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, 2017 – January 31, 2018 | ||
Item 1: Reports to Shareholders |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/energyfundx1x1.jpg)
Annual Report | January 31, 2018
Vanguard Energy Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Advisors’ Report. | 6 |
Results of Proxy Voting. | 10 |
Fund Profile. | 12 |
Performance Summary. | 14 |
Financial Statements. | 16 |
Your Fund’s After-Tax Returns. | 33 |
About Your Fund’s Expenses. | 34 |
Glossary. | 36 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2018, Vanguard Energy Fund returned nearly 9%. It trailed its benchmark, the MSCI ACWI Energy Index, and slightly lagged the average return of its global natural resources peer funds.
• The fund, managed by two advisors, seeks long-term capital appreciation through its multicapitalization exposure to global energy stocks.
• Oil prices stagnated early in the period as the market watched to see how production cuts by OPEC nations would affect crude oil inventories. Energy stocks rebounded in the second half of 2017 as U.S. crude oil inventories declined.
• The fund benefited modestly from its holdings among transportation-related companies, but it was held back most by an overweight allocation to and selection among exploration and production companies.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard Energy Fund | |
Investor Shares | 8.75% |
Admiral™ Shares | 8.84 |
MSCI ACWI Energy Index | 13.73 |
Global Natural Resources Funds Average | 8.89 |
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, 2018 | |
Average | |
Annual Return | |
Energy Fund Investor Shares | 1.31% |
Spliced Energy Index | 0.44 |
Global Natural Resources Funds Average | -2.47 |
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 | 0.41% | 0.33% | 1.36% |
The fund expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For
the fiscal year ended January 31, 2018, the fund’s expense ratios were 0.38% for Investor Shares and 0.30% 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 2017.
Peer group: Global Natural Resources Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/energyfundx5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/energyfundx5x2.jpg)
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Advisors’ Report
For the 12 months ended January 31, 2018, Vanguard Energy Fund returned nearly 9%. It trailed its benchmark, the MSCI ACWI Energy Index, and slightly lagged the average return of its 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 20, 2018.
Wellington Management Company llp
Portfolio Manager:
Gregory LeBlanc, CFA,
Senior Managing Director,
Global Industry Analyst
The investment environment
Global equities performed strongly over the 12 months. Global energy stocks, as measured by the fund’s benchmark, returned 13.73%, trailing the more than
Vanguard Energy Fund Investment Advisors | |||
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Wellington Management | 93 | 9,075 | Emphasizes long-term total-return opportunities |
Company LLP | from 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 | 5 | 464 | Employs a quantitative fundamental |
Group | management 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 | 225 | 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. |
6
27% return of the broader market, as measured by the MSCI All Country World Index.
Oil prices stagnated at the start of the fiscal year as the market watched for how production cuts by OPEC nations would ultimately affect crude oil inventories. Unfortunately for the sector, U.S. inventories initially ticked higher, pushing oil below $50 per barrel and weighing on energy stocks.
Energy companies rebounded in the second half of 2017 as U.S. crude oil inventories declined, as did the inventories of member countries of the Organization for Economic Co-operation and Development.
The inventory reductions from strong demand and supply restraint were encouraging, as was a renewed focus across the sector on capital discipline, as many producers—including several U.S. shale producers—pledged not to materially raise spending in a higher oil price environment. Preserving that discipline will be a critical component of determining the oil market’s strength in 2018, as accelerating growth from U.S. shale presents the greatest short-term risk to the current trend of inventory rebalancing.
Our investment strategy
Wellington Management’s portion of the fund emphasizes long-term, total-return opportunities from the various energy subsectors: global integrated oil companies, North American producers, non-North American producers, oil services and equipment, transportation and distribution, and refining and marketing.
Our successes and shortfalls
Security selection drove the fund’s underperformance for the period, most notably among upstream producers. An overweighting of that subindustry also weighed on results.
A preference for exploration and production companies over integrated oil companies also detracted, as exploration and production businesses tend to be more sensitive to oil prices. Newfield Exploration, QEP Resources, and Pioneer Natural Resources were among the biggest detractors for the period. We continue to see the most opportunity in the sector among select North American production companies and believe they are well-positioned to outperform over the long term.
The portfolio benefited from selection among transportation-related companies. The fund’s position in Keyera boosted returns, as we were able to take advantage of short-term price movement after the company missed earnings estimates in August. Not holding benchmark constituent Enbridge was also beneficial, as high debt levels from aggressive capital spending have hurt the stock.
Valero Energy, a U.S. refiner and marketer, and Portuguese upstream producer Galp Energia were also top relative contributors. Strong demand and the availability of
7
advantaged feedstock—raw material that can be used as or converted to a fuel—helped maintain healthy refining-company margins. This benefited Valero, while Galp was able to strike a balance between growth of its Brazilian assets and improved free cash flow.
The fund’s positioning
As we look toward the new fiscal year, we expect the market to continue to focus on crude oil inventories, a prime measure of supply and demand.
