solid tumors. This drug is marketed by Johnson & Johnson and to a | |
large degree will determine the growth of that company. We believe | |
Genmab is a more attractive way to play this growth. | |
Samsung BioLogics, Aspen Pharmacare, | All of these are biopharmaceutical companies located in emerging |
Shanghai Fosun Pharmaceuticals, and | markets, and all were new purchases. After a long period of |
Sino Biopharmaceutical | underperformance for emerging markets, and because of the |
positive fundamentals of these companies, we initiated exposure | |
to this growing part of the world. | |
Reductions | Comments |
CVS Health | In the first half of the fiscal year, we eliminated CVS Health from |
the fund at what we believe was a fair valuation. |
7
Our successes
Stock selection was strongest within three subsectors: biopharma mid-cap, biopharma small-cap, and medical technology. Underweighting large-cap biopharmaceuticals and overweighting health care services helped results, as did underweighting developed Europe outside of the United Kingdom.
Among our mid-cap biopharmaceutical holdings, Incyte stood out, returning about 74%. Positive phase 3 results for its rheumatoid arthritis drug baricitinib, along with clinical progress made on its promising immuno-oncology agent epacadostat, lifted the stock. Alkermes also performed well. In October, the company reported positive phase 3 data for its novel depression drug ALKS-5461—welcome news after the mixed data disclosed early in 2016. We own Alkermes for its underappreciated pipeline of drugs for central nervous system disorders, including depression, schizophrenia, and addiction. Our avoidance of certain stocks, including Valeant Pharmaceuticals, further boosted our relative results in the subsector.
In small-cap biopharmaceuticals, shares of Prothena surged on continued positive advancement for the company’s lead drug for AL amyloidosis. As with the mid-cap biopharmaceuticals, our decision to avoid certain stocks helped relative performance here.
In medical technology, our large position in Boston Scientific outperformed. The company consistently reported strong quarterly results across its portfolio during the year, and it also provided a long-term path to increased operating leverage.
Standout performer UnitedHealth Group helped the fund as well. The managed-care leader posted steady financial results throughout the period, and its December investor day showcased its best-in-class diversified benefits platform. In a health care world increasingly focused on lowering costs, improving transparency, and aligning incentives, UnitedHealth Group is well-positioned to thrive—and became even more so with the failure of competitive mergers. Our third-largest position, UnitedHealth Group remains a high-conviction holding.
Our shortfalls
Our stock selection was weak in the large-cap biopharmaceutical subsector. In addition, our underweighting of medical technology and our cash position (roughly 3% of assets) pulled down relative performance modestly.
Within large-cap biopharmaceuticals, relative results were most hindered by our positions in Allergan, Bristol-Myers Squibb, and Mylan, and our avoidance of Johnson & Johnson (a strong performer in the benchmark).
Allergan weakened when its proposed merger with Pfizer unraveled after the U.S. Treasury changed its inversion standards. Its stand-alone pipeline and growth prospects remain attractive, however,
8
and we continue to hold a large position. Bristol-Myers Squibb declined after the company announced that CheckMate -026 (a phase 3 clinical trial investigating the use of Opdivo as first-line monotherapy for lung cancer) did not meet its primary endpoint. We believe that trial design caused the negative outcome and that the results, while a competitive setback, do not affect the longer-term potential of the firm’s immuno-oncology franchise.
Mylan performed poorly in the wake of public scrutiny about its EpiPen pricing. We still find the firm attractive, however, because of its leading generics and biosimilars pipeline. We continue to hold the stock and look forward to some important approvals and launches in the coming year.
The fund’s positioning
We currently hold about 21% of the fund’s assets in non-U.S. investments, a level that has remained fairly stable over recent years. Our non-U.S. holdings are primarily domiciled in Japan, the United Kingdom, Switzerland, Belgium, Israel, and Denmark, but many of our holdings operate globally. We believe this strategy provides diversification for the fund’s shareholders over the long term.
The portfolio consists of 75 companies across all subsectors of health care. This figure is down slightly from a year ago (when we held 79 names); the reduction reflects the consolidating that we did during a period of intense volatility. At the period’s close, the fund’s ten largest holdings represented a significant portion—about 45%—of its assets. The fund’s annualized turnover rate as of the end of January (about 12%) is within our normal range, but that rate may increase modestly when opportunities arise. We expect turnover to remain quite low.
Biopharmaceutical innovation, an aging population, and growth from developing markets make the health care sector an attractive longer-term investment. Offsetting these powerful tailwinds is the issue of the affordability of health care, which has raised the bar from both a regulatory and a reimbursement standpoint. Because of this, it’s more crucial than ever that we stay true to our disciplined investment process and seek companies dedicated to groundbreaking innovation or the provision of value—that is, high-quality health care at a lower cost. We believe that while some companies will clearly thrive in this environment, others will struggle to meet ever-increasing standards of performance. The likely result will be increased divergence in the performance of health care stocks—which will make for an attractive environment for dedicated health care investors.
Although the sector will continue to face an overhang from Washington politics in the near term, we still expect innovation to generate strong returns globally. We also expect that, despite calls for a full repeal of the Affordable Care Act, the United States will provide insurance for the population, albeit with different funding mechanisms than those in place over the last few years.
9
A core tenet of our philosophy is the importance of using a longer-term horizon to evaluate secular themes and health care trends, as well as individual companies, on a global scale. Doing this should allow us to identify pockets of opportunity in the health care sector that are best positioned to create value and generate sustainable, innovation-driven, differentiated growth. We will remain diversified across subsectors and regions, focused on the long haul, and positioned in what we believe to be the most attractive stocks as we seek to generate strong risk-adjusted returns.
As always, we thank you very much for your continued confidence and support as an investor in Vanguard Health Care Fund.
Jean M. Hynes, CFA
Senior Managing Director and
Portfolio Manager
Wellington Management Company llp
February 17, 2017
10
Health Care Fund
Fund Profile
As of January 31, 2017
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGHCX | VGHAX |
Expense Ratio1 | 0.36% | 0.31% |
30-Day SEC Yield | 1.11% | 1.16% |
Portfolio Characteristics | |||
MSCI | DJ | ||
ACWI | U.S. Total | ||
Health | Market | ||
Fund | Care | FA Index | |
Number of Stocks | 76 | 170 | 3,825 |
Median Market Cap | $40.5B | $82.1B | $56.7B |
Price/Earnings Ratio | 26.6x | 21.4x | 24.1x |
Price/Book Ratio | 3.2x | 3.5x | 2.9x |
Return on Equity | 11.7% | 18.1% | 16.4% |
Earnings Growth | |||
Rate | 4.2% | 8.9% | 8.5% |
Dividend Yield | 1.5% | 2.1% | 1.9% |
Foreign Holdings | 21.2% | 39.5% | 0.0% |
Turnover Rate | 12% | — | — |
Short-Term Reserves | 2.4% | — | — |
Volatility Measures | ||
MSCI | DJ | |
ACWI | U.S. Total | |
Health | Market | |
Care | FA Index | |
R-Squared | 0.91 | 0.56 |
Beta | 1.04 | 0.93 |
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) | ||
Allergan plc | Pharmaceuticals | 6.3% |
Bristol-Myers Squibb Co. Pharmaceuticals | 6.1 | |
UnitedHealth Group Inc. | Managed Health | |
Care | 5.7 | |
Merck & Co. Inc. | Pharmaceuticals | 4.9 |
Eli Lilly & Co. | Pharmaceuticals | 4.9 |
AstraZeneca plc | Pharmaceuticals | 4.2 |
Medtronic plc | Health Care | |
Equipment | 3.3 | |
Incyte Corp. | Biotechnology | 2.9 |
Regeneron | ||
Pharmaceuticals Inc. | Biotechnology | 2.8 |
Mylan NV | Pharmaceuticals | 2.6 |
Top Ten | 43.7% | |
The holdings listed exclude any temporary cash investments and equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2017, the expense ratios were 0.37% for Investor Shares and 0.32% for Admiral Shares.
11
Health Care Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Health | ||
Fund | Care | |
Biotechnology | 14.9% | 17.5% |
Consumer Staples | 1.6 | 0.0 |
Health Care Distributors | 3.8 | 2.5 |
Health Care Equipment | 10.3 | 13.5 |
Health Care Facilities | 3.9 | 1.6 |
Health Care Services | 0.8 | 3.6 |
Health Care Supplies | 0.4 | 1.9 |
Health Care Technology | 3.1 | 0.5 |
Life Sciences Tools & Services | 3.5 | 3.7 |
Managed Health Care | 11.7 | 7.5 |
Pharmaceuticals | 46.0 | 47.7 |
Market Diversification (% of equity exposure) | |
Europe | |
United Kingdom | 5.1% |
Switzerland | 4.2 |
Belguim | 1.9 |
Other | 0.7 |
Subtotal | 11.9% |
Pacific | |
Japan | 8.8% |
Other | 0.1 |
Subtotal | 8.9% |
Emerging Markets | 0.2% |
North America | |
United States | 78.1% |
Middle East | 0.9% |
12
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, 2007, Through January 31, 2017
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2017 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Health Care Fund Investor Shares | 2.71% | 16.84% | 10.22% | $26,460 | |
• • • • • • • • | Spliced Health Care Index | 3.27 | 13.30 | 7.74 | 21,083 |
– – – – | Global Health/Biotechnology Funds Average | 3.13 | 15.55 | 8.60 | 22,814 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 | |
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 | 2.76% | 16.90% | 10.28% | $133,038 |
Spliced Health Care Index | 3.27 | 13.30 | 7.74 | 105,414 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 100,058 |
See Financial Highlights for dividend and capital gains information.
13
Health Care Fund
Fiscal-Year Total Returns (%): January 31, 2007, Through January 31, 2017
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2016
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 | -8.99% | 16.78% | 10.22% |
Admiral Shares | 11/12/2001 | -8.94 | 16.84 | 10.29 |
14
Health Care Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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 (97.5%) | |||
United States (76.2%) | |||
Biotechnology (13.9%) | |||
*,1 | Incyte Corp. | 10,306,508 | 1,249,252 |
* | Regeneron | ||
Pharmaceuticals Inc. | 3,425,550 | 1,230,766 | |
*,1 | Vertex | ||
Pharmaceuticals Inc. | 13,230,341 | 1,136,089 | |
* | Biogen Inc. | 3,841,803 | 1,065,102 |
*,1 | Alkermes plc | 8,694,176 | 470,442 |
*,^,1Alnylam | |||
Pharmaceuticals Inc. | 8,549,357 | 341,889 | |
*,^,1Agios | |||
Pharmaceuticals Inc. | 3,581,634 | 154,118 | |
Amgen Inc. | 696,572 | 109,139 | |
*,^ | Ionis Pharmaceuticals Inc. | 2,397,300 | 106,680 |
*,^,1 Prothena Corp. plc | 2,150,294 | 105,278 | |
* | Ironwood | ||
Pharmaceuticals Inc. | |||
Class A | 4,533,887 | 65,197 | |
6,033,952 | |||
Food & Staples Retailing (1.5%) | |||
Walgreens Boots | |||
Alliance Inc. | 8,048,160 | 659,466 | |
Health Care Equipment & Supplies (9.5%) | |||
Medtronic plc | 19,045,523 | 1,447,841 | |
* | Boston Scientific Corp. | 42,463,169 | 1,021,664 |
Abbott Laboratories | 17,608,199 | 735,495 | |
Stryker Corp. | 1,654,500 | 204,380 | |
Becton Dickinson and Co. | 992,573 | 175,973 | |
Baxter International Inc. | 3,094,340 | 148,250 | |
* | Hologic Inc. | 3,538,200 | 143,403 |
* | Intuitive Surgical Inc. | 186,869 | 129,442 |
Dentsply Sirona Inc. | 1,904,590 | 107,990 | |
4,114,438 |
Health Care Providers & Services (19.7%) | |||
UnitedHealth Group Inc. | 15,327,374 | 2,484,567 | |
Cigna Corp. | 7,804,631 | 1,141,193 | |
McKesson Corp. | 8,157,400 | 1,135,102 | |
* | HCA Holdings Inc. | 12,087,883 | 970,415 |
Aetna Inc. | 5,828,889 | 691,365 | |
Universal Health Services | |||
Inc. Class B | 4,527,240 | 509,903 | |
Cardinal Health Inc. | 6,324,531 | 474,087 | |
Anthem Inc. | 2,666,933 | 411,081 | |
* | Envision Healthcare Corp. | 4,723,860 | 321,223 |
* | WellCare Health Plans Inc. | 1,061,400 | 154,476 |
*,^ | Acadia Healthcare Co. Inc. | 3,698,655 | 141,918 |
Humana Inc. | 215,600 | 42,797 | |
* | Centene Corp. | 668,300 | 42,283 |
* | LifePoint Health Inc. | 341,100 | 20,244 |
* | Community Health | ||
Systems Inc. CVR | 18,834,700 | 98 | |
8,540,752 | |||
Health Care Technology (3.1%) | |||
* | Cerner Corp. | 16,918,530 | 908,694 |
*,^,1athenahealth Inc. | 2,294,365 | 289,067 | |
*,1 | Allscripts Healthcare | ||
Solutions Inc. | 11,198,893 | 131,139 | |
1,328,900 | |||
Life Sciences Tools & Services (3.3%) | |||
Thermo Fisher Scientific | |||
Inc. | 3,721,300 | 567,089 | |
* | Illumina Inc. | 2,948,379 | 472,035 |
* | Quintiles IMS Holdings | ||
Inc. | 2,844,677 | 223,279 | |
Agilent Technologies Inc. | 1,889,350 | 92,521 | |
* | PAREXEL International | ||
Corp. | 1,108,785 | 78,602 | |
1,433,526 |
15
Health Care Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Pharmaceuticals (25.2%) | |||
* | Allergan plc | 12,454,439 | 2,726,152 |
Bristol-Myers Squibb | |||
Co. | 53,574,317 | 2,633,714 | |
Merck & Co. Inc. | 34,284,418 | 2,125,291 | |
Eli Lilly & Co. | 27,339,210 | 2,105,939 | |
*,1 | Mylan NV | 30,084,537 | 1,144,717 |
*,^,1Medicines Co. | 5,564,220 | 200,590 | |
10,936,403 | |||
Total United States | 33,047,437 | ||
International (21.3%) | |||
Belgium (1.8%) | |||
1 | UCB SA | 11,342,503 | 783,433 |
China (0.1%) | |||
Sino Biopharmaceutical | |||
Ltd. | 31,970,000 | 25,093 | |
Shanghai Fosun | |||
Pharmaceutical Group | |||
Co. Ltd. | 7,193,000 | 23,863 | |
48,956 | |||
Denmark (0.7%) | |||
* | Genmab A/S | 811,958 | 157,244 |
* | H Lundbeck A/S | 3,104,915 | 133,353 |
290,597 | |||
Israel (0.8%) | |||
Teva Pharmaceutical | |||
Industries Ltd. ADR | 11,039,400 | 369,047 | |
Japan (8.6%) | |||
1 | Eisai Co. Ltd. | 15,038,875 | 828,954 |
Shionogi & Co. Ltd. | 14,932,054 | 719,161 | |
Chugai Pharmaceutical | |||
Co. Ltd. | 16,188,700 | 475,763 | |
Astellas Pharma Inc. | 34,367,700 | 461,275 | |
Takeda Pharmaceutical | |||
Co. Ltd. | 10,581,700 | 443,221 | |
Ono Pharmaceutical | |||
Co. Ltd. | 18,388,760 | 377,269 | |
Olympus Corp. | 5,944,700 | 205,653 | |
Kyowa Hakko Kirin | |||
Co. Ltd. | 6,291,000 | 85,190 | |
Nippon Shinyaku Co. Ltd. | 1,318,400 | 68,560 | |
Daiichi Sankyo Co. Ltd. | 2,116,100 | 47,344 | |
3,712,390 | |||
South Africa (0.1%) | |||
Aspen Pharmacare Holdings | |||
Ltd. | 1,140,383 | 26,090 | |
South Korea (0.1%) | |||
* | Samsung Biologics Co. Ltd. | 241,834 | 33,504 |
Switzerland (4.1%) | ||
Novartis AG | 11,522,964 | 850,712 |
Roche Holding AG | 2,994,934 | 709,645 |
Actelion Ltd. | 478,519 | 124,938 |
Roche Holding AG (Bearer) | 376,066 | 90,627 |
1,775,922 | ||
United Kingdom (5.0%) | ||
AstraZeneca plc | 34,360,301 | 1,823,474 |
Hikma Pharmaceuticals | ||
plc | 7,155,385 | 164,812 |
Smith & Nephew plc | 8,976,157 | 134,281 |
*,2 ConvaTec Group plc | 14,905,700 | 46,017 |
2,168,584 | ||
Total International | 9,208,523 | |
Total Common Stocks | ||
(Cost $28,544,987) | 42,255,960 | |
Temporary Cash Investments (2.6%) | ||
Money Market Fund (0.2%) | ||
3,4 Vanguard Market | ||
Liquidity Fund, 0.856% | 880,028 | 88,012 |
Face | ||
Amount | ||
($000) | ||
Repurchase Agreements (0.9%) | ||
Bank of America Securities, | ||
LLC 0.540%, 2/1/17 (Dated | ||
1/31/17, Repurchase Value | ||
$8,400,000, collateralized | ||
by Government National | ||
Mortgage Assn. 3.500%, | ||
1/20/47, with a value of | ||
$8,568,000) | 8,400 | 8,400 |
Bank of Nova Scotia | ||
0.540%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $104,802,000, | ||
collateralized by U.S. | ||
Treasury Note/Bond | ||
0.875%–8.500%, | ||
3/31/18–1/31/23, with | ||
a value of $106,898,000) | 104,800 | 104,800 |
Barclays Capital Inc. | ||
0.530%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $36,801,000, | ||
collateralized by U.S. | ||
Treasury Note/Bond | ||
6.250%, 8/15/23, with | ||
a value of $37,536,000) | 36,800 | 36,800 |
16
Health Care Fund
Face | Market | |
Amount | Value• | |
($000) | ($000) | |
BNP Paribas Securities Corp. | ||
0.560%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $71,501,000, | ||
collateralized by Federal | ||
Home Loan Mortgage | ||
Corp. 2.148%–4.000%, | ||
11/1/35–11/1/46, Federal | ||
National Mortgage Assn. | ||
2.453%–6.000%, | ||
5/1/21–1/1/47, and | ||
Government National | ||
Mortgage Assn. | ||
2.000%–3.500%, | ||
6/20/25–7/20/46, with | ||
a value of $72,930,000) | 71,500 | 71,500 |
HSBC Securities USA | ||
0.520%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $81,501,000, | ||
collateralized by Federal | ||
National Mortgage Assn. | ||
2.500%, 1/1/28, with a | ||
value of $83,134,000) | 81,500 | 81,500 |
RBC Capital Markets LLC | ||
0.530%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $14,200,000, | ||
collateralized by Federal | ||
National Mortgage Assn. | ||
2.356%–3.500%, | ||
4/1/40–1/1/47, with | ||
a value of $14,484,000) | 14,200 | 14,200 |
Wells Fargo & Co. 0.550%, | ||
2/1/17 (Dated 1/31/17, | ||
Repurchase Value | ||
$64,501,000, collateralized | ||
by Federal Home Loan | ||
Mortgage Corp. 3.500%, | ||
12/1/46, with a value of | ||
$65,790,000) | 64,500 | 64,500 |
381,700 |
U.S. Government and Agency Obligations (1.0%) | |||
5 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.521%, 2/22/17 | 125,000 | 124,962 | |
5 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.531%, 4/17/17 | 125,000 | 124,859 | |
5 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.547%, 4/21/17 | 125,000 | 124,851 | |
5 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.551%, 4/26/17 | 50,000 | 49,937 | |
424,609 | |||
Commercial Paper (0.5%) | |||
GE Capital Treasury Services | |||
US LLC, 0.802%, 4/20/17 | 75,000 | 74,843 | |
GE Capital Treasury Services | |||
US LLC, 0.094%, 12/7/17 | 75,000 | 74,990 | |
Microsoft Corp., 0.862%, | |||
3/14/17 | 86,100 | 86,015 | |
235,848 | |||
Total Temporary Cash Investments | |||
(Cost $1,130,146) | 1,130,169 | ||
Total Investments (100.1%) | |||
(Cost $29,675,133) | 43,386,129 | ||
Other Assets and Liabilities (-0.1%) | |||
Other Assets | 210,381 | ||
Liabilities 4 | (244,973) | ||
(34,592) | |||
Net Assets (100%) | 43,351,537 |
17
Health Care Fund
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 36,463,149 |
Affiliated Vanguard Funds | 88,012 |
Other Affiliated Issuers | 6,834,968 |
Total Investments in Securities | 43,386,129 |
Investment in Vanguard | 3,163 |
Receivables for Investment | |
Securities Sold | 142,013 |
Receivables for Accrued Income | 55,034 |
Receivables for Capital Shares Issued | 9,571 |
Other Assets | 600 |
Total Assets | 43,596,510 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 29,978 |
Collateral for Securities on Loan | 88,011 |
Payables to Investment Advisor | 20,872 |
Payables for Capital Shares Redeemed | 50,183 |
Payables to Vanguard | 55,929 |
Total Liabilities | 244,973 |
Net Assets | 43,351,537 |
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 28,498,174 |
Overdistributed Net Investment Income | (107,645) |
Accumulated Net Realized Gains | 1,250,191 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 13,710,996 |
Foreign Currencies | (179) |
Net Assets | 43,351,537 |
Investor Shares—Net Assets | |
Applicable to 50,748,578 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 9,636,233 |
Net Asset Value Per Share— | |
Investor Shares | $189.88 |
Admiral Shares—Net Assets | |
Applicable to 420,975,801 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 33,715,304 |
Net Asset Value Per Share— | |
Admiral Shares | $80.09 |
• 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 $97,459,000.
1 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
2 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, 2017, the value of this security represented 0.1% of net assets.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
4 Includes $88,011,000 of collateral received for securities on loan. The fund received additional collateral of $12,147,000 on the next
business day.
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.
ADR—American Depositary Receipt.
CVR—Contingent Value Rights.
See accompanying Notes, which are an integral part of the Financial Statements.
18
Health Care Fund
Statement of Operations
Year Ended | |
January 31, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 624,067 |
Interest | 5,579 |
Securities Lending—Net | 2,275 |
Total Income | 631,921 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 67,424 |
Performance Adjustment | 17,703 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 17,611 |
Management and Administrative—Admiral Shares | 47,491 |
Marketing and Distribution—Investor Shares | 2,114 |
Marketing and Distribution—Admiral Shares | 2,158 |
Custodian Fees | 891 |
Auditing Fees | 36 |
Shareholders’ Reports—Investor Shares | 202 |
Shareholders’ Reports—Admiral Shares | 111 |
Trustees’ Fees and Expenses | 78 |
Total Expenses | 155,819 |
Net Investment Income | 476,102 |
Realized Net Gain (Loss) | |
Investment Securities Sold | 3,505,847 |
Foreign Currencies | (3,793) |
Realized Net Gain (Loss) | 3,502,054 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | (2,691,927) |
Foreign Currencies | 3,198 |
Change in Unrealized Appreciation (Depreciation) | (2,688,729) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,289,427 |
1 Dividends are net of foreign withholding taxes of $19,642,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
19
Health Care Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 476,102 | 449,895 |
Realized Net Gain (Loss) | 3,502,054 | 3,464,015 |
Change in Unrealized Appreciation (Depreciation) | (2,688,729) | (3,823,799) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,289,427 | 90,111 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (91,432) | (137,657) |
Admiral Shares | (337,537) | (466,453) |
Realized Capital Gain1 | ||
Investor Shares | (710,003) | (811,843) |
Admiral Shares | (2,437,191) | (2,604,058) |
Total Distributions | (3,576,163) | (4,020,011) |
Capital Share Transactions | ||
Investor Shares | (780,048) | 67,555 |
Admiral Shares | (1,103,458) | 5,352,587 |
Net Increase (Decrease) from Capital Share Transactions | (1,883,506) | 5,420,142 |
Total Increase (Decrease) | (4,170,242) | 1,490,242 |
Net Assets | ||
Beginning of Period | 47,521,779 | 46,031,537 |
End of Period2 | 43,351,537 | 47,521,779 |
1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $132,789,000 and $416,632,000, 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 ($107,645,000) and ($120,376,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
20
Health Care Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $200.67 | $216.14 | $191.63 | $152.58 | $131.96 |
Investment Operations | |||||
Net Investment Income | 2.039 | 1.934 | 2.941 | 2.350 | 2.777 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 2.951 | .566 | 49.127 | 53.058 | 22.791 |
Total from Investment Operations | 4.990 | 2.500 | 52.068 | 55.408 | 25.568 |
Distributions | |||||
Dividends from Net Investment Income | (1.854) | (2.611) | (2.115) | (2.357) | (2.757) |
Distributions from Realized Capital Gains | (13.926) | (15.359) | (25.443) | (14.001) | (2.191) |
Total Distributions | (15.780) | (17.970) | (27.558) | (16.358) | (4.948) |
Net Asset Value, End of Period | $189.88 | $200.67 | $216.14 | $191.63 | $152.58 |
Total Return1 | 2.71% | 0.49% | 28.15% | 37.66% | 19.59% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $9,636 | $10,916 | $11,660 | $9,905 | $8,681 |
Ratio of Total Expenses to Average Net Assets2 | 0.37% | 0.36% | 0.34% | 0.35% | 0.35% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 0.98% | 0.84% | 1.44% | 1.33% | 1.94% |
Portfolio Turnover Rate | 12% | 18% | 20% | 21% | 8% |
1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of 0.04% for fiscal 2017 and 0.02% for fiscal 2016.
Performance-based investment advisory fees did not apply before fiscal 2016.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Health Care Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $84.64 | $91.17 | $80.84 | $64.37 | $55.68 |
Investment Operations | |||||
Net Investment Income | .908 | .868 | 1.290 | 1.040 | 1.211 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 1.244 | .236 | 20.715 | 22.378 | 9.605 |
Total from Investment Operations | 2.152 | 1.104 | 22.005 | 23.418 | 10.816 |
Distributions | |||||
Dividends from Net Investment Income | (.828) | (1.155) | (.942) | (1.042) | (1.201) |
Distributions from Realized Capital Gains | (5.874) | (6.479) | (10.733) | (5.906) | (.925) |
Total Distributions | (6.702) | (7.634) | (11.675) | (6.948) | (2.126) |
Net Asset Value, End of Period | $80.09 | $84.64 | $91.17 | $80.84 | $64.37 |
Total Return1 | 2.76% | 0.54% | 28.20% | 37.74% | 19.65% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $33,715 | $36,606 | $34,371 | $24,821 | $16,002 |
Ratio of Total Expenses to Average Net Assets2 | 0.32% | 0.31% | 0.29% | 0.30% | 0.30% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.03% | 0.89% | 1.49% | 1.38% | 1.99% |
Portfolio Turnover Rate | 12% | 18% | 20% | 21% | 8% |
1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of 0.04% for fiscal 2017 and 0.02% for fiscal 2016.
Performance-based investment advisory fees did not apply before fiscal 2016.
See accompanying Notes, which are an integral part of the Financial Statements.
22
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 are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. 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, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. 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.
23
Health Care Fund
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, 2014–2017), 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.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, or at any time during the period then ended.
8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
24
Health Care 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. 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 relative to the MSCI ACWI Health Care Index since April 30, 2014. For the year ended January 31, 2017, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before an increase of $17,703,000 (0.04%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $3,163,000, representing 0.01% of the fund’s net assets and 1.27% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—United States | 33,047,437 | — | — |
Common Stocks—International | 369,047 | 8,839,476 | — |
Temporary Cash Investments | 88,012 | 1,042,157 | — |
Total | 33,504,496 | 9,881,633 | — |
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Health Care Fund
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.
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 $30,609,000 from overdistributed net investment income, and $224,984,000 from accumulated net realized gains to paid-in capital.
The fund used capital loss carryforwards of $24,288,000 to offset taxable capital gains realized during the year ended January 31, 2017, reducing the amount of capital gains that would otherwise be available to distribute to shareholders. For tax purposes, at January 31, 2017, the fund had $164,396,000 of ordinary income and $1,099,888,000 of long-term capital gains available for distribution.
At January 31, 2017, the cost of investment securities for tax purposes was $29,744,138,000. Net unrealized appreciation of investment securities for tax purposes was $13,641,991,000, consisting of unrealized gains of $15,270,899,000 on securities that had risen in value since their purchase and $1,628,908,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2017, the fund purchased $5,532,491,000 of investment securities and sold $10,122,104,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were: | ||||
Year Ended January 31, | ||||
2017 | 2016 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 1,313,938 | 6,581 | 2,981,987 | 13,073 |
Issued in Lieu of Cash Distributions | 760,856 | 4,044 | 905,320 | 4,073 |
Redeemed | (2,854,842) | (14,276) | (3,819,752) | (16,695) |
Net Increase (Decrease)—Investor Shares | (780,048) | (3,651) | 67,555 | 451 |
Admiral Shares | ||||
Issued | 2,173,067 | 25,669 | 5,917,072 | 61,196 |
Issued in Lieu of Cash Distributions | 2,517,721 | 31,739 | 2,816,045 | 30,054 |
Redeemed | (5,794,246) | (68,911) | (3,380,530) | (35,758) |
Net Increase (Decrease)—Admiral Shares | (1,103,458) | (11,503) | 5,352,587 | 55,492 |
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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 period in securities of these companies were as follows:
Current Period Transactions | ||||||
Jan. 31, | Proceeds | Jan. 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Agios Pharmaceuticals Inc. | 107,433 | 39,639 | — | — | — | 154,118 |
Alkermes plc | 260,756 | 19,123 | — | — | — | 470,442 |
Allscripts Healthcare | ||||||
Solutions Inc. | 154,321 | — | — | — | — | 131,139 |
Alnylam Pharmaceuticals Inc. | 583,564 | 4,384 | — | — | — | 341,889 |
athenahealth Inc. | NA2 | 45,236 | — | — | — | 289,067 |
Cerner Corp. | NA3 | 34,061 | 11,460 | — | — | NA3 |
Eisai Co. Ltd. | NA2 | 121,688 | — | 17,099 | — | 828,954 |
Envision Healthcare Corp. | NA3,4 | 84,462 | — | — | — | NA3,4 |
Incyte Corp. | 953,139 | 177,331 | 611,053 | — | — | 1,249,252 |
Medicines Co. | 192,299 | — | — | — | — | 200,590 |
Mylan NV | NA 2 | 243,180 | 7,248 | — | — | 1,144,717 |
Prothena Corp. plc | NA2 | 17,203 | — | — | — | 105,278 |
UCB SA | 914,626 | 46,090 | — | 11,453 | — | 783,433 |
Vanguard Market | ||||||
Liquidity Fund | 12,794 | NA 5 | NA5 | — | — | 88,012 |
Vertex Pharmaceuticals Inc. | NA2 | 152,751 | — | — | — | 1,136,089 |
Total | 3,178,932 | 28,552 | — | 6,922,980 |
1 Includes net realized gain (loss) on affiliated investment securities sold of $151,973,000.
2 Not applicable—at January 31, 2016, the issuer was not an affiliated company of the fund.
3 Not applicable—at January 31, 2016, and January 31, 2017, the issuer was not an affiliated company of the fund, but it was affiliated
during the year.
4 Not applicable—in December 2016, Envision Healthcare Corp. merged with Envision Healthcare Holdings Inc. and AmSurg.
5 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, 2017, 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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/healthcarefundx30x1.jpg)
Special 2016 tax information (unaudited) for Vanguard Health Care Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of
the Internal Revenue Code.
The fund distributed $3,219,831,000 as capital gain dividends (20% rate gain distributions) 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 $561,757,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 46.3% 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 2017. (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, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 2.71% | 16.84% | 10.22% |
Returns After Taxes on Distributions | 0.76 | 14.61 | 8.63 |
Returns After Taxes on Distributions and Sale of Fund Shares | 3.06 | 13.41 | 8.17 |
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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, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Health Care Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $925.31 | $1.79 |
Admiral Shares | 1,000.00 | 925.59 | 1.55 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.28 | $1.88 |
Admiral Shares | 1,000.00 | 1,023.53 | 1.63 |
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 0.32% 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 (184/366).
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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 | 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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2017 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q520 032017 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx1x1.jpg)
Annual Report | January 31, 2017
Vanguard REIT Index Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2017, Vanguard REIT Index Fund returned 12.07% for Investor Shares. Returns for ETF, Admiral, and Institutional Shares were a bit higher. The results were in line with the fund’s benchmark index and exceeded that of its peer group.
• Small-capitalization stocks outperformed large- and mid-cap stocks in the broad U.S. market, while value stocks outpaced growth.
• Real estate investment trusts (REITs) underperformed the broad market. After a strong six-month advance, REITs gave back much of those gains in the second half of the period but still generated double-digit returns.
• The largest contributor to the fund’s return was office REITs (+23%). Hotel and resort REITs (+35%) posted the highest nominal return. Industrial REITs (+29%) and diversified REITs (+23%) also did well. The largest subsector, retail REITs, returned only 1% as online shopping’s growth continued to hurt brick-and-mortar stores.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard REIT Index Fund | |
Investor Shares | 12.07% |
ETF Shares | |
Market Price | 12.29 |
Net Asset Value | 12.25 |
Admiral™ Shares | 12.23 |
Institutional Shares | 12.23 |
MSCI US REIT Index | 12.34 |
Real Estate Funds Average | 11.15 |
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.
1
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
REIT Index Fund Investor Shares | 4.23% |
REIT Spliced Index | 4.34 |
Real Estate Funds Average | 3.23 |
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.
Expense Ratios | |||||
Your Fund Compared With Its Peer Group | |||||
Investor | ETF | Admiral | Institutional | Peer Group | |
Shares | Shares | Shares | Shares | Average | |
REIT Index Fund | 0.26% | 0.12% | 0.12% | 0.10% | 1.28% |
The fund expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratios were 0.26% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral
Shares, and 0.10% for Institutional Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters
Company, and captures information through year-end 2016.
Peer group: Real Estate Funds.
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
3
In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
4
The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
5
read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
6
REIT Index Fund
Fund Profile
As of January 31, 2017
Share-Class Characteristics | ||||
Investor | Admiral | Institutional | ||
Shares | ETF Shares | Shares | Shares | |
Ticker Symbol | VGSIX | VNQ | VGSLX | VGSNX |
Expense Ratio1 | 0.26% | 0.12% | 0.12% | 0.10% |
Portfolio Characteristics | |||
DJ | |||
U.S. | |||
Total | |||
Market | |||
MSCI US | FA | ||
Fund | REIT Index | Index | |
Number of Stocks | 157 | 155 | 3,825 |
Median Market Cap | $10.0B | $10.0B | $56.7B |
Price/Earnings Ratio | 28.1x | 28.1x | 24.1x |
Price/Book Ratio | 2.3x | 2.3x | 2.9x |
Return on Equity | 8.6% | 8.6% | 16.4% |
Earnings Growth | |||
Rate | 16.6% | 16.6% | 8.5% |
Dividend Yield | 3.9% | 3.9% | 1.9% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 7% | — | — |
Short-Term Reserves | 0.1% | — | — |
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 | 7.8% | 7.7% |
Health Care REITs | 11.9 | 11.9 |
Hotel & Resort REITs | 6.3 | 6.4 |
Industrial REITs | 6.0 | 6.0 |
Office REITs | 13.7 | 13.7 |
Residential REITs | 15.5 | 15.4 |
Retail REITs | 22.4 | 22.4 |
Specialized REITs | 16.4 | 16.5 |
Volatility Measures | ||
DJ | ||
U.S. Total | ||
MSCI US | Market | |
REIT Index | FA Index | |
R-Squared | 1.00 | 0.23 |
Beta | 1.00 | 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) | ||
Simon Property Group | ||
Inc. | Retail REITs | 7.1% |
Public Storage | Specialized REITs | 3.9 |
Equinix Inc. | Specialized REITs | 3.4 |
Prologis Inc. | Industrial REITs | 3.2 |
AvalonBay Communities | ||
Inc. | Residential REITs | 2.9 |
Welltower Inc. | Health Care REITs | 2.9 |
Equity Residential | Residential REITs | 2.7 |
Ventas Inc. | Health Care REITs | 2.7 |
Boston Properties Inc. | Office REITs | 2.5 |
Vornado Realty Trust | Office REITs | 2.2 |
Top Ten | 33.5% | |
The holdings listed exclude any temporary cash investments and equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2017, the expense ratios were 0.26% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral Shares, and 0.10% for
Institutional 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, 2007, Through January 31, 2017
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2017 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
REIT Index Fund Investor Shares | 12.07% | 10.22% | 4.23% | $15,136 | |
• • • • • • • • | REIT Spliced Index | 12.34 | 10.47 | 4.34 | 15,287 |
– – – – | Real Estate Average Funds | 11.15 | 9.37 | 3.23 | 13,745 |
Dow Jones U.S. Total Stock Market Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 | |
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 | ||||
ETF Shares Net Asset Value | 12.25% | 10.37% | 4.36% | $15,327 |
REIT Spliced Index | 12.34 | 10.47 | 4.34 | 15,287 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 |
See Financial Highlights for dividend and capital gains information.