Industry discipline will be key to improving sentiment in the sector. Although there is a healthy degree of skepticism about the sustainability of this newfound discipline, we think the flattening of the oil futures curve and questions about long-term demand growth will ultimately force energy companies to adjust their business models to better balance growth and returns.
The companies that can differentiate themselves in that transition should outperform, and our portfolio construction has prioritized companies whose visibility into free-cash-flow conversion is improving relative to market expectations.
We continue to forecast a range of possible outcomes, but we believe that our focus on companies with the best assets and strong management teams will lead to outperformance across these scenarios.
We are also paying close attention to the fundamentals of natural gas companies, for which sentiment has been especially poor. Although inventories and supplies of natural gas have held steady, company valuations are beginning to look more attractive.
Vanguard Quantitative Equity Group
Portfolio Managers:
James P. Stetler
Binbin Guo, Principal, Head of Alpha
Equity Investments
The investment environment
Energy stocks generally lagged the broader market over the 12 months. Although they rebounded during the latter part of the fiscal year amid a decline in oil inventories and rising natural gas prices, energy companies couldn’t shake off the turbulent first six months when oil prices stagnated.
Investment objective and strategy
Although it’s important to understand how our overall performance is affected by the macroeconomic 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 in order to identify those with characteristics that we believe will outperform over the long run.
8
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) sound management decisions—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, our quality, valuation, and sentiment models boosted performance, while our management decisions model detracted.
Our overweight position and strong stock selection in refiners, particularly those in emerging markets, boosted results. We also benefited from strong selection in oil services and among integrated oil and gas companies. Our underweighting of exploration and production companies also helped. While mostly positive, our selection in certain countries—in particular, the United Kingdom, Italy, and Singapore—held back results.
Our most successful overweightings included those to Cosmo Energy Holdings, Ecopetrol SA ADR, Grupa Lotos SA, and OMV AG. Our results were dragged down by underweight allocations to Reliance Industries Limited and Devon Energy, as well as overweight positions in Doosan Heavy Industries & Construction and Newfield Exploration.
9
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Energy Fund | 70,690,643 | 4,196,468 | 6,005,214 | 17,710,393 | 71.7% |
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Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Energy Fund | 19,148,572 | 5,098,638 | 56,645,116 | 17,710,393 | 19.4% |
11
Energy Fund
Fund Profile
As of January 31, 2018
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGENX | VGELX |
Expense Ratio1 | 0.41% | 0.33% |
30-Day SEC Yield | 2.24% | 2.31% |
Portfolio Characteristics | |||
DJ | |||
U.S. | |||
Total | |||
MSCI Market | |||
ACWI | FA | ||
Fund | Energy | Index | |
Number of Stocks | 135 | 134 | 3,765 |
Median Market Cap | $49.7B | $69.5B | $73.6B |
Price/Earnings Ratio | 24.5x | 21.3x | 23.8x |
Price/Book Ratio | 1.7x | 1.6x | 3.2x |
Return on Equity | 5.3% | 6.1% | 14.9% |
Earnings Growth Rate | -29.4% | -22.1% | 9.1% |
Dividend Yield | 2.5% | 3.4% | 1.7% |
Foreign Holdings | 33.2% | 50.8% | 0.0% |
Turnover Rate | 24% | — | — |
Short-Term Reserves | 2.9% | — | — |
Volatility Measures | ||
DJ | ||
MSCI | U.S. Total | |
ACWI | Market | |
Energy | FA Index | |
R-Squared | 0.95 | 0.34 |
Beta | 1.05 | 1.06 |
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 | 8.9% |
Chevron Corp. | Integrated Oil & Gas | 6.3 |
Royal Dutch Shell plc | Integrated Oil & Gas | 5.0 |
Pioneer Natural | Oil & Gas Exploration | |
Resources Co. | & Production | 4.6 |
TOTAL SA | Integrated Oil & Gas | 4.0 |
EOG Resources Inc. | Oil & Gas Exploration | |
& Production | 3.3 | |
BP plc | Integrated Oil & Gas | 3.2 |
Schlumberger Ltd. | Oil & Gas Equipment | |
& Services | 2.9 | |
Diamondback Energy | Oil & Gas Exploration | |
Inc. | & Production | 2.7 |
Valero Energy Corp. | Oil & Gas Refining & | |
Marketing | 2.7 | |
Top Ten | 43.6% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2018, the expense ratios were 0.38% for Investor Shares and 0.30% for Admiral Shares.
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Energy Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Fund | Energy | |
Coal & Consumable Fuels | 0.0% | 1.1% |
Industrials | 0.2 | 0.0 |
Information Technology | 0.5 | 0.0 |
Integrated Oil & Gas | 41.5 | 53.6 |
Oil & Gas Drilling | 1.0 | 0.3 |
Oil & Gas Equipment & | ||
Services | 7.2 | 6.8 |
Oil & Gas Exploration & | ||
Production | 31.1 | 18.9 |
Oil & Gas Refining & | ||
Marketing | 9.1 | 10.2 |
Oil & Gas Storage & | ||
Transportation | 3.2 | 9.1 |
Utilities | 4.9 | 0.0 |
Other | 1.3 | 0.0 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Market Diversification (% of