8
REIT Index Fund
Average Annual Total Returns | ||||
Periods Ended January 31, 2017 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Admiral Shares | 12.23% | 10.38% | 4.37% | $15,335 |
REIT Spliced Index | 12.34 | 10.47 | 4.34 | 15,287 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 |
Final Value | ||||
One | Five | Ten | of a $5,000,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Institutional Shares | 12.23% | 10.39% | 4.39% | $7,686,400 |
REIT Spliced Index | 12.34 | 10.47 | 4.34 | 7,643,419 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 10,005,815 |
Cumulative Returns of ETF Shares: January 31, 2007, Through January 31, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
REIT Index Fund ETF Shares Market Price | 12.29% | 63.74% | 53.18% |
REIT Index Fund ETF Shares Net Asset Value | 12.25 | 63.78 | 53.27 |
REIT Spliced Index | 12.34 | 64.50 | 52.87 |
Fiscal-Year Total Returns (%): January 31, 2007, Through January 31, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx11x1.jpg)
For a benchmark description, see the Glossary.
9
REIT Index Fund
Average Annual Total Returns: Periods Ended December 31, 2016
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 | 8.34% | 11.62% | 5.09% |
ETF Shares | 9/23/2004 | |||
Market Price | 8.53 | 11.78 | 5.24 | |
Net Asset Value | 8.53 | 11.77 | 5.23 | |
Admiral Shares | 11/12/2001 | 8.50 | 11.78 | 5.23 |
Institutional Shares | 12/2/2003 | 8.51 | 11.79 | 5.26 |
10
REIT Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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) | ||
Equity Real Estate Investment Trusts (REITs) (99.9%)1 | |||
Diversified REITs (7.8%) | |||
2 | VEREIT Inc. | 72,289,565 | 616,630 |
2 | Colony NorthStar Inc. | ||
Class A | 40,222,989 | 559,904 | |
2 | WP Carey Inc. | 7,687,554 | 476,167 |
2 | Liberty Property Trust | 11,230,504 | 431,139 |
Forest City Realty Trust | |||
Inc. Class A | 18,488,094 | 418,571 | |
2 | Spirit Realty Capital Inc. | 36,712,453 | 386,215 |
2 | Gramercy Property Trust | 10,765,047 | 283,551 |
2 | STORE Capital Corp. | 11,732,756 | 277,597 |
Empire State Realty | |||
Trust Inc. | 9,431,575 | 193,253 | |
2 | Washington REIT | 5,636,641 | 177,272 |
2 | Lexington Realty Trust | 16,327,217 | 175,028 |
2 | PS Business Parks Inc. | 1,554,983 | 174,220 |
2 | Select Income REIT | 5,131,136 | 128,330 |
2 | American Assets Trust | ||
Inc. | 2,606,578 | 111,901 | |
2 | Global Net Lease Inc. | 12,956,356 | 100,412 |
*,2 | iStar Inc. | 5,475,519 | 61,435 |
^,2 | Investors Real Estate | ||
Trust | 9,287,000 | 59,808 | |
2 | First Potomac Realty | ||
Trust | 4,483,899 | 45,915 | |
2 | Gladstone Commercial | ||
Corp. | 1,816,336 | 35,673 | |
2 | Armada Hoffler Properties | ||
Inc. | 2,578,964 | 35,538 | |
2 | Whitestone REIT | 2,208,573 | 30,721 |
2 | RAIT Financial Trust | 7,129,494 | 24,668 |
2 | One Liberty Properties | ||
Inc. | 1,003,030 | 23,230 | |
2 | Winthrop Realty Trust | 1,892,511 | 15,172 |
4,842,350 |
Health Care REITs (11.9%) | |||
2 | Welltower Inc. | 27,392,284 | 1,816,108 |
2 | Ventas Inc. | 26,889,899 | 1,658,300 |
2 | HCP Inc. | 34,864,464 | 1,057,091 |
^,2 | Omega Healthcare | ||
Investors Inc. | 14,804,652 | 474,785 | |
2 | Senior Housing | ||
Properties Trust | 18,176,957 | 346,271 | |
2 | Healthcare Trust of | ||
America Inc. Class A | 10,559,130 | 306,954 | |
2 | Medical Properties Trust | ||
Inc. | 23,139,997 | 295,035 | |
2 | Healthcare Realty Trust | ||
Inc. | 8,867,414 | 267,885 | |
2 | National Health | ||
Investors Inc. | 2,998,439 | 221,854 | |
2 | Physicians Realty Trust | 10,301,324 | 191,090 |
2 | Care Capital Properties | ||
Inc. | 6,429,654 | 158,877 | |
2 | LTC Properties Inc. | 2,921,423 | 136,343 |
*,2 | Quality Care Properties | ||
Inc. | 7,152,080 | 132,027 | |
2 | Sabra Health Care REIT | ||
Inc. | 4,995,619 | 126,889 | |
2 | CareTrust REIT Inc. | 4,745,906 | 71,948 |
2 | Universal Health Realty | ||
Income Trust | 993,967 | 61,745 | |
2 | New Senior Investment | ||
Group Inc. | 5,717,510 | 57,232 | |
7,380,434 | |||
Hotel & Resort REITs (6.3%) | |||
2 | Host Hotels & Resorts | ||
Inc. | 56,824,272 | 1,026,815 | |
2 | Hospitality Properties | ||
Trust | 12,441,630 | 387,308 | |
2 | LaSalle Hotel Properties | 8,653,754 | 261,084 |
11
REIT Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
2 | Apple Hospitality REIT | ||
Inc. | 12,700,261 | 254,259 | |
Park Hotels & Resorts | |||
Inc. | 9,093,148 | 246,788 | |
2 | Sunstone Hotel | ||
Investors Inc. | 16,577,952 | 244,027 | |
2 | RLJ Lodging Trust | 9,516,923 | 220,888 |
2 | Ryman Hospitality | ||
Properties Inc. | 3,514,411 | 215,012 | |
2 | DiamondRock Hospitality | ||
Co. | 15,377,736 | 173,307 | |
2 | Pebblebrook Hotel Trust | 5,271,809 | 157,680 |
2 | Xenia Hotels & Resorts | ||
Inc. | 8,101,934 | 148,670 | |
2 | Chesapeake Lodging | ||
Trust | 4,600,210 | 117,765 | |
^,2 | MGM Growth Properties | ||
LLC Class A | 4,410,793 | 113,887 | |
2 | Summit Hotel Properties | ||
Inc. | 6,697,464 | 106,021 | |
2 | FelCor Lodging Trust Inc. | 9,729,677 | 74,918 |
2 | Hersha Hospitality Trust | ||
Class A | 3,267,620 | 65,320 | |
2 | Chatham Lodging Trust | 2,953,492 | 59,483 |
2 | Ashford Hospitality Trust | ||
Inc. | 7,414,853 | 56,353 | |
2 | Ashford Hospitality Prime | ||
Inc. | 1,783,636 | 23,972 | |
3,953,557 | |||
Industrial REITs (6.0%) | |||
2 | Prologis Inc. | 40,329,139 | 1,970,078 |
2 | Duke Realty Corp. | 26,844,504 | 653,127 |
2 | DCT Industrial Trust Inc. | 6,900,551 | 308,386 |
2 | First Industrial Realty | ||
Trust Inc. | 8,946,718 | 231,273 | |
2 | EastGroup Properties Inc. | 2,517,345 | 178,153 |
2 | STAG Industrial Inc. | 5,464,783 | 126,455 |
2 | Rexford Industrial | ||
Realty Inc. | 5,053,688 | 114,769 | |
2 | Terreno Realty Corp. | 3,534,487 | 96,103 |
2 | Monmouth Real Estate | ||
Investment Corp. | 4,691,253 | 68,492 | |
3,746,836 | |||
Office REITs (13.7%) | |||
2 | Boston Properties Inc. | 11,762,619 | 1,539,727 |
2 | Vornado Realty Trust | 13,002,557 | 1,382,302 |
2 | SL Green Realty Corp. | 7,677,798 | 836,650 |
2 | Alexandria Real Estate | ||
Equities Inc. | 5,967,635 | 661,333 | |
2 | Kilroy Realty Corp. | 7,060,668 | 528,491 |
2 | Douglas Emmett Inc. | 10,981,471 | 415,539 |
2 | Hudson Pacific | ||
Properties Inc. | 11,185,475 | 396,078 | |
2 | Highwoods Properties | ||
Inc. | 7,547,377 | 388,011 | |
*,2 | Equity Commonwealth | 9,129,867 | 281,565 |
2 | Piedmont Office Realty | ||
Trust Inc. Class A | 11,114,958 | 241,417 | |
2 | Corporate Office | ||
Properties Trust | 7,253,859 | 230,818 | |
2 | Paramount Group Inc. | 13,439,457 | 224,304 |
2 | Cousins Properties Inc. | 25,581,670 | 217,444 |
2 | Brandywine Realty Trust | 13,407,277 | 215,857 |
2 | Columbia Property Trust | ||
Inc. | 8,978,303 | 199,767 | |
2 | Mack-Cali Realty Corp. | 6,519,659 | 182,681 |
2 | New York REIT Inc. | 12,702,113 | 126,386 |
^,2 | Government Properties | ||
Income Trust | 5,459,400 | 105,148 | |
2 | Franklin Street | ||
Properties Corp. | 7,743,946 | 98,735 | |
*,2 | Parkway Inc. | 3,379,376 | 71,947 |
2 | Tier REIT Inc. | 3,658,845 | 66,627 |
2 | NorthStar Realty Europe | ||
Corp. | 4,658,939 | 55,954 | |
2 | Easterly Government | ||
Properties Inc. | 2,709,831 | 53,384 | |
8,520,165 | |||
Residential REITs (15.5%) | |||
2 | AvalonBay Communities | ||
Inc. | 10,509,083 | 1,821,329 | |
2 | Equity Residential | 27,977,107 | 1,700,169 |
2 | Essex Property Trust Inc. | 5,012,503 | 1,124,304 |
2 | Mid-America Apartment | ||
Communities Inc. | 8,689,077 | 825,028 | |
2 | UDR Inc. | 20,438,696 | 714,332 |
2 | Camden Property Trust | 6,689,922 | 559,077 |
2 | Apartment Investment | ||
& Management Co. | |||
Class A | 11,957,696 | 526,976 | |
2 | American Campus | ||
Communities Inc. | 9,985,071 | 485,474 | |
2 | Equity LifeStyle | ||
Properties Inc. | 6,201,610 | 458,547 | |
2 | Sun Communities Inc. | 5,265,111 | 414,680 |
2 | American Homes 4 | ||
Rent Class A | 16,376,355 | 364,865 | |
^,2 | Education Realty | ||
Trust Inc. | 5,591,808 | 224,847 | |
Colony Starwood Homes | 5,051,368 | 158,866 | |
2 | Monogram Residential | ||
Trust Inc. | 12,127,667 | 123,338 |
12
REIT Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
2 | Independence Realty | ||
Trust Inc. | 5,031,936 | 46,445 | |
2 | Silver Bay Realty Trust | ||
Corp. | 2,593,320 | 43,697 | |
2 | NexPoint Residential | ||
Trust Inc. | 1,306,136 | 30,185 | |
9,622,159 | |||
Retail REITs (22.4%) | |||
2 | Simon Property Group | ||
Inc. | 24,048,466 | 4,419,387 | |
2 | Realty Income Corp. | 19,789,144 | 1,180,027 |
GGP Inc. | 44,012,503 | 1,093,271 | |
2 | Kimco Realty Corp. | 32,147,831 | 800,160 |
2 | Federal Realty | ||
Investment Trust | 5,466,465 | 767,656 | |
2 | Macerich Co. | 9,343,342 | 641,794 |
2 | Brixmor Property Group | ||
Inc. | 23,290,108 | 561,990 | |
2 | Regency Centers Corp. | 7,996,962 | 557,628 |
2 | National Retail | ||
Properties Inc. | 11,259,810 | 490,928 | |
2 | DDR Corp. | 23,800,797 | 361,296 |
2 | Weingarten Realty | ||
Investors | 9,295,434 | 331,196 | |
2 | Taubman Centers Inc. | 4,622,957 | 327,490 |
2 | Retail Properties of | ||
America Inc. | 18,168,821 | 271,987 | |
2 | Tanger Factory Outlet | ||
Centers Inc. | 7,353,347 | 251,411 | |
Equity One Inc. | 7,153,968 | 223,132 | |
2 | Urban Edge Properties | 7,612,973 | 212,935 |
2 | Acadia Realty Trust | 6,184,500 | 196,914 |
2 | Retail Opportunity | ||
Investments Corp. | 8,335,319 | 176,709 | |
2 | Kite Realty Group Trust | 6,385,474 | 153,379 |
2 | Washington Prime | ||
Group Inc. | 14,082,727 | 135,898 | |
2 | CBL & Associates | ||
Properties Inc. | 12,421,164 | 134,770 | |
2 | Ramco-Gershenson | ||
Properties Trust | 6,076,325 | 98,801 | |
2 | Pennsylvania REIT | 5,334,737 | 95,545 |
2 | Agree Realty Corp. | 1,984,576 | 93,077 |
Alexander’s Inc. | 176,182 | 74,491 | |
^,2 | Seritage Growth | ||
Properties Class A | 1,716,133 | 70,018 | |
Saul Centers Inc. | 989,470 | 62,821 | |
2 | Getty Realty Corp. | 2,080,656 | 53,660 |
Urstadt Biddle Properties | |||
Inc. Class A | 2,171,855 | 48,758 | |
2 | Cedar Realty Trust Inc. | 6,327,564 | 38,029 |
Urstadt Biddle Properties | |||
Inc. | 58,856 | 1,050 | |
13,926,208 |
Specialized REITs (16.3%) | |||
2 | Public Storage | 11,280,265 | 2,425,257 |
2 | Equinix Inc. | 5,439,532 | 2,094,111 |
2 | Digital Realty Trust Inc. | 12,193,747 | 1,312,413 |
2 | Extra Space Storage Inc. | 9,627,034 | 693,628 |
2 | Iron Mountain Inc. | 19,139,861 | 685,207 |
2 | Gaming and Leisure | ||
Properties Inc. | 14,288,615 | 451,949 | |
2 | EPR Properties | 4,869,951 | 360,230 |
2 | CubeSmart | 13,722,865 | 344,856 |
2 | Life Storage Inc. | 3,494,591 | 284,634 |
2 | DuPont Fabros | ||
Technology Inc. | 5,782,381 | 274,547 | |
2 | CoreCivic Inc. | 8,625,464 | 250,483 |
2 | GEO Group Inc. | 5,740,623 | 238,351 |
2 | CoreSite Realty Corp. | 2,596,561 | 223,642 |
CyrusOne Inc. | 3,951,505 | 190,305 | |
2 | QTS Realty Trust Inc. | ||
Class A | 3,652,191 | 184,034 | |
2 | Four Corners Property | ||
Trust Inc. | 4,362,127 | 95,138 | |
2 | National Storage | ||
Affiliates Trust | 3,252,635 | 72,371 | |
10,181,156 | |||
Total Equity Real Estate | |||
Investment Trusts (REITs) | |||
(Cost $54,308,011) | 62,172,865 | ||
Temporary Cash Investments (0.2%)1 | |||
Money Market Fund (0.2%) | |||
3,4 | Vanguard Market | ||
Liquidity Fund, 0.856% | 1,492,705 | 149,286 | |
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (0.0%) | |||
5 | United States Treasury Bill, | ||
0.577%, 5/25/17 | 3,000 | 2,995 | |
Total Temporary Cash Investments | |||
(Cost $152,280) | 152,281 | ||
Total Investments (100.1%) | |||
(Cost $54,460,291) | 62,325,146 | ||
Other Assets and Liabilities (-0.1%) | |||
Other Assets | 136,686 | ||
Liabilities 3 | (195,481) | ||
(58,795) | |||
Net Assets (100%) | 62,266,351 |
13
REIT Index Fund
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 2,714,299 |
Other Affiliated Issuers | 59,610,847 |
Total Investments in Securities | 62,325,146 |
Investment in Vanguard | 4,523 |
Receivables for Investment | |
Securities Sold | 32 |
Receivables for Accrued Income | 81,160 |
Receivables for Capital Shares Issued | 38,772 |
Other Assets | 12,199 |
Total Assets | 62,461,832 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 32,509 |
Collateral for Securities on Loan | 102,325 |
Payables for Capital Shares Redeemed | 27,852 |
Payables to Vanguard | 31,766 |
Other Liabilities | 1,029 |
Total Liabilities | 195,481 |
Net Assets | 62,266,351 |
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 54,314,660 |
Undistributed Net Investment Income | 87,705 |
Accumulated Net Realized Gains | — |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 7,864,855 |
Swap Contracts | (869) |
Net Assets | 62,266,351 |
Amount | |
($000) | |
Investor Shares—Net Assets | |
Applicable to 95,067,371 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 2,603,181 |
Net Asset Value Per Share— | |
Investor Shares | $27.38 |
ETF Shares—Net Assets | |
Applicable to 406,705,094 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 33,526,633 |
Net Asset Value Per Share— | |
ETF Shares | $82.43 |
Admiral Shares—Net Assets | |
Applicable to 156,955,479 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 18,337,328 |
Net Asset Value Per Share— | |
Admiral Shares | $116.83 |
Institutional Shares—Net Assets | |
Applicable to 431,313,369 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 7,799,209 |
Net Asset Value Per Share— | |
Institutional Shares | $18.08 |
• 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 $99,480,000.
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 0.1%,
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 Includes $102,325,000 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 Securities with a value of $429,000 have been segregated as collateral for open swap contracts.
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, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends | 1,710,147 |
Interest | 223 |
Securities Lending—Net | 968 |
Total Income | 1,711,338 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 5,390 |
Management and Administrative—Investor Shares | 6,192 |
Management and Administrative—ETF Shares | 32,213 |
Management and Administrative—Admiral Shares | 17,364 |
Management and Administrative—Institutional Shares | 6,524 |
Marketing and Distribution—Investor Shares | 599 |
Marketing and Distribution—ETF Shares | 2,077 |
Marketing and Distribution—Admiral Shares | 1,614 |
Marketing and Distribution—Institutional Shares | 200 |
Custodian Fees | 702 |
Auditing Fees | 40 |
Shareholders’ Reports—Investor Shares | 59 |
Shareholders’ Reports—ETF Shares | 956 |
Shareholders’ Reports—Admiral Shares | 142 |
Shareholders’ Reports—Institutional Shares | 70 |
Trustees’ Fees and Expenses | 45 |
Total Expenses | 74,187 |
Net Investment Income | 1,637,151 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received | 700,561 |
Investment Securities Sold | 1,651,647 |
Futures Contracts | 701 |
Swap Contracts | 20,759 |
Realized Net Gain (Loss) | 2,373,668 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 2,175,377 |
Swap Contracts | 2,011 |
Change in Unrealized Appreciation (Depreciation) | 2,177,388 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 6,188,207 |
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, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 1,637,151 | 1,425,510 |
Realized Net Gain (Loss) | 2,373,668 | 2,873,988 |
Change in Unrealized Appreciation (Depreciation) | 2,177,388 | (8,494,863) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 6,188,207 | (4,195,365) |
Distributions | ||
Net Investment Income | ||
Investor Shares | (73,006) | (72,647) |
ETF Shares | (913,086) | (728,106) |
Admiral Shares | (491,479) | (407,189) |
Institutional Shares | (213,737) | (184,580) |
Realized Capital Gain | ||
Investor Shares | (18,164) | — |
ETF Shares | (218,412) | — |
Admiral Shares | (117,607) | — |
Institutional Shares | (50,930) | — |
Return of Capital | ||
Investor Shares | (33,133) | (31,917) |
ETF Shares | (411,208) | (319,892) |
Admiral Shares | (221,353) | (178,898) |
Institutional Shares | (96,185) | (81,095) |
Total Distributions | (2,858,300) | (2,004,324) |
Capital Share Transactions | ||
Investor Shares | (198,893) | (257,705) |
ETF Shares | 4,811,962 | 836,661 |
Admiral Shares | 2,316,263 | 1,058,869 |
Institutional Shares | 564,537 | 773,129 |
Net Increase (Decrease) from Capital Share Transactions | 7,493,869 | 2,410,954 |
Total Increase (Decrease) | 10,823,776 | (3,788,735) |
Net Assets | ||
Beginning of Period | 51,442,575 | 55,231,310 |
End of Period1 | 62,266,351 | 51,442,575 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $87,705,000 and $71,700,000. |
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 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $25.59 | $28.73 | $22.37 | $22.66 | $20.50 |
Investment Operations | |||||
Net Investment Income | .746 | .711 | . 645 | . 579 | . 514 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 2.324 | (2.851) | 6.650 | .025 | 2.393 |
Total from Investment Operations | 3.070 | (2.140) | 7.295 | .604 | 2.907 |
Distributions | |||||
Dividends from Net Investment Income | (.752) | (. 695) | (. 624) | (. 626) | (. 514) |
Distributions from Realized Capital Gains | (.187) | — | — | — | — |
Return of Capital | (. 341) | (. 305) | (. 311) | (. 268) | (. 233) |
Total Distributions | (1.280) | (1.000) | (.935) | (.894) | (.747) |
Net Asset Value, End of Period | $27.38 | $25.59 | $28.73 | $22.37 | $22.66 |
Total Return1 | 12.07% | -7.44% | 33.29% | 2.78% | 14.45% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,603 | $2,621 | $3,231 | $2,482 | $2,817 |
Ratio of Total Expenses to Average Net Assets | 0.26% | 0.26% | 0.26% | 0.24% | 0.24% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.60% | 2.66% | 2.56% | 2.51% | 2.39% |
Portfolio Turnover Rate2 | 7% | 11% | 8% | 11% | 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.
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
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $77.05 | $86.49 | $67.36 | $68.24 | $61.72 |
Investment Operations | |||||
Net Investment Income | 2.334 | 2.217 | 2.011 | 1.814 | 1.613 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 7.022 | (8.533) | 20.038 | .097 | 7.250 |
Total from Investment Operations | 9.356 | (6.316) | 22.049 | 1.911 | 8.863 |
Distributions | |||||
Dividends from Net Investment Income | (2.353) | (2.170) | (1.947) | (1.955) | (1.612) |
Distributions from Realized Capital Gains | (.563) | — | — | — | — |
Return of Capital | (1.060) | (. 954) | (. 972) | (. 836) | (.731) |
Total Distributions | (3.976) | (3.124) | (2.919) | (2.791) | (2.343) |
Net Asset Value, End of Period | $82.43 | $77.05 | $86.49 | $67.36 | $68.24 |
Total Return | 12.25% | -7.31% | 33.41% | 2.93% | 14.64% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $33,527 | $27,007 | $29,487 | $18,528 | $16,983 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.10% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.74% | 2.80% | 2.70% | 2.65% | 2.53% |
Portfolio Turnover Rate1 | 7% | 11% | 8% | 11% | 9% |
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.
18
REIT Index Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $109.19 | $122.58 | $95.46 | $96.70 | $87.47 |
Investment Operations | |||||
Net Investment Income | 3.306 | 3.142 | 2.852 | 2.569 | 2.285 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 9.966 | (12.105) | 28.403 | .148 | 10.263 |
Total from Investment Operations | 13.272 | (8.963) | 31.255 | 2.717 | 12.548 |
Distributions | |||||
Dividends from Net Investment Income | (3.333) | (3.076) | (2.758) | (2.772) | (2.283) |
Distributions from Realized Capital Gains | (.798) | — | — | — | — |
Return of Capital | (1.501) | (1.351) | (1.377) | (1.185) | (1.035) |
Total Distributions | (5.632) | (4.427) | (4.135) | (3.957) | (3.318) |
Net Asset Value, End of Period | $116.83 | $109.19 | $122.58 | $95.46 | $96.70 |
Total Return1 | 12.23% | -7.30% | 33.46% | 2.94% | 14.63% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $18,337 | $15,029 | $15,725 | $7,987 | $7,399 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.10% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.74% | 2.80% | 2.70% | 2.65% | 2.53% |
Portfolio Turnover Rate2 | 7% | 11% | 8% | 11% | 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.
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.
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REIT Index Fund
Financial Highlights
Institutional Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $16.90 | $18.97 | $14.78 | $14.97 | $13.54 |
Investment Operations | |||||
Net Investment Income | .515 | .489 | .444 | .400 | . 356 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 1.540 | (1.870) | 4.390 | .025 | 1.590 |
Total from Investment Operations | 2.055 | (1.381) | 4.834 | .425 | 1.946 |
Distributions | |||||
Dividends from Net Investment Income | (. 519) | (. 479) | (. 430) | (. 431) | (. 355) |
Distributions from Realized Capital Gains | (.123) | — | — | — | — |
Return of Capital | (. 233) | (. 210) | (. 214) | (.184) | (.161) |
Total Distributions | (. 875) | (. 689) | (. 644) | (. 615) | (. 516) |
Net Asset Value, End of Period | $18.08 | $16.90 | $18.97 | $14.78 | $14.97 |
Total Return1 | 12.23% | -7.27% | 33.43% | 2.97% | 14.66% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $7,799 | $6,785 | $6,788 | $3,922 | $3,185 |
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.10% | 0.10% | 0.08% | 0.08% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.76% | 2.82% | 2.72% | 2.67% | 2.55% |
Portfolio Turnover Rate2 | 7% | 11% | 8% | 11% | 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.
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
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, ETF Shares, Admiral Shares, and Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, 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 Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities 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
REIT Index Fund
During the year ended January 31, 2017, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund had no open futures contracts at January 31, 2017.
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 Assets and Liabilities. 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 Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded. A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Statement of Assets and Liabilities. 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, 2017, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
22
REIT Index Fund
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, 2014–2017), 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.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and 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 Assets and Liabilities 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, 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
23
REIT Index Fund
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. Fees assessed on redemptions of capital shares are credited to paid-in capital.
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. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $4,523,000, representing 0.01% of the fund’s net assets and 1.81% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Real Estate Investment Trusts | 62,157,693 | — | 15,172 |
Temporary Cash Investments | 149,286 | 2,995 | — |
Swap Contracts—Liabilities | — | (869) | — |
Total | 62,306,979 | 2,126 | 15,172 |
24
REIT Index Fund
D. At January 31, 2017, the fund had the following open total return swap contracts:
Floating | Unrealized | ||||
Notional | Interest Rate | Appreciation | |||
Termination | Amount | Received | (Depreciation) | ||
Reference Entity | Date | Counterparty | ($000) | (Paid) | ($000) |
CyrusOne Inc. | 3/1/17 | GSCM | 87,534 | (0.777%) | (869) |
GSCM—Goldman Sachs Capital Management. |
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, 2017, the fund realized $1,885,392,000 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 gains 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 $20,759,000 on swap contracts have been reclassified from accumulated net realized gains to undistributed net investment income. The fund has reclassified $49,403,000 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, 2017, the fund had no ordinary income available for distribution. The fund used capital loss carryforwards of $62,404,000 to offset taxable capital gains realized during the year ended January 31, 2017, reducing the amount of capital gains that would otherwise be available to distribute to shareholders.
At January 31, 2017, the cost of investment securities for tax purposes was $54,460,291,000. Net unrealized appreciation of investment securities for tax purposes was $7,864,855,000, consisting of unrealized gains of $9,316,150,000 on securities that had risen in value since their purchase and $1,451,295,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2017, the fund purchased $16,519,137,000 of investment securities and sold $9,072,459,000 of investment securities, other than temporary cash investments. Purchases and sales include $8,249,986,000 and $5,038,238,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
25
REIT Index Fund
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2017 | 2016 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 565,677 | 20,200 | 559,943 | 20,973 |
Issued in Lieu of Cash Distributions | 117,019 | 4,262 | 98,734 | 3,809 |
Redeemed | (881,589) | (31,830) | (916,382) | (34,822) |
Net Increase (Decrease)—Investor Shares | (198,893) | (7,368) | (257,705) | (10,040) |
ETF Shares | ||||
Issued | 9,698,505 | 115,071 | 8,300,504 | 104,710 |
Issued in Lieu of Cash Distributions | — | — | — | — |
Redeemed | (4,886,543) | (58,900) | (7,463,843) | (95,100) |
Net Increase (Decrease)—ETF Shares | 4,811,962 | 56,171 | 836,661 | 9,610 |
Admiral Shares | ||||
Issued | 4,651,310 | 39,078 | 3,269,367 | 28,897 |
Issued in Lieu of Cash Distributions | 737,270 | 6,295 | 524,621 | 4,749 |
Redeemed | (3,072,317) | (26,057) | (2,735,119) | (24,294) |
Net Increase (Decrease)—Admiral Shares | 2,316,263 | 19,316 | 1,058,869 | 9,352 |
Institutional Shares | ||||
Issued | 1,775,348 | 96,049 | 1,828,326 | 104,466 |
Issued in Lieu of Cash Distributions | 334,740 | 18,463 | 244,166 | 14,282 |
Redeemed | (1,545,551) | (84,706) | (1,299,363) | (75,011) |
Net Increase (Decrease)—Institutional Shares | 564,537 | 29,806 | 773,129 | 43,737 |
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 period in securities of these companies were as follows:
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Acadia Realty Trust | 170,801 | 68,569 | 26,419 | 4,385 | 2,257 | 196,914 |
Agree Realty Corp. | 52,050 | 35,489 | 10,057 | 2,709 | — | 93,077 |
Alexandria Real Estate Equities | ||||||
Inc. | 416,568 | 147,811 | 74,282 | 5,226 | 5,330 | 661,333 |
American Assets Trust Inc. | 91,654 | 20,824 | 14,216 | 2,585 | — | 111,900 |
26
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
American Campus Communities | ||||||
Inc. | 344,896 | 151,862 | 70,075 | 3,399 | 5,167 | 485,474 |
American Homes 4 Rent Class A | 183,983 | 133,060 | 81,901 | 2,676 | 218 | 364,865 |
American Residential Properties | 37,742 | 330 | 262 | (220) | — | NA2 |
Apartment Investment & | ||||||
Management Co. Class A | 445,234 | 104,650 | 78,909 | 6,873 | 8,705 | 526,976 |
Apple Hospitality REIT Inc. | 221,790 | 47,556 | 35,856 | 10,229 | — | 254,259 |
Armada Hoffler Properties Inc. | — | 36,929 | 523 | 450 | — | 35,538 |
Ashford Hospitality Prime Inc. | 22,738 | 4,599 | 7,746 | — | 888 | 23,972 |
Ashford Hospitality Trust Inc. | 38,693 | 8,114 | 5,304 | 51 | — | 56,353 |
AvalonBay Communities Inc. | 1,658,413 | 417,443 | 263,324 | 37,917 | 17,843 | 1,821,329 |
Boston Properties Inc. | 1,298,614 | 310,438 | 230,429 | 27,918 | 3,325 | 1,539,727 |
Brandywine Realty Trust | 167,964 | 39,778 | 33,233 | 198 | 8,163 | 215,857 |
Brixmor Property Group Inc. | NA3 | 353,363 | 76,934 | 18,611 | — | 561,990 |
Camden Property Trust | 482,237 | 113,410 | 80,952 | — | 48,310 | 559,077 |
Campus Crest Communities Inc. | 32,564 | 227 | 33,252 | — | — | — |
Care Capital Properties Inc. | 181,040 | 33,329 | 22,585 | 13,664 | 731 | 158,877 |
CareTrust REIT Inc. | 34,305 | 26,772 | 9,544 | 2,561 | — | 71,948 |
CBL & Associates Properties Inc. | 133,340 | 28,589 | 28,109 | 13,624 | — | 134,770 |
Cedar Realty Trust Inc. | 37,071 | 14,100 | 6,433 | 579 | — | 38,029 |
Chatham Lodging Trust | 52,607 | 10,677 | 6,959 | 3,375 | — | 59,483 |
Chesapeake Lodging Trust | 109,064 | 22,445 | 15,760 | 6,409 | 40 | 117,765 |
Colony NorthStar Inc. Class A | NA4 | 363,194 | 2,249 | — | — | 559,904 |
Columbia Property Trust Inc. | 192,576 | 38,784 | 30,834 | 707 | — | 199,767 |
CoreCivic Inc. | NA5 | 9,683 | 20,355 | 3,734 | — | 250,483 |
CoreSite Realty Corp. | 140,593 | 52,716 | 22,192 | 5,709 | — | 223,642 |
Corporate Office Properties | ||||||
Trust | 153,354 | 39,863 | 29,050 | 4,786 | — | 230,818 |
Corrections Corp. of America | 245,510 | 39,648 | 21,823 | 12,520 | — | NA5 |
Cousins Properties Inc. | 129,102 | 46,898 | 42,217 | 3,969 | 16,460 | 217,444 |
CubeSmart | 385,206 | 90,395 | 46,461 | 11,867 | 146 | 344,856 |
CyrusOne Inc. | 168,756 | 83,487 | 108,450 | 1,065 | — | NA6 |
DCT Industrial Trust Inc. | 230,020 | 64,136 | 42,211 | 6,433 | 1,184 | 308,386 |
DDR Corp. | 383,192 | 83,712 | 57,441 | 8,542 | — | 361,296 |
DiamondRock Hospitality Co. | 121,225 | 29,655 | 22,046 | 7,566 | — | 173,307 |
Digital Realty Trust Inc. | 791,470 | 367,755 | 151,774 | 39,815 | 887 | 1,312,413 |
Douglas Emmett Inc. | 299,109 | 75,922 | 45,738 | 1,492 | 91 | 415,539 |
Duke Realty Corp. | 505,731 | 134,672 | 90,681 | 13,804 | 4,705 | 653,127 |
27
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
DuPont Fabros Technology Inc. | 157,777 | 72,124 | 29,338 | 6,854 | — | 274,547 |
Easterly Government Properties | ||||||
Inc. | NA3 | 34,337 | 3,434 | 1,173 | — | 53,384 |
EastGroup Properties Inc. | 125,524 | 32,436 | 21,133 | 5,162 | 694 | 178,153 |
Education Realty Trust Inc. | 177,424 | 72,555 | 26,795 | 4,046 | — | 224,847 |
EPR Properties | 252,113 | 92,548 | 45,047 | 15,122 | 1,871 | 360,230 |
Equinix Inc. | 1,507,139 | 452,886 | 241,509 | 35,845 | — | 2,094,111 |
Equity Commonwealth | 241,186 | 51,829 | 46,479 | — | — | 281,565 |
Equity LifeStyle Properties Inc. | 384,029 | 91,621 | 62,580 | 9,243 | — | 458,547 |
Equity Residential | 2,042,285 | 385,324 | 278,253 | 19,452 | 331,122 | 1,700,169 |
Essex Property Trust Inc. | 1,019,484 | 230,712 | 177,620 | 27,551 | 4,066 | 1,124,304 |
Extra Space Storage Inc. | 770,152 | 211,163 | 103,550 | 24,479 | 2,830 | 693,628 |
Federal Realty Investment Trust | 758,676 | 180,168 | 109,760 | 20,369 | — | 767,656 |
FelCor Lodging Trust Inc. | 68,987 | 13,452 | 14,706 | 7 | — | 74,919 |
First Industrial Realty Trust Inc. | 165,937 | 54,968 | 33,195 | 5,349 | 1,025 | 231,273 |
First Potomac Realty Trust | 41,900 | 7,043 | 5,030 | — | — | 45,915 |
Four Corners Property Trust Inc. | — | 84,812 | 9,929 | 2,670 | — | 95,138 |
Franklin Street Properties Corp. | 64,052 | 25,363 | 10,847 | 2,921 | — | 98,735 |
Gaming and Leisure Properties | ||||||
Inc. | 173,869 | 251,748 | 7,483 | 27,208 | 777 | 451,949 |
GEO Group Inc. | 160,673 | 36,336 | 25,369 | 11,391 | — | 238,351 |
Getty Realty Corp. | 34,742 | 8,203 | 5,214 | 1,292 | 720 | 53,660 |
Gladstone Commercial Corp. | — | 33,939 | 506 | 292 | — | 35,673 |
Global Net Lease Inc. | 86,098 | 19,862 | 14,093 | 2,949 | 570 | 100,412 |
Government Properties Income | ||||||
Trust | 71,036 | 19,795 | 13,638 | 5,985 | — | 105,148 |
Gramercy Property Trust | 223,553 | 58,576 | 42,537 | 10,458 | — | 283,551 |
HCP Inc. | 1,209,735 | 243,941 | 195,456 | 33,594 | — | 1,057,091 |
Healthcare Realty Trust Inc. | 212,202 | 86,828 | 33,554 | 6,335 | 536 | 267,885 |
Healthcare Trust of America | ||||||
Inc. Class A | 259,182 | 81,807 | 39,443 | 9,180 | — | 306,954 |
Hersha Hospitality Trust Class A | 54,991 | 15,593 | 13,376 | 4,296 | — | 65,320 |
Highwoods Properties Inc. | 289,601 | 78,246 | 42,838 | 8,606 | 9,656 | 388,011 |
Hospitality Properties Trust | 260,007 | 91,556 | 49,046 | 22,899 | — | 387,308 |
Host Hotels & Resorts Inc. | 756,975 | 196,737 | 160,861 | 33,169 | 14,727 | 1,026,815 |
Hudson Pacific Properties Inc. | 140,618 | 214,596 | 32,021 | 4,438 | 747 | 396,078 |
Independence Realty Trust Inc. | — | 43,705 | 645 | 324 | 275 | 46,445 |
Inland Real Estate Corp. | 70,486 | 1,647 | 71,409 | 627 | — | — |
28
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Investors Real Estate Trust | 59,539 | 11,470 | 10,239 | 614 | 4,183 | 59,808 |
Iron Mountain Inc. | 401,371 | 267,005 | 103,120 | 23,976 | — | 685,207 |
iStar Inc. | — | 68,130 | 1,083 | — | — | 61,435 |
Kilroy Realty Corp. | 374,829 | 94,659 | 71,747 | 12,865 | 10,614 | 528,491 |
Kimco Realty Corp. | 817,371 | 193,539 | 129,257 | 20,851 | 9,397 | 800,160 |
Kite Realty Group Trust | 160,639 | 28,245 | 19,097 | 5,269 | 419 | 153,379 |
LaSalle Hotel Properties | 182,397 | 43,915 | 33,121 | 9,335 | 5,991 | 261,084 |
Lexington Realty Trust | 113,445 | 30,124 | 21,549 | 10,700 | — | 175,028 |
Liberty Property Trust | 319,745 | 83,037 | 69,216 | 11,532 | 6,796 | 431,139 |
Life Storage Inc. | NA7 | 24,361 | 25,717 | 6,510 | — | 284,634 |
LTC Properties Inc. | 112,602 | 35,182 | 16,281 | 4,210 | 414 | 136,343 |
Macerich Co. | 763,505 | 156,708 | 185,733 | (8,142) | 35,101 | 641,794 |
Mack-Cali Realty Corp. | 128,020 | 33,179 | 23,516 | 55 | — | 182,681 |
Medical Properties Trust Inc. | 187,231 | 127,861 | 37,053 | 12,481 | 1,801 | 295,035 |
MGM Growth Properties LLC | ||||||
Class A | — | 108,593 | 2,310 | 1,682 | — | 113,887 |
Mid-America Apartment | ||||||
Communities Inc. | 514,589 | 130,388 | 95,023 | 21,591 | — | 825,028 |
Monmouth Real Estate | ||||||
Investment Corp. | 41,025 | 14,775 | 5,668 | 1,422 | 209 | 68,492 |
Monogram Residential Trust Inc. | 100,378 | 23,800 | 17,493 | 1,981 | 735 | 123,338 |
National Health Investors Inc. | 157,530 | 55,344 | 26,558 | 7,660 | 2,633 | 221,854 |
National Retail Properties Inc. | 420,011 | 131,430 | 61,085 | 16,667 | — | 490,928 |
National Storage Affiliates Trust | — | 72,540 | 4,090 | 1,361 | — | 72,371 |
New Senior Investment | ||||||
Group Inc. | 57,894 | 11,136 | 16,840 | — | 409 | 57,232 |
New York REIT Inc. | 121,559 | 25,047 | 16,477 | (450) | 483 | 126,386 |
NexPoint Residential Trust Inc. | — | 26,880 | 414 | 117 | 24 | 30,185 |
NorthStar Realty Europe Corp. | 39,755 | 12,924 | 8,332 | 2,824 | — | 55,954 |
NorthStar Realty Finance Corp. | 157,525 | 39,328 | 32,723 | 22,963 | — | NA4 |
Omega Healthcare Investors Inc. | 426,777 | 104,683 | 59,670 | 29,220 | 989 | 474,785 |
One Liberty Properties Inc. | 19,954 | 4,817 | 3,762 | 1,180 | 445 | 23,230 |
Paramount Group Inc. | 189,849 | 55,970 | 25,213 | 1,487 | — | 224,305 |
Parkway Inc. | NA8 | 80,869 | 3,814 | — | — | 71,947 |
Parkway Properties Inc. | 82,026 | 13,613 | 7,431 | 468 | — | NA8 |
Pebblebrook Hotel Trust | 127,666 | 29,495 | 28,515 | 8,245 | — | 157,680 |
Pennsylvania REIT | 98,553 | 21,379 | 14,410 | — | — | 95,545 |
Physicians Realty Trust | 131,251 | 75,418 | 25,823 | 5,466 | — | 191,090 |
29
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Piedmont Office Realty Trust | ||||||
Inc. Class A | 203,823 | 43,504 | 39,882 | 8,015 | — | 241,417 |
Post Properties | 227,617 | 39,577 | 35,428 | 2,730 | 2,978 | NA9 |
Prologis Inc. | 1,505,298 | 401,656 | 292,964 | 29,646 | 36,722 | 1,970,078 |
PS Business Parks Inc. | 127,430 | 32,390 | 23,599 | 4,584 | — | 174,220 |
Public Storage | 2,712,576 | 557,724 | 399,120 | 81,008 | — | 2,425,257 |
QTS Realty Trust Inc. Class A | 130,933 | 63,935 | 24,076 | 4,367 | — | 184,034 |
Quality Care Properties Inc. | — | 110,905 | 6,098 | — | — | 132,027 |
RAIT Financial Trust | 16,910 | 3,887 | 2,227 | 1,215 | 1,297 | 24,668 |
Ramco-Gershenson Properties | ||||||
Trust | 98,454 | 20,695 | 14,653 | 4,156 | 979 | 98,801 |
Realty Income Corp. | 953,458 | 330,028 | 158,325 | 36,529 | — | 1,180,027 |
Regency Centers Corp. | 495,998 | 159,874 | 74,876 | 7,664 | 1,157 | 557,628 |
Retail Opportunity Investments | ||||||
Corp. | 132,869 | 45,058 | 20,106 | 4,373 | — | 176,709 |
Retail Properties of America Inc. | 267,703 | 58,176 | 42,648 | 8,094 | — | 271,987 |
Rexford Industrial Realty Inc. | 50,087 | 49,491 | 14,055 | 2,563 | 7 | 114,769 |
RLJ Lodging Trust | 174,044 | 40,508 | 39,541 | 10,450 | 1,970 | 220,888 |
Rouse Properties | 51,719 | 5,053 | 58,018 | — | — | — |
Ryman Hospitality Properties Inc. | 157,637 | 37,300 | 28,880 | 9,765 | 637 | 215,012 |
Sabra Health Care REIT Inc. | 87,029 | 21,005 | 15,194 | 3,454 | — | 126,889 |
Select Income REIT | 92,154 | 24,587 | 17,985 | 6,624 | — | 128,330 |
Senior Housing Properties Trust | 250,111 | 69,913 | 51,593 | 16,843 | — | 346,271 |
Seritage Growth Properties | ||||||
Class A | 70,269 | 9,131 | 12,812 | 1,736 | — | 70,018 |
Silver Bay Realty Trust Corp. | 34,765 | 7,858 | 6,369 | 10 | — | 43,697 |
Simon Property Group Inc. | 4,193,915 | 982,321 | 658,418 | 151,106 | 451 | 4,419,387 |
SL Green Realty Corp. | 700,929 | 163,555 | 118,468 | 19,192 | 2,958 | 836,650 |
Sovran Self Storage | 319,859 | 91,950 | 21,010 | 5,612 | — | NA7 |
Spirit Realty Capital Inc. | 336,675 | 114,783 | 60,253 | 18,915 | 1,036 | 386,215 |
STAG Industrial Inc. | 83,885 | 25,909 | 14,136 | 4,950 | — | 126,455 |
STORE Capital Corp. | NA3 | 192,426 | 38,262 | 11,028 | 683 | 277,597 |
Summit Hotel Properties Inc. | 63,978 | 16,009 | 10,823 | 3,577 | — | 106,021 |
Sun Communities Inc. | 252,039 | 159,899 | 51,368 | 4,583 | 2,263 | 414,680 |
Sunstone Hotel Investors Inc. | 185,934 | 44,163 | 32,145 | 9,949 | 1,152 | 244,027 |
Tanger Factory Outlet Centers | ||||||
Inc. | 223,094 | 53,866 | 38,685 | 9,397 | 102 | 251,411 |
Taubman Centers Inc. | 314,608 | 67,054 | 52,219 | 8,362 | 2,438 | 327,490 |
30
REIT Index Fund
Current Period Transactions | ||||||
January 31, | Proceeds | January 31, | ||||
2016 | from | Capital Gain | 2017 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold1 | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Terreno Realty Corp. | 66,683 | 23,537 | 9,337 | 1,971 | 233 | 96,103 |
Tier REIT Inc. | 48,720 | 14,351 | 6,830 | 319 | — | 66,628 |
UDR Inc. | 678,523 | 158,190 | 106,728 | 14,732 | 8,955 | 714,332 |
Universal Health Realty Income | ||||||
Trust | 46,780 | 10,270 | 5,891 | 1,919 | — | 61,745 |
Urban Edge Properties | 175,563 | 40,539 | 29,313 | 6,128 | — | 212,935 |
Vanguard Market Liquidity Fund | 229,188 | NA10 | NA10 | 205 | — | 149,286 |
Ventas Inc. | 1,331,908 | 398,538 | 212,533 | 69,851 | 5,733 | 1,658,300 |
VEREIT Inc. | 507,748 | 215,692 | 145,344 | 36,519 | 1,766 | 616,630 |
Vornado Realty Trust | 1,091,975 | 261,713 | 194,869 | 28,336 | 5,314 | 1,382,302 |
Washington Prime Group Inc. | NA11 | 6,464 | 14,000 | 4,368 | — | 135,898 |
Washington REIT | 125,120 | 42,030 | 21,665 | 4,388 | 76 | 177,272 |
Weingarten Realty Investors | 298,894 | 73,266 | 44,173 | 10,521 | 2,521 | 331,196 |
Welltower Inc. | 1,593,124 | 394,130 | 260,476 | 66,772 | 23,333 | 1,816,108 |
Whitestone REIT | 21,604 | 6,461 | 2,959 | 1,158 | 403 | 30,721 |
Winthrop Realty Trust | 29,655 | 38,050 | 23,528 | 8,482 | — | 15,172 |
WP Carey Inc. | 420,341 | 97,274 | 65,421 | 25,107 | — | 476,167 |
WP Glimcher Inc. | 122,417 | 18,404 | 8,699 | 4,128 | — | NA11 |
Xenia Hotels & Resorts Inc. | 112,932 | 32,656 | 26,622 | 8,981 | — | 148,670 |
49,463,656 | 1,667,036 | 679,873 | 59,610,847 |
1 Includes net realized gain (loss) on affiliated investment securities sold of $1,506,500,000.
2 Not applicable—in March 2016, American Residential Properties Inc. merged with American Homes 4 Rent Class A.
3 Not applicable—at January 31, 2016, the issuer was not an affiliated company of the fund.
4 Not applicable—in January 2017, NorthStar Realty Finance Corp. merged with Colony NorthStar Inc. Class A.
5 Not applicable—in November 2016, Corrections Corp. of America changed its name to CoreCivic Inc.
6 Not applicable—at January 31, 2017, the issuer was not an affiliated company of the fund.
7 Not applicable—in August 2016, Sovran Self Storage Inc. changed its name to Life Storage Inc.
8 Not applicable—in October 2016, Parkway Properties Inc. merged with Cousins Properties Inc. and immediately following spun off
Parkway Inc.
9 Not applicable—in December 2016, Mid-America Apartment Communities Inc. acquired Post Properties Inc.
10 Not applicable—purchases and sales are for temporary cash investment purposes.
11 Not applicable—in August 2016, WP Glimcher Inc. changed its name to Washington Prime Group Inc.
I. Management has determined that no material events or transactions occurred subsequent to January 31, 2017, 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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/reitindexfundx34x1.jpg)
Special 2016 tax information (unaudited) for Vanguard REIT Index Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of the
Internal Revenue Code.
The fund distributed $405,113,000 as capital gain dividends (from net long-term capital gains) to
shareholders during the fiscal year. The fund designates $200,103,000 of its capital gain dividends
as 20% rate gain distributions and $205,010,000 as unrecaptured section 1250 gain distributions
(25% rate gain).
The fund distributed $60,764,000 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 2017. (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, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 12.07% | 10.22% | 4.23% |
Returns After Taxes on Distributions | 10.56 | 9.00 | 3.04 |
Returns After Taxes on Distributions and Sale of Fund Shares | 6.94 | 7.50 | 2.71 |
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, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
REIT Index Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $916.50 | $1.20 |
ETF Shares | 1,000.00 | 917.41 | 0.58 |
Admiral Shares | 1,000.00 | 917.25 | 0.58 |
Institutional Shares | 1,000.00 | 917.08 | 0.48 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.88 | $1.27 |
ETF Shares | 1,000.00 | 1,024.53 | 0.61 |
Admiral Shares | 1,000.00 | 1,024.53 | 0.61 |
Institutional Shares | 1,000.00 | 1,024.63 | 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 0.25% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral Shares, and 0.10% for Institutional 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
(184/366).
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.
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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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Thomson Reuters Company, or Morningstar, Inc., unless | |
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Q1230 032017 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx1x1.jpg)
Annual Report | January 31, 2017
Vanguard Dividend Growth Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Advisor’s Report. | 7 |
Fund Profile. | 10 |
Performance Summary. | 11 |
Financial Statements. | 13 |
Your Fund’s After-Tax Returns. | 23 |
About Your Fund’s Expenses. | 24 |
Trustees Approve Advisory Arrangement. | 26 |
Glossary. | 28 |
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• Vanguard Dividend Growth Fund returned about 12% for the 12 months ended
January 31, 2017. It trailed its benchmark, the NASDAQ US Dividend Achievers Select
Index, and the average return of its large-capitalization core fund peers.
• Dividend-paying stocks posted strong returns over the fiscal year but still lagged the
broad U.S. market.
• For the period, the advisor’s stock holdings restrained performance compared with
the benchmark.
• The advisor’s holdings in industrials and information technology were the most notable
underperformers. Only consumer staples and financials outperformed the benchmark.
• For the ten years ended January 31, 2017, the fund produced an average annual return
of nearly 8%, about 2 percentage points ahead of its benchmark and peers.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard Dividend Growth Fund | 12.06% |
NASDAQ US Dividend Achievers Select Index | 16.67 |
Large-Cap Core Funds Average | 18.20 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
Dividend Growth Fund | 7.80% |
Dividend Growth Spliced Index | 5.93 |
Large-Cap Core Funds Average | 5.66 |
For a benchmark description, see the Glossary. | |
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.
1
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Dividend Growth Fund | 0.33% | 1.07% |
The fund expense ratio shown is from the prospectus dated May 25, 2016, and represents estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratio was 0.30%. The peer-group expense ratio is derived from data provided by
Lipper, a Thomson Reuters Company, and captures information through year-end 2016.
Peer group: Large-Cap Core Funds.
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
3
In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
4
The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
5
read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
6
Advisor’s Report
Vanguard Dividend Growth Fund returned 12.06% for the 12 months ended January 31, 2017, underper-forming the 16.67% return of its benchmark, the NASDAQ US Dividend Achievers Select Index.
The investment environment
China was a focal point of the global investment narrative early in the period, but the focus subsequently shifted to the United Kingdom’s Brexit vote and to the U.S. presidential election, making for a volatile 12 months.
After challenges in January 2016 arising from the concerns over China, markets rallied as extended monetary policy stimulus by major central banks helped support risk assets. Then, in late June, Brexit took center stage. Global markets reacted strongly to the vote to leave the European Union, as the potential economic implications are profound—not merely for the United Kingdom but also for the EU and the broader world. Given the long road ahead, we feel it is unwise to draw any firm conclusion on how Brexit will resolve itself.
The election of Donald Trump was also unexpected, but global markets in the fourth quarter of 2016 seemed to suggest that the results had ushered in a new period of global prosperity that would be reflected in higher markets. And although we are not certain ourselves, it’s clear what one must believe, in order to embrace this new narrative, that the next four years (or eight) will be characterized by higher rates, higher inflation, less regulation, more pro-business federal policy, and fairer trade policy.
We remain mindful of the global backdrop: tepid growth, heavy government indebtedness, growing geopolitical instability, and a growing absence of global economic cooperation. This can all certainly change, but it’s unlikely to do so in a time frame that is consistent with the markets’ highly bullish response. Indeed, the only thing harder than coordinating U.S. policy is coordinating policy globally.
The fund’s shortfalls
Our holdings in real estate and consumer discretionary detracted most from absolute performance. Among the biggest absolute detractors were Nike (consumer discretionary), McKesson (health care), CVS Health (consumer staples), and VF (consumer discretionary).
Nike, a provider of athletic footwear, apparel, and equipment, was the fund’s largest absolute detractor. Although the stock underperformed, we think that many investors’ concerns (increased competition and an unpredictable macroenvironment) are temporary and offer a chance to buy an excellent business at an attractive price. Nike’s growth appears healthy, and we used the weakness in its stock to add to our position. Nike has a new manufacturing process (Flyknit), which is much more flexible and cheaper and should help margins. The company is also selling a lot more through its own channel (direct-to-consumer), which is higher margin. We continue to believe that Nike is one of the world’s great franchises.
7
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 to the fund over a longer period, with a consistent focus on dividend action.
The fund’s successes
Holdings in the industrial, financial, information technology, and health care sectors were the fund’s biggest absolute contributors over the fiscal year.
Among the top contributors relative to the fund’s benchmark were Union Pacific (industrials), UnitedHealth Group (health care), and PNC Financial Services and Marsh & McLennan (both financials).
The biggest absolute and relative contributor was Union Pacific, a premier North American rail franchise. The company beat earnings expectations and said that volumes should accelerate in 2017, and these developments drove the stock price up more than 50% for the period. We continue to favor Union Pacific, as it is among the most efficient and well-run operators, with less exposure to eastern coal and with more diversified and longer-haul routes.
On a “run-rate” basis, the portfolio is expected to produce asset-weighted dividend growth of 6.5% for calendar year 2017. 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, although companies in the early stages of dividend growth tend to show large percentage increases, the absolute cash dividend may be small. The run-rate calculation also is not an accurate reflection of the growth in the fund’s dividend payments to shareholders. Despite these shortcomings, we view this estimate as a reasonable report card.
Honeywell and Accenture were among holdings with recent notable dividend run-rate increases. On a run-rate basis, both companies increased their dividend by just under 10%, continuing long histories of steady dividend growth.
The fund’s positioning and investment strategy
Our primary objective is to identify companies that we believe will steadily and reliably increase their dividend payments. We seek to meet 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 industrials, consumer staples, and health care but less exposure (below 5%) to materials, real estate, and energy. We hold no stocks in utilities or telecommunication services.
8
Since our last report, the fund’s positioning has changed modestly, but our investment strategy has not. In the current environment, we remain careful but not dogmatic. For example, government regulation of the financial services industry is likely to moderate. That, combined with rising rates, will create a much more investable backdrop for our approach in the banking industry. To be clear, we have not rushed (and will not rush) gleefully into a sector or industry on the promise of a better day driven by government policy. But we will be far more open to the question of investing in those companies where we see a new narrative on dividend growth.
Additions to the fund over the 12 months were driven largely by price opportunity. We constantly assess and adjust the weightings of our positions.
Donald J. Kilbride
Senior Managing Director and
Equity Portfolio Manager
Wellington Management Company llp
February 10, 2017
9
Dividend Growth Fund
Fund Profile
As of January 31, 2017
Portfolio Characteristics | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Number of Stocks | 45 | 185 | 3,825 |
Median Market Cap | $84.6B | $55.3B | $56.7B |
Price/Earnings Ratio | 22.4x | 22.7x | 24.1x |
Price/Book Ratio | 4.4x | 4.3x | 2.9x |
Return on Equity | 21.7% | 20.9% | 16.4% |
Earnings Growth Rate | 6.7% | 5.0% | 8.5% |
Dividend Yield | 2.2% | 2.2% | 1.9% |
Foreign Holdings | 6.0% | 0.0% | 0.0% |
Turnover Rate | 27% | — | — |
Ticker Symbol | VDIGX | — | — |
Expense Ratio1 | 0.33% | — | — |
30-Day SEC Yield | 1.97% | — | — |
Short-Term Reserves | 0.8% | — | — |
Sector Diversification (% of equity exposure) | |||
NASDAQ | DJ | ||
US | U.S. | ||
Dividend | Total | ||
Achievers | Market | ||
Select | FA | ||
Fund | Index | Index | |
Consumer Discretionary 13.6% | 11.7% | 12.7% | |
Consumer Staples | 18.3 | 23.3 | 8.3 |
Energy | 3.9 | 1.4 | 6.7 |
Financials | 10.9 | 8.3 | 15.1 |
Health Care | 17.4 | 12.1 | 13.1 |
Industrials | 17.4 | 22.0 | 10.8 |
Information Technology | 11.2 | 11.7 | 20.5 |
Materials | 3.5 | 6.6 | 3.4 |
Real Estate | 3.8 | 0.0 | 4.0 |
Telecommunication | |||
Services | 0.0 | 0.1 | 2.3 |
Utilities | 0.0 | 2.8 | 3.1 |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 0.94 | 0.88 |
Beta | 0.95 | 0.81 |
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) | ||
NIKE Inc. | Footwear | 3.8% |
Microsoft Corp. | Systems Software | 3.7 |
Costco Wholesale Corp. | Hypermarkets & | |
Super Centers | 3.6 | |
United Parcel Service | Air Freight & | |
Inc. | Logistics | 2.8 |
Chubb Ltd. | Property & Casualty | |
Insurance | 2.8 | |
Medtronic plc | Health Care | |
Equipment | 2.7 | |
Canadian National | ||
Railway Co. | Railroads | 2.6 |
Visa Inc. | Data Processing & | |
Outsourced Services | 2.6 | |
Coca-Cola Co. | Soft Drinks | 2.6 |
Union Pacific Corp. | Railroads | 2.6 |
Top Ten | 29.8% | |
The holdings listed exclude any temporary cash investments and equity index products. |
Investment Focus
1 The expense ratio shown is from the prospectus dated May 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year
ended January 31, 2017, the expense ratio was 0.30%.
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, 2007, Through January 31, 2017
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx13x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2017 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Dividend Growth Fund* | 12.06% | 12.09% | 7.80% | $21,197 | |
• • • • • • •• | Dividend Growth Spliced Index | 16.67 | 11.60 | 5.93 | 17,785 |
– – – – | Large-Cap Core Funds Average | 18.20 | 12.25 | 5.66 | 17,334 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 | |
For a benchmark description, see the Glossary. | |||||
Large-Cap Core Funds 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, 2007, Through January 31, 2017
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2016
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 | 7.53% | 12.37% | 7.79% |
12
Dividend Growth Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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 (99.3%) | ||
Consumer Discretionary (13.5%) | ||
NIKE Inc. Class B | 21,759,443 | 1,151,074 |
TJX Cos. Inc. | 9,931,271 | 744,051 |
McDonald’s Corp. | 5,177,089 | 634,556 |
Lowe’s Cos. Inc. | 8,276,115 | 604,818 |
Walt Disney Co. | 4,577,186 | 506,466 |
VF Corp. | 9,688,924 | 498,786 |
4,139,751 | ||
Consumer Staples (18.2%) | ||
Costco Wholesale Corp. | 6,746,405 | 1,106,073 |
Coca-Cola Co. | 18,882,214 | 784,934 |
Colgate-Palmolive Co. | 11,788,802 | 761,321 |
PepsiCo Inc. | 6,807,788 | 706,512 |
Diageo plc | 24,450,400 | 679,182 |
Walgreens Boots | ||
Alliance Inc. | 7,480,497 | 612,952 |
CVS Health Corp. | 6,726,602 | 530,123 |
Procter & Gamble Co. | 4,464,370 | 391,079 |
5,572,176 | ||
Energy (3.9%) | ||
Schlumberger Ltd. | 7,333,733 | 613,907 |
Exxon Mobil Corp. | 7,044,396 | 590,954 |
1,204,861 | ||
Financials (10.8%) | ||
Chubb Ltd. | 6,483,800 | 852,555 |
PNC Financial Services | ||
Group Inc. | 6,222,256 | 749,533 |
Marsh & McLennan Cos. | ||
Inc. | 10,067,926 | 684,820 |
American Express Co. | 7,356,593 | 561,896 |
BlackRock Inc. | 1,233,004 | 461,119 |
3,309,923 | ||
Health Care (17.2%) | ||
Medtronic plc | 10,763,303 | 818,226 |
Cardinal Health Inc. | 10,392,050 | 778,988 |
Merck & Co. Inc. | 11,740,857 | 727,816 |
UnitedHealth Group Inc. | 4,405,358 | 714,109 |
McKesson Corp. | 4,587,500 | 638,351 |
Johnson & Johnson | 5,620,083 | 636,474 |
Amgen Inc. | 3,849,518 | 603,142 |
Roche Holding AG | 1,544,470 | 365,960 |
5,283,066 | ||
Industrials (17.3%) | ||
United Parcel Service Inc. | ||
Class B | 7,865,309 | 858,341 |
^ Canadian National | ||
Railway Co. | ||
(Tornonto Shares) | 11,298,928 | 785,303 |
Union Pacific Corp. | 7,347,180 | 783,063 |
Honeywell International | ||
Inc. | 6,011,979 | 711,337 |
Lockheed Martin Corp. | 2,782,938 | 699,436 |
United Technologies | ||
Corp. | 5,668,156 | 621,627 |
Northrop Grumman Corp. | 1,878,712 | 430,375 |
General Dynamics Corp. | 2,174,041 | 393,675 |
5,283,157 | ||
Information Technology (11.1%) | ||
Microsoft Corp. | 17,352,160 | 1,121,817 |
Visa Inc. Class A | 9,492,249 | 785,104 |
Automatic Data | ||
Processing Inc. | 7,576,231 | 765,124 |
Accenture plc Class A | 6,421,818 | 731,252 |
3,403,297 | ||
Materials (3.5%) | ||
Praxair Inc. | 5,089,952 | 602,854 |
Ecolab Inc. | 3,958,246 | 475,504 |
1,078,358 | ||
Real Estate (3.8%) | ||
Public Storage | 3,158,865 | 679,156 |
American Tower | ||
Corporation | 4,570,798 | 473,078 |
1,152,234 | ||
Total Common Stocks | ||
(Cost $22,666,473) | 30,426,823 |
13
Dividend Growth Fund
Market | ||
Value• | ||
Shares | ($000) | |
Temporary Cash Investments (0.8%) | ||
Money Market Fund (0.0%) | ||
1,2 Vanguard Market Liquidity | ||
Fund, 0.856% | 18,825 | 1,883 |
Face | ||
Amount | ||
($000) | ||
Repurchase Agreements (0.8%) | ||
RBS Securities, Inc. | ||
0.530%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $96,400,000, | ||
collaterized by U.S. | ||
Treasury Note/Bond, | ||
0.875%–3.500%, | ||
5/15/17–5/15/20, with | ||
a value of $98,331,000) | 96,400 | 96,400 |
Societe Generale | ||
0.530%, 2/1/17 (Dated | ||
1/31/17, Repurchase | ||
Value $137,602,000, | ||
collaterized by U.S. | ||
Treasury Note/Bond, | ||
1.125%–4.375%, | ||
1/31/19–11/15/39, and | ||
Government National | ||
Mortgage Assn., 3.000%, | ||
6/20/46, with a value | ||
of $140,352,000) | 137,600 | 137,600 |
234,000 | ||
Total Temporary Cash Investments | ||
(Cost $235,883) | 235,883 | |
Total Investments (100.1%) | ||
(Cost $22,902,356) | 30,662,706 |
Amount | |
($000) | |
Other Assets and Liabilities (-0.1%) | |
Other Assets | |
Investment in Vanguard | 2,268 |
Receivables for Accrued Income | 34,770 |
Receivable for Capital Shares Issued | 7,199 |
Other Assets | 679 |
Total Other Assets | 44,916 |
Liabilities | |
Collateral for Securities on Loan | (1,850) |
Payables to Investment Advisor | (10,595) |
Payables for Capital Shares Redeemed | (35,701) |
Payables to Vanguard | (26,943) |
Total Liabilities | (75,089) |
Net Assets (100%) | |
Applicable to 1,291,364,234 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 30,632,533 |
Net Asset Value Per Share | $23.72 |
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 22,726,914 |
Overdistributed Net Investment Income | (4,809) |
Accumulated Net Realized Gains | 150,427 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 7,760,350 |
Foreign Currencies | (349) |
Net Assets | 30,632,533 |
• 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 $1,738,000.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
2 Includes $1,850,000 of collateral received for securities on loan.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Dividend Growth Fund
Statement of Operations
Year Ended | |
January 31, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 658,068 |
Interest2 | 2,420 |
Securities Lending—Net | 4,099 |
Total Income | 664,587 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 39,076 |
Performance Adjustment | 8,332 |
The Vanguard Group—Note C | |
Management and Administrative | 35,215 |
Marketing and Distribution | 5,789 |
Custodian Fees | 272 |
Auditing Fees | 34 |
Shareholders’ Reports | 339 |
Trustees’ Fees and Expenses | 50 |
Total Expenses | 89,107 |
Net Investment Income | 575,480 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | 403,222 |
Foreign Currencies | (253) |
Realized Net Gain (Loss) | 402,969 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 2,296,098 |
Foreign Currencies | 202 |
Change in Unrealized Appreciation (Depreciation) | 2,296,300 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 3,274,749 |
1 Dividends are net of foreign withholding taxes of $4,516,000. | |
2 Interest income and realized net gain (loss) from an affiliated company of the fund were $0 and $33,000, respectively. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Growth Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 575,480 | 487,197 |
Realized Net Gain (Loss) | 402,969 | 658,531 |
Change in Unrealized Appreciation (Depreciation) | 2,296,300 | (592,958) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 3,274,749 | 552,770 |
Distributions | ||
Net Investment Income | (579,527) | (476,748) |
Realized Capital Gain1 | (281,098) | (928,751) |
Total Distributions | (860,625) | (1,405,499) |
Capital Share Transactions | ||
Issued | 6,868,116 | 5,744,103 |
Issued in Lieu of Cash Distributions | 770,864 | 1,268,037 |
Redeemed | (5,052,269) | (3,594,784) |
Net Increase (Decrease) from Capital Share Transactions | 2,586,711 | 3,417,356 |
Total Increase (Decrease) | 5,000,835 | 2,564,627 |
Net Assets | ||
Beginning of Period | 25,631,698 | 23,067,071 |
End of Period2 | 30,632,533 | 25,631,698 |
1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $57,257,000 and $121,739,000, 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 ($4,809,000) and ($509,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Dividend Growth Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $21.78 | $22.47 | $20.45 | $17.52 | $15.81 |
Investment Operations | |||||
Net Investment Income | .446 | .442 | .430 | . 385 | . 357 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 2.165 | .145 | 2.378 | 3.033 | 1.721 |
Total from Investment Operations | 2.611 | .587 | 2.808 | 3.418 | 2.078 |
Distributions | |||||
Dividends from Net Investment Income | (. 450) | (. 432) | (. 440) | (. 384) | (. 368) |
Distributions from Realized Capital Gains | (. 221) | (. 845) | (. 348) | (.104) | — |
Total Distributions | (. 671) | (1.277) | (.788) | (. 488) | (. 368) |
Net Asset Value, End of Period | $23.72 | $21.78 | $22.47 | $20.45 | $17.52 |
Total Return1 | 12.06% | 2.44% | 13.69% | 19.60% | 13.36% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $30,633 | $25,632 | $23,067 | $19,137 | $12,704 |
Ratio of Total Expenses to Average Net Assets2 | 0.30% | 0.33% | 0.32% | 0.31% | 0.29% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.93% | 1.95% | 1.94% | 2.03% | 2.22% |
Portfolio Turnover Rate | 27% | 26% | 23% | 18% | 11% |
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%, 0.04%, 0.03%, 0.02%, and 0.00%. |
See accompanying Notes, which are an integral part of the Financial Statements.
17
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. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. 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, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. 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, 2014–2017), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
18
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 subject to termination by the fund at any time, and 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, 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 relative to the NASDAQ US Dividend Achievers Select Index for the preceding three years. For the year ended January 31, 2017, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets before an increase of $8,332,000 (0.03%) based on performance.
19
Dividend Growth Fund
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $2,268,000, representing 0.01% of the fund’s net assets and 0.91% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 29,381,681 | 1,045,142 | — |
Temporary Cash Investments | 1,883 | 234,000 | — |
Total | 29,383,564 | 1,279,142 | — |
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.
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 $29,635,000 from accumulated net realized gains to paid-in capital.
The fund used a capital loss carryforward of $5,177,000 to offset taxable capital gains realized during the year ended January 31, 2017, reducing the amount of capital gains that would otherwise be available to distribute to shareholders. For tax purposes, at January 31, 2017, the fund had $72,981,000 of ordinary income and $97,651,000 of long-term capital gains available for distribution.
20
Dividend Growth Fund
At January 31, 2017, the cost of investment securities for tax purposes was $22,902,356,000. Net unrealized appreciation of investment securities for tax purposes was $7,760,350,000, consisting of unrealized gains of $8,029,076,000 on securities that had risen in value since their purchase and $268,726,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2017, the fund purchased $10,512,391,000 of investment securities and sold $7,724,608,000 of investment securities, other than temporary cash investments. Purchases and sales include $212,677,000 and $0, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2017 | 2016 | |
Shares | Shares | |
(000) | (000) | |
Issued | 298,231 | 253,289 |
Issued in Lieu of Cash Distributions | 33,034 | 55,584 |
Redeemed | (216,755) | (158,371) |
Net Increase (Decrease) in Shares Outstanding | 114,510 | 150,502 |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2017, that would require recognition or disclosure in these financial statements.
21
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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendgrowthfundx24x1.jpg)
Special 2016 tax information (unaudited) for Vanguard Dividend Growth Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of
the Internal Revenue Code.
The fund distributed $244,511,000 as capital gain dividends (20% rate gain distributions) 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 $633,429,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 76.5% of investment income (dividend income plus short-term gains,
if any) qualifies for the dividends-received deduction.
22
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 2017. (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, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 12.06% | 12.09% | 7.80% |
Returns After Taxes on Distributions | 11.30 | 11.24 | 7.22 |
Returns After Taxes on Distributions and Sale of Fund Shares | 7.42 | 9.58 | 6.29 |
23
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.
24
Six Months Ended January 31, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Growth Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | $1,000.00 | $1,012.73 | $1.37 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.78 | 1.37 |
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 0.27%. 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 (184/366).
25
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Dividend Growth Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company LLP (Wellington Management). The board determined that renewing the fund’s advisory arrangement 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. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year directing the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also 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 reviewed 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 considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional managers. The board also noted that the portfolio manager of the fund has nearly 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 firm has advised the fund since its inception in 1992.
The board concluded that Wellington Management’s experience, stability, depth, and performance, among other factors, warranted 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 compared with a relevant 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.
26
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, 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.
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.
27
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.
28
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 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.
29
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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 | |
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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2017 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q570 032017 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendappreciationindex1x1.jpg)
Annual Report | January 31, 2017
Vanguard Dividend Appreciation Index Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Fund Profile. | 7 |
Performance Summary. | 8 |
Financial Statements. | 11 |
Your Fund’s After-Tax Returns. | 26 |
About Your Fund’s Expenses. | 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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• Vanguard Dividend Appreciation Index Fund returned more than 16% for the 12 months ended January 31, 2017. It closely tracked its target index, the NASDAQ US Dividend Achievers Select Index, but trailed the average return of its large-capitalization core fund peers.
• The target index is composed of stocks of companies that have increased their dividends for at least ten straight years.
• Dividend-paying stocks posted strong returns over the fiscal year but still lagged the broad U.S. market.
• All ten industry sectors produced positive results. Industrials, the fund’s largest sector, was the top contributor. Technology and financials also boosted returns significantly. Only the two consumer sectors failed to reach double-digit returns.
• For the ten years ended January 31, the fund recorded an average annual return of about 7%, in line with its benchmark and more than 1 percentage point ahead of its peers.
Total Returns: Fiscal Year Ended January 31, 2017 | |
Total | |
Returns | |
Vanguard Dividend Appreciation Index Fund | |
Investor Shares | 16.46% |
ETF Shares | |
Market Price | 16.65 |
Net Asset Value | 16.59 |
Admiral™ Shares | 16.58 |
NASDAQ US Dividend Achievers Select Index | 16.67 |
Large-Cap Core Funds Average | 18.20 |
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.
1
Total Returns: Ten Years Ended January 31, 2017 | |
Average | |
Annual Return | |
Dividend Appreciation Index Fund Investor Shares | 6.88% |
NASDAQ US Dividend Achievers Select Index | 7.11 |
Large-Cap Core Funds Average | 5.66 |
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.
Expense Ratios | ||||
Your Fund Compared With Its Peer Group | ||||
Investor | ETF | Admiral | Peer Group | |
Shares | Shares | Shares | Average | |
Dividend Appreciation Index Fund | 0.19% | 0.09% | 0.09% | 1.07% |
The fund expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2017, the fund’s expense ratios were 0.17% for Investor Shares, 0.08% for ETF Shares, and 0.08% 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 2016.
Peer group: Large-Cap Core Funds.
2
Chairman’s Perspective
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
As investors, we’re accustomed to hearing about risk. There’s market risk, inflation risk, currency risk, and so on. No form of risk, though, challenges investors quite the way uncertainty can. In my experience, how well we respond to uncertainty can be a key to long-term investing success.
Of course, we never have the luxury of complete clarity when investing—none of us has a crystal ball, after all—but the current environment seems to have more than its fair share of uncertainty.
There are plenty of question marks surrounding the economy as a new administration rolls out its policies, the Federal Reserve shifts its thinking, and global growth, especially in China, continues to worry market watchers. A general feeling of unsettledness is reflected in many questions I’ve been getting from clients in recent months.
Confronting the challenge of the unknowable
First, a bit about the difference between risk and uncertainty. Risk can be measured, albeit not with 100% accuracy. An investor armed with the right data can calculate a reasonable probability of, say, a given company missing earnings expectations.
Uncertainty can’t be quantified that easily. There are “black swan” events that fall completely outside the realm of the expected. The data needed to make sense of such an event are either not known or unknowable.
3
In times of uncertainty, it’s easy for investors to make bad decisions. Markets often respond to surprise events with volatility. We had plenty of those in 2016, and I expect similar market-rattling events to occur this year. Some investors may interpret volatility as a sign of trouble and flee to whatever they perceive as a safe haven. Others may see buying opportunities at every turn. Both are likely to fall prey to common investor biases, like these:
• Focusing on just the information that confirms our decisions.
• Buying into the mistaken belief that past performance indicates future results.
• Sticking to the familiar at the cost of smart diversification.
The problem with these natural inclinations is that they can make us forget about our long-term investment plan. That’s never a good thing.
Help yourself avoid unforced errors
Sound investing was ingrained in me from an early age. My mother and father did a good job of saving for retirement by building a diversified portfolio. They recognized that diversification is the most logical response to a future that is, inevitably, uncertain. But my family, just like yours, can succumb to common biases.
During the 1990s tech boom, my mom, who has always paid close attention to the markets, wanted to invest in some of the high-flying stocks of the moment. She had
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 20.81% | 10.50% | 14.06% |
Russell 2000 Index (Small-caps) | 33.53 | 7.89 | 13.00 |
Russell 3000 Index (Broad U.S. market) | 21.73 | 10.28 | 13.97 |
FTSE All-World ex US Index (International) | 16.35 | 1.50 | 4.79 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 1.45% | 2.59% | 2.09% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.28 | 3.70 | 2.94 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.30 | 0.10 | 0.09 |
CPI | |||
Consumer Price Index | 2.50% | 1.26% | 1.39% |
4
The perils of performance-chasing |
A gap often exists between a mutual fund’s stated return and how much the average investor |
in that fund actually earned over the same period. That’s because fund returns and investor |
returns don’t measure quite the same thing. Simply put, the size of the gap depends on when |
you owned shares in the fund and, maybe even more importantly, when you didn’t. |
The usual performance yardstick for a mutual fund is its “time-weighted” return. That’s the |
average annual 3-, 5-, or 10-year performance you might see in a fund report, for example. |
To get that return, you would have had to buy shares of the fund at the beginning of the stated |
period, hold onto those shares without adding or selling any, and reinvest all distributions. |
In contrast, the return earned by the average investor is “dollar-weighted”—it reflects not only |
the performance of the fund over a given period, but also the timing and amount of cash flows |
into and out of the fund. |
Whether you’re looking at stock funds or bond funds, investors as a whole generally don’t fare |
as well as the funds they invest in, as you can see in the chart below. There may be a number |
of reasons for this, but cash-flow data suggest that a key factor is investors pouring money into |
funds that have done well recently and selling those that have disappointed. That might seem |
like a reasonable strategy, but in practice it often leads to performance-chasing, with investors |
buying high and selling low. |
The difference between fund returns and investor returns |
For the ten years ended December 31, 2015 |
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendappreciationindex7x1.jpg)
Note: A basis point is equal to one one-hundredth of a percentage point. |
Sources: Vanguard calculations, based on data from Morningstar, Inc., for the ten years ended December 31, 2015, the most recent period |
for which data are available. |
5
read about them and heard about them on TV, which confirmed her thinking that they were good buys. Years later, she wanted to sell some holdings when stocks were at their low point during the financial crisis, just before the stock market rebounded. Those were scary times, and she was just trying to protect the nest egg she had so diligently built up over all those years. I’m happy to say she rethought both decisions.
None of us, of course, is immune from mistakes. I can fall into traps as well, so I’ve tried to develop habits that help me counter the biases that affect most of us as investors. These habits don’t require great investment acumen.
For example, I try to remove emotion from the investing equation. At the end of every year, I look at my retirement account and determine if I need to rebalance. Rarely, though, do I spend time trying to figure out why a certain fund over- or under-performed. I don’t want to be tempted by market noise.
Another way to cope with uncertainty: Save more. Just as we can’t know for sure where the markets are headed, we can’t predict when we might have to contend with a health or career setback. Putting away something extra isn’t easy, but it can give us the flexibility to make the most of bad situations.
The one thing we can be sure of
In investing, there is always going to be uncertainty—and a little pain. It’s difficult to continue to dollar-cost average into a tumbling market. Likewise, short-term noise can tempt us to not rebalance on a regular basis. Disciplined rebalancing is vital to achieving long-term goals. To paraphrase legendary investor John Neff, the best time to invest can be when your stomach is churning most.
Because my portfolio is fully diversified, it always contains something that under-performs expectations. There almost always are surprises on the upside, too. This is the power of diversification and a secret to investment success.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendappreciationindex8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
February 14, 2017
6
Dividend Appreciation Index Fund
Fund Profile
As of January 31, 2017
Share-Class Characteristics | |||
Investor | ETF | Admiral | |
Shares | Shares | Shares | |
Ticker Symbol | VDAIX | VIG | VDADX |
Expense Ratio1 | 0.19% | 0.09% | 0.09% |
30-Day SEC Yield | 2.06% | 2.14% | 2.15% |
Portfolio Characteristics | |||
NASDAQ | DJ | ||
US | U.S. | ||
Dividend | Total | ||
Achievers | Market | ||
Select | FA | ||
Fund | Index | Index | |
Number of Stocks | 186 | 185 | 3,825 |
Median Market Cap | $55.3B | $55.3B | $56.7B |
Price/Earnings Ratio | 22.7x | 22.7x | 24.1x |
Price/Book Ratio | 4.3x | 4.3x | 2.9x |
Return on Equity | 21.8% | 20.9% | 16.4% |
Earnings Growth | |||
Rate | 5.0% | 5.0% | 8.5% |
Dividend Yield | 2.2% | 2.2% | 1.9% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 19% | — | — |
Short-Term Reserves | 0.0% | — | — |
Sector Diversification (% of equity exposure) | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Basic Materials | 4.2% | 4.2% | 2.7% |
Consumer Goods | 21.2 | 21.2 | 9.7 |
Consumer Services | 16.8 | 16.8 | 13.2 |
Financials | 8.2 | 8.2 | 20.4 |
Health Care | 11.1 | 11.1 | 12.2 |
Industrials | 25.5 | 25.5 | 12.9 |
Oil & Gas | 1.4 | 1.4 | 6.7 |
Technology | 8.6 | 8.6 | 16.9 |
Telecommunications | 0.1 | 0.1 | 2.2 |
Utilities | 2.9 | 2.9 | 3.1 |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 1.00 | 0.88 |
Beta | 1.00 | 0.83 |
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) | ||
Microsoft Corp. | Software | 4.5% |
Johnson & Johnson | Pharmaceuticals | 3.8 |
PepsiCo Inc. | Soft Drinks | 3.7 |
Coca-Cola Co. | Soft Drinks | 3.4 |
McDonald's Corp. | Restaurants & Bars | 2.7 |
Medtronic plc | Medical Equipment | 2.6 |
3M Co. | Diversified Industrials | 2.6 |
United Technologies | ||
Corp. | Aerospace | 2.2 |
Walgreens Boots | ||
Alliance Inc. | Drug Retailers | 2.2 |
CVS Health Corp. | Drug Retailers | 2.1 |
Top Ten | 29.8% | |
The holdings listed exclude any temporary cash investments and equity index products. |
Investment Focus
1 The expense ratios shown are from the prospectus dated May 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2017, the expense ratios were 0.17% for Investor Shares, 0.08% for ETF Shares, and 0.08% for Admiral Shares.
7
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: January 31, 2007, Through January 31, 2017
Initial Investment of $10,000
Average Annual Total Returns | ||||
Periods Ended January 31, 2017 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
Dividend Appreciation Index Fund | ||||
Investor Shares | 16.46% | 11.41% | 6.88% | $19,454 |
NASDAQ US Dividend Achievers Select | ||||
• • • • • • • • | ||||
Index | 16.67 | 11.60 | 7.11 | 19,881 |
– – – – Dow Large-Cap Jones Core U.S. Funds Total Stock Average Market | 18.20 | 12.25 | 5.66 | 17,334 |
Float Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 |
Large-Cap Core 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 | |
Dividend Appreciation Index Fund | ||||
ETF Shares Net Asset Value | 16.59% | 11.52% | 6.99% | $19,662 |
NASDAQ US Dividend Achievers Select Index | 16.67 | 11.60 | 7.11 | 19,881 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 21.72 | 13.91 | 7.18 | 20,012 |
See Financial Highlights for dividend and capital gains information.
8
Dividend Appreciation Index Fund
Average Annual Total Returns | |||
Periods Ended January 31, 2017 | |||
Since | Final Value | ||
One | Inception | of a $10,000 | |
Year | (12/19/2013) | Investment | |
Dividend Appreciation Index Fund Admiral | |||
Shares | 16.58% | 7.57% | $12,554 |
NASDAQ US Dividend Achievers Select Index | 16.67 | 7.64 | 12,579 |
Dow Jones U.S. Total Stock Market Float | |||
Adjusted Index | 21.72 | 9.53 | 13,280 |
"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards. |
Cumulative Returns of ETF Shares: January 31, 2007, Through January 31, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Dividend Appreciation Index Fund ETF Shares | |||
Market Price | 16.65% | 72.34% | 96.28% |
Dividend Appreciation Index Fund ETF Shares Net | |||
Asset Value | 16.59 | 72.51 | 96.62 |
NASDAQ US Dividend Achievers Select Index | 16.67 | 73.08 | 98.81 |
Fiscal-Year Total Returns (%): January 31, 2007, Through January 31, 2017
![](https://capedge.com/proxy/N-CSR/0000932471-17-003671/dividendappreciationindx11x1.jpg)
9
Dividend Appreciation Index Fund
Average Annual Total Returns: Periods Ended December 31, 2016
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 | 4/27/2006 | 11.73% | 11.57% | 6.85% |
ETF Shares | 4/21/2006 | |||
Market Price | 11.90 | 11.69 | 6.96 | |
Net Asset Value | 11.84 | 11.68 | 6.96 | |
Admiral Shares | 12/19/2013 | 11.79 | — | 7.131 |
1 Return since inception. |
10
Dividend Appreciation Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2017
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 (99.9%)1 | |||
Basic Materials (4.2%) | |||
Ecolab Inc. | 2,016,130 | 242,198 | |
Praxair Inc. | 1,940,093 | 229,785 | |
Air Products & | |||
Chemicals Inc. | 1,468,843 | 205,285 | |
PPG Industries Inc. | 1,817,008 | 181,719 | |
Albemarle Corp. | 764,284 | 70,803 | |
International Flavors & | |||
Fragrances Inc. | 546,670 | 64,075 | |
Westlake Chemical Corp. | 887,141 | 54,923 | |
RPM International Inc. | 904,998 | 47,295 | |
Royal Gold Inc. | 444,277 | 32,063 | |
Sensient Technologies | |||
Corp. | 306,060 | 23,490 | |
HB Fuller Co. | 340,773 | 16,824 | |
Stepan Co. | 151,793 | 11,857 | |
* | Versum Materials Inc. | 486 | 14 |
1,180,331 | |||
Consumer Goods (21.2%) | |||
PepsiCo Inc. | 9,845,654 | 1,021,782 | |
Coca-Cola Co. | 23,045,816 | 958,015 | |
Reynolds American Inc. | 9,722,530 | 584,616 | |
NIKE Inc. Class B | 9,195,029 | 486,417 | |
Colgate-Palmolive Co. | 6,081,037 | 392,713 | |
Monsanto Co. | 2,999,117 | 324,834 | |
Kimberly-Clark Corp. | 2,458,413 | 297,788 | |
General Mills Inc. | 4,041,918 | 252,539 | |
Archer-Daniels-Midland | |||
Co. | 4,045,122 | 179,037 | |
Kellogg Co. | 2,385,686 | 173,463 | |
VF Corp. | 2,903,664 | 149,481 | |
Hormel Foods Corp. | 3,599,352 | 130,656 | |
Stanley Black & Decker | |||
Inc. | 1,037,578 | 128,660 | |
JM Smucker Co. | 815,143 | 110,737 | |
Clorox Co. | 881,653 | 105,798 | |
Genuine Parts Co. | 1,018,442 | 98,595 |
Church & Dwight Co. Inc. | 1,767,163 | 79,911 | |
McCormick & Co. Inc. | 785,774 | 75,081 | |
Brown-Forman Corp. | |||
Class B | 1,591,406 | 72,568 | |
Hasbro Inc. | 850,052 | 70,138 | |
Bunge Ltd. | 960,313 | 66,463 | |
Leggett & Platt Inc. | 924,484 | 44,116 | |
^ | Polaris Industries Inc. | 442,537 | 37,204 |
Flowers Foods Inc. | 1,446,670 | 29,093 | |
Lancaster Colony Corp. | 186,373 | 24,424 | |
J&J Snack Foods Corp. | 127,157 | 16,221 | |
^ | Tootsie Roll Industries Inc. | 260,443 | 9,754 |
Andersons Inc. | 191,009 | 7,211 | |
5,927,315 | |||
Consumer Services (16.8%) | |||
McDonald’s Corp. | 6,141,476 | 752,761 | |
Walgreens Boots | |||
Alliance Inc. | 7,348,065 | 602,100 | |
CVS Health Corp. | 7,482,516 | 589,697 | |
Costco Wholesale Corp. | 2,995,625 | 491,133 | |
Lowe’s Cos. Inc. | 6,198,582 | 452,992 | |
TJX Cos. Inc. | 4,560,655 | 341,684 | |
Target Corp. | 4,102,428 | 264,525 | |
Sysco Corp. | 3,845,582 | 201,739 | |
Ross Stores Inc. | 2,758,494 | 182,364 | |
Cardinal Health Inc. | 2,243,112 | 168,144 | |
Yum! Brands Inc. | 2,499,691 | 163,805 | |
AmerisourceBergen Corp. | |||
Class A | 1,399,432 | 122,142 | |
Best Buy Co. Inc. | 2,205,613 | 98,194 | |
Tiffany & Co. | 873,272 | 68,744 | |
Rollins Inc. | 1,490,329 | 52,549 | |
FactSet Research | |||
Systems Inc. | 280,663 | 48,569 | |
Casey’s General Stores | |||
Inc. | 265,692 | 30,528 | |
John Wiley & Sons Inc. | |||
Class A | 330,908 | 18,233 | |
Aaron’s Inc. | 494,974 | 15,314 |
11
Dividend Appreciation Index Fund
Market | ||||
Value• | ||||
Shares | ($000) | |||
Matthews International | ||||
Corp. Class A | 224,785 | 15,162 | ||
Monro Muffler Brake Inc. | 219,561 | 13,152 | ||
International Speedway | ||||
Corp. Class A | 181,989 | 6,670 | ||
4,700,201 | ||||
Financials (8.2%) | ||||
Chubb Ltd. | 3,144,808 | 413,511 | ||
Travelers Cos. Inc. | 2,009,142 | 236,637 | ||
S&P Global Inc. | 1,806,970 | 217,162 | ||
Aflac Inc. | 2,860,639 | 200,216 | ||
Franklin Resources Inc. | 4,036,518 | 160,411 | ||
Ameriprise Financial Inc. | 1,150,870 | 129,208 | ||
T. Rowe Price Group Inc. | 1,690,346 | 113,997 | ||
Cincinnati Financial Corp. | 1,119,390 | 79,006 | ||
Torchmark Corp. | 825,966 | 60,741 | ||
WR Berkley Corp. | 835,022 | 56,122 | ||
SEI Investments Co. | 1,114,895 | 54,084 | ||
American Financial Group | ||||
Inc. | 589,885 | 50,830 | ||
Bank of the Ozarks Inc. | 824,626 | 45,247 | ||
Axis Capital Holdings Ltd. | 646,537 | 41,385 | ||
RenaissanceRe Holdings | ||||
Ltd. | 293,866 | 40,060 | ||
Brown & Brown Inc. | 943,844 | 39,764 | ||
Commerce Bancshares Inc. 692,818 | 39,165 | |||
Assurant Inc. | 388,354 | 37,721 | ||
^ | BOK Financial Corp. | 450,486 | 37,048 | |
Erie Indemnity Co. Class A | 314,639 | 35,274 | ||
Prosperity Bancshares Inc. | 475,943 | 34,568 | ||
Eaton Vance Corp. | 786,695 | 32,986 | ||
UMB Financial Corp. | 337,615 | 26,044 | ||
Hanover Insurance Group | ||||
Inc. | 291,517 | 24,470 | ||
RLI Corp. | 297,133 | 17,656 | ||
Community Bank System | ||||
Inc. | 298,987 | 17,449 | ||
American Equity | ||||
Investment Life | ||||
Holding Co. | 558,111 | 13,171 | ||
BancFirst Corp. | 106,054 | 10,006 | ||
Tompkins Financial Corp. | 101,858 | 9,223 | ||
1st Source Corp. | 176,201 | 7,948 | ||
Infinity Property & Casualty | ||||
Corp. | 75,298 | 6,540 | ||
2,287,650 | ||||
Health Care (11.1%) | ||||
Johnson & Johnson | 9,447,452 | 1,069,924 | ||
Medtronic plc | 9,578,225 | 728,137 | ||
Abbott Laboratories | 10,035,206 | 419,171 | ||
Stryker Corp. | 2,540,735 | 313,857 | ||
Becton Dickinson and Co. | 1,442,749 | 255,785 | ||
CR Bard Inc. | 502,210 | 119,189 | ||
Perrigo Co. plc | 975,350 | 74,273 |
West Pharmaceutical | ||
Services Inc. | 492,785 | 41,704 |
STERIS plc | 585,129 | 41,445 |
Healthcare Services Group | ||
Inc. | 491,241 | 19,527 |
Owens & Minor Inc. | 427,014 | 15,321 |
National HealthCare Corp. | 102,140 | 7,645 |
Atrion Corp. | 12,421 | 6,069 |
3,112,047 | ||
Industrials (25.5%) | ||
3M Co. | 4,121,327 | 720,490 |
United Technologies | ||
Corp. | 5,697,441 | 624,838 |
Lockheed Martin Corp. | 2,080,863 | 522,983 |
Accenture plc Class A | 4,277,189 | 487,044 |
General Dynamics Corp. | 2,119,559 | 383,810 |
FedEx Corp. | 1,877,428 | 355,040 |
Illinois Tool Works Inc. | 2,477,918 | 315,191 |
Automatic Data | ||
Processing Inc. | 3,116,183 | 314,703 |
CSX Corp. | 6,560,862 | 304,358 |
Raytheon Co. | 2,036,541 | 293,588 |
Northrop Grumman Corp. | 1,232,569 | 282,357 |
Norfolk Southern Corp. | 2,031,093 | 238,572 |
Waste Management Inc. | 3,035,345 | 210,956 |
Sherwin-Williams Co. | 628,457 | 190,932 |
Parker-Hannifin Corp. | 920,233 | 135,394 |
Republic Services Inc. | ||
Class A | 2,348,928 | 134,782 |
Roper Technologies Inc. | 688,415 | 132,072 |
WW Grainger Inc. | 420,437 | 106,190 |
Fastenal Co. | 1,965,144 | 97,628 |
Cintas Corp. | 736,513 | 85,517 |
L3 Technologies Inc. | 530,075 | 84,118 |
Dover Corp. | 1,055,838 | 82,091 |
JB Hunt Transport | ||
Services Inc. | 768,170 | 76,110 |
CH Robinson Worldwide | ||
Inc. | 975,644 | 74,207 |
Expeditors International | ||
of Washington Inc. | 1,240,357 | 64,598 |
Valspar Corp. | 538,186 | 59,561 |
AO Smith Corp. | 1,017,535 | 49,605 |
Jack Henry & Associates | ||
Inc. | 537,280 | 48,237 |
Carlisle Cos. Inc. | 437,254 | 47,709 |
Nordson Corp. | 388,300 | 44,084 |
Toro Co. | 747,940 | 44,076 |
Robert Half International | ||
Inc. | 893,631 | 42,054 |
Lincoln Electric Holdings | ||
Inc. | 481,515 | 40,144 |
Donaldson Co. Inc. | 903,541 | 38,175 |
Graco Inc. | 375,424 | 33,634 |
12
Dividend Appreciation Index Fund
Market | ||
Value• | ||
Shares | ($000) | |
MSC Industrial Direct Co. | ||
Inc. Class A | 328,634 | 33,570 |
Bemis Co. Inc. | 645,212 | 31,435 |
AptarGroup Inc. | 428,227 | 31,248 |
Crane Co. | 396,830 | 28,588 |
Ryder System Inc. | 364,538 | 28,288 |
CLARCOR Inc. | 330,665 | 27,382 |
ITT Inc. | 609,969 | 24,929 |
Silgan Holdings Inc. | 411,127 | 24,055 |
Valmont Industries Inc. | 155,333 | 22,368 |
Regal Beloit Corp. | 304,288 | 22,091 |
MSA Safety Inc. | 254,473 | 18,157 |
ABM Industries Inc. | 380,981 | 15,388 |
G&K Services Inc. Class A | 135,570 | 13,023 |
Franklin Electric Co. Inc. | 315,960 | 12,749 |
Tennant Co. | 120,023 | 8,312 |
Badger Meter Inc. | 197,440 | 7,611 |
Gorman-Rupp Co. | 178,057 | 5,780 |
^ Lindsay Corp. | 75,836 | 5,714 |
Cass Information Systems | ||
Inc. | 77,116 | 5,072 |
Mesa Laboratories Inc. | 24,554 | 2,925 |
7,133,533 | ||
Oil & Gas (1.4%) | ||
EOG Resources Inc. | 3,745,701 | 380,488 |
Technology (8.6%) | ||
Microsoft Corp. | 19,535,467 | 1,262,968 |
Texas Instruments Inc. | 6,847,462 | 517,257 |
Analog Devices Inc. | 2,111,632 | 158,246 |
Linear Technology Corp. | 1,630,220 | 102,916 |
Xilinx Inc. | 1,740,571 | 101,301 |
Microchip Technology Inc. | 1,387,608 | 93,456 |
Harris Corp. | 849,102 | 87,211 |
Maxim Integrated | ||
Products Inc. | 1,950,704 | 86,767 |
2,410,122 | ||
Telecommunications (0.1%) | ||
Telephone & Data | ||
Systems Inc. | 692,740 | 21,233 |
ATN International Inc. | 109,689 | 8,807 |
30,040 | ||
Utilities (2.8%) | ||
NextEra Energy Inc. | 3,137,525 | 388,175 |
Edison International | 2,219,193 | 161,735 |
UGI Corp. | 1,171,213 | 54,309 |
Atmos Energy Corp. | 695,521 | 52,985 |
Aqua America Inc. | 1,206,250 | 36,682 |
WGL Holdings Inc. | 339,490 | 27,818 |
New Jersey Resources | ||
Corp. | 585,291 | 22,065 |
MGE Energy Inc. | 236,078 | 15,026 |
California Water Service | ||
Group | 325,622 | 11,234 |
American States Water Co. | 248,430 | 10,876 | |
SJW Group | 139,201 | 6,974 | |
Chesapeake Utilities Corp. | 104,039 | 6,804 | |
Connecticut Water Service | |||
Inc. | 75,997 | 4,107 | |
798,790 | |||
Total Common Stocks | |||
(Cost $22,790,297) | 27,960,517 | ||
Temporary Cash Investments (0.2%)1 | |||
Money Market Fund (0.2%) | |||
2,3 | Market Liquidity Fund, | ||
0.856% | 506,493 | 50,655 | |
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (0.0%) | |||
4 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.390%, 2/1/17 | 200 | 200 | |
5 | United States Treasury Bill, | ||
0.501%–0.564%, 5/4/17 | 1,100 | 1,098 | |
United States Treasury Bill, | |||
0.592%, 7/13/17 | 100 | 100 | |
1,398 | |||
Total Temporary Cash Investments | |||
(Cost $52,052) | 52,053 | ||
Total Investments (100.1%) | |||
(Cost $22,842,349) | 28,012,570 | ||
Amount | |||
($000) | |||
Other Assets and Liabilities (-0.1%) | |||
Other Assets | |||
Investment in Vanguard | 2,021 | ||
Receivables for Accrued Income | 25,165 | ||
Receivables for Capital Shares Issued | 8,193 | ||
Other Assets 5 | 86 | ||
Total Other Assets | 35,465 | ||
Liabilities | |||
Payables for Investment Securities | |||
Purchased | (20,448) | ||
Collateral for Securities on Loan | (22,031) | ||
Payables for Capital Shares Redeemed | (8,720) | ||
Payables to Vanguard | (11,383) | ||
Other Liabilities | (32) | ||
Total Liabilities | (62,614) | ||
Net Assets (100%) | 27,985,421 |
13
Dividend Appreciation Index Fund
At January 31, 2017, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 23,464,392 |
Undistributed Net Investment Income | 15,174 |
Accumulated Net Realized Losses | (664,600) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 5,170,221 |
Futures Contracts | 234 |
Net Assets | 27,985,421 |
Investor Shares—Net Assets | |
Applicable to 28,670,456 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 994,081 |
Net Asset Value Per Share— | |
Investor Shares | $34.67 |
ETF Shares—Net Assets | |
Applicable to 261,912,625 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 22,697,553 |
Net Asset Value Per Share— | |
ETF Shares | $86.66 |
Admiral Shares—Net Assets | |
Applicable to 182,582,230 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 4,293,787 |
Net Asset Value Per Share— | |
Admiral Shares | $23.52 |
• 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 $21,459,000.
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 0.1%, 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 $22,031,000 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 $1,099,000 and cash of $86,000 have been segregated as initial margin for open futures contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Dividend Appreciation Index Fund
Statement of Operations
Year Ended | |
January 31, 2017 | |
($000) | |
Investment Income | |
Income | |
Dividends | 591,398 |
Interest1 | 123 |
Securities Lending—Net | 2,865 |
Total Income | 594,386 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 2,918 |
Management and Administrative—Investor Shares | 1,198 |
Management and Administrative—ETF Shares | 13,001 |
Management and Administrative—Admiral Shares | 2,167 |
Marketing and Distribution—Investor Shares | 199 |
Marketing and Distribution—ETF Shares | 977 |
Marketing and Distribution—Admiral Shares | 320 |
Custodian Fees | 262 |
Auditing Fees | 37 |
Shareholders’ Reports—Investor Shares | 23 |
Shareholders’ Reports—ETF Shares | 465 |
Shareholders’ Reports—Admiral Shares | 35 |
Trustees’ Fees and Expenses | 18 |
Total Expenses | 21,620 |
Net Investment Income | 572,766 |
Realized Net Gain (Loss) | |
Investment Securities Sold1 | 24,485 |
Futures Contracts | 7,175 |
Realized Net Gain (Loss) | 31,660 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 3,292,840 |
Futures Contracts | 225 |
Change in Unrealized Appreciation (Depreciation) | 3,293,065 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 3,897,491 |
1 Interest income and realized net gain (loss) from an affiliated company of the fund were $111,000 and $14,000, respectively. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2017 | 2016 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 572,766 | 533,935 |
Realized Net Gain (Loss) | 31,660 | 2,703,169 |
Change in Unrealized Appreciation (Depreciation) | 3,293,065 | (3,303,415) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 3,897,491 | (66,311) |
Distributions | ||
Net Investment Income | ||
Investor Shares | (18,763) | (24,306) |
ETF Shares | (474,719) | (456,267) |
Admiral Shares | (82,693) | (73,040) |
Realized Capital Gain | ||
Investor Shares | — | — |
ETF Shares | — | — |
Admiral Shares | — | — |
Total Distributions | (576,175) | (553,613) |
Capital Share Transactions | ||
Investor Shares | 2,117 | (554,813) |
ETF Shares | 1,201,844 | (1,350,433) |
Admiral Shares | 599,134 | 550,641 |
Net Increase (Decrease) from Capital Share Transactions | 1,803,095 | (1,354,605) |
Total Increase (Decrease) | 5,124,411 | (1,974,529) |
Net Assets | ||
Beginning of Period | 22,861,010 | 24,835,539 |
End of Period1 | 27,985,421 | 22,861,010 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $15,174,000 and $18,583,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Dividend Appreciation Index Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $30.40 | $31.37 | $28.59 | $25.23 | $22.42 |
Investment Operations | |||||
Net Investment Income | .694 | .670 | .627 | . 540 | . 538 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 4.275 | (.947) | 2.756 | 3.350 | 2.812 |
Total from Investment Operations | 4.969 | (.277) | 3.383 | 3.890 | 3.350 |
Distributions | |||||
Dividends from Net Investment Income | (. 699) | (. 693) | (. 603) | (. 530) | (. 540) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (. 699) | (. 693) | (. 603) | (. 530) | (. 540) |
Net Asset Value, End of Period | $34.67 | $30.40 | $31.37 | $28.59 | $25.23 |
Total Return1 | 16.46% | -0.93% | 11.86% | 15.51% | 15.15% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $994 | $875 | $1,450 | $2,966 | $2,804 |
Ratio of Total Expenses to Average Net Assets | 0.17% | 0.19% | 0.20% | 0.20% | 0.20% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.11% | 2.11% | 2.04% | 1.98% | 2.32% |
Portfolio Turnover Rate2 | 19% | 22% | 20% | 3% | 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.
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Dividend Appreciation Index Fund
Financial Highlights
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $75.98 | $78.42 | $71.47 | $63.08 | $56.04 |
Investment Operations | |||||
Net Investment Income | 1.810 | 1.759 | 1.645 | 1.421 | 1.401 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 10.696 | (2.380) | 6.890 | 8.357 | 7.049 |
Total from Investment Operations | 12.506 | (.621) | 8.535 | 9.778 | 8.450 |
Distributions | |||||
Dividends from Net Investment Income | (1.826) | (1.819) | (1.585) | (1.388) | (1.410) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (1.826) | (1.819) | (1.585) | (1.388) | (1.410) |
Net Asset Value, End of Period | $86.66 | $75.98 | $78.42 | $71.47 | $63.08 |
Total Return | 16.59% | -0.84% | 11.97% | 15.60% | 15.29% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $22,698 | $18,771 | $20,610 | $18,511 | $13,119 |
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.09% | 0.10% | 0.10% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.20% | 2.21% | 2.14% | 2.08% | 2.42% |
Portfolio Turnover Rate1 | 19% | 22% | 20% | 3% | 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.
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Dividend Appreciation Index Fund
Financial Highlights
Admiral Shares | ||||
Dec. 19, | ||||
20131 to | ||||
Year Ended January 31, | Jan. 31, | |||
For a Share Outstanding Throughout Each Period | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $20.62 | $21.28 | $19.40 | $20.00 |
Investment Operations | ||||
Net Investment Income | .492 | .478 | .445 | . 030 |
Net Realized and Unrealized Gain (Loss) | ||||
on Investments | 2.903 | (.644) | 1.865 | (.630) |
Total from Investment Operations | 3.395 | (.166) | 2.310 | (.600) |
Distributions | ||||
Dividends from Net Investment Income | (. 495) | (. 494) | (. 430) | — |
Distributions from Realized Capital Gains | — | — | — | — |
Total Distributions | (. 495) | (. 494) | (. 430) | — |
Net Asset Value, End of Period | $23.52 | $20.62 | $21.28 | $19.40 |
Total Return2 | 16.58% | -0.83% | 11.94% | -3.00% |
Ratios/Supplemental Data | ||||
Net Assets, End of Period (Millions) | $4,294 | $3,215 | $2,776 | $760 |
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.09% | 0.10% | 0.10%3 |
Ratio of Net Investment Income to Average Net Assets | 2.20% | 2.21% | 2.14% | 2.08%3 |
Portfolio Turnover Rate 4 | 19% | 22% | 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.
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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, ETF Shares, and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, 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).
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Dividend Appreciation Index Fund
During the year ended January 31, 2017, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of 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, 2014–2017), 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 subject to termination by the fund at any time, and 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. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% 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 based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at January 31, 2017, or at any time during the period then ended.
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Dividend Appreciation Index Fund
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.
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. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2017, the fund had contributed to Vanguard capital in the amount of $2,021,000, representing 0.01% of the fund’s net assets and 0.81% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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, 2017, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 27,960,517 | — | — |
Temporary Cash Investments | 50,655 | 1,398 | — |
Futures Contracts—Liabilities1 | (19) | — | — |
Total | 28,011,153 | 1,398 | — |
1 Represents variation margin on the last day of the reporting period. |
22
Dividend Appreciation Index Fund
D. At January 31, 2017, 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 2017 | 247 | 28,090 | 234 |
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, 2017, the fund realized $538,755,000 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, 2017, the fund had $25,379,000 of ordinary income available for distribution. At January 31, 2017, the fund had available capital losses totaling $664,366,000 to offset future net capital gains. Of this amount, $11,128,000 is subject to expiration on January 31, 2019. Capital losses of $653,238,000 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, 2017, the cost of investment securities for tax purposes was $22,842,349,000. Net unrealized appreciation of investment securities for tax purposes was $5,170,221,000, consisting of unrealized gains of $5,458,738,000 on securities that had risen in value since their purchase and $288,517,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2017, the fund purchased $8,640,248,000 of investment securities and sold $6,843,882,000 of investment securities, other than temporary cash investments. Purchases and sales include $2,677,069,000 and $1,876,760,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
23
Dividend Appreciation Index Fund
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2017 | 2016 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 306,256 | 9,147 | 156,453 | 4,950 |
Issued in Lieu of Cash Distributions | 17,178 | 515 | 20,734 | 661 |
Redeemed | (321,317) | (9,762) | (732,000) | (23,050) |
Net Increase (Decrease)—Investor Shares | 2,117 | (100) | (554,813) | (17,439) |
ETF Shares | ||||
Issued | 3,087,183 | 37,802 | 6,278,046 | 78,491 |
Issued in Lieu of Cash Distributions | — | — | — | — |
Redeemed | (1,885,339) | (22,950) | (7,628,479) | (94,250) |
Net Increase (Decrease)—ETF Shares | 1,201,844 | 14,852 | (1,350,433) | (15,759) |
Admiral Shares | ||||
Issued | 1,490,587 | 65,899 | 1,093,111 | 50,897 |
Issued in Lieu of Cash Distributions | 74,470 | 3,292 | 63,639 | 2,998 |
Redeemed | (965,923) | (42,568) | (606,109) | (28,401) |
Net Increase (Decrease)—Admiral Shares | 599,134 | 26,623 | 550,641 | 25,494 |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2017, 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 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”) as of January 31, 2017, 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 as of January 31, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 14, 2017
Special 2016 tax information (unaudited) for Vanguard Dividend Appreciation Index Fund
This information for the fiscal year ended January 31, 2017, is included pursuant to provisions of the
Internal Revenue Code.
The fund distributed $576,175,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 96.2% 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 2017. (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, 2017 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 16.46% | 11.41% | 6.88% |
Returns After Taxes on Distributions | 15.88 | 10.91 | 6.48 |
Returns After Taxes on Distributions and Sale of Fund Shares | 9.75 | 9.06 | 5.53 |
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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, 2017 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Appreciation Index Fund | 7/31/2016 | 1/31/2017 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,028.49 | $0.82 |
ETF Shares | 1,000.00 | 1,029.21 | 0.36 |
Admiral Shares | 1,000.00 | 1,029.37 | 0.36 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,024.33 | $0.81 |
ETF Shares | 1,000.00 | 1,024.78 | 0.36 |
Admiral Shares | 1,000.00 | 1,024.78 | 0.36 |
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 0.16% for Investor Shares, 0.07% for ETF Shares, and 0.07% 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 (184/366).
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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.
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
John James | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
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 | |
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This material may be used in conjunction | NASDAQ OMX makes no warranties and bears no |
with the offering of shares of any Vanguard | liability with respect to the Vanguard mutual funds. |
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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2017 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q6020 032017 |
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. All members of the Audit Committee have been determined by the Registrant’s Board of Trustees to be Audit Committee Financial Experts and to be independent: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, and Peter F. Volanakis.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Audit Fees of the Registrant
Fiscal Year Ended January 31, 2017: $216,000
Fiscal Year Ended January 31, 2016: $235,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended January 31, 2017: $9,629,849
Fiscal Year Ended January 31, 2016: $7,000,200
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, 2017: $2,717,627
Fiscal Year Ended January 31, 2016: $2,899,096
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, 2017: $254,050
Fiscal Year Ended January 31, 2016: $353,389
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, 2017: $214,225
Fiscal Year Ended January 31, 2016: $202,313
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, 2017: $468,275
Fiscal Year Ended January 31, 2016: $555,702
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: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, 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 22, 2017 |
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 22, 2017 | |
| VANGUARD SPECIALIZED FUNDS |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER | |
Date: March 22, 2017 |
* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on October 4, 2016 see file Number
33-32548, Incorporated by Reference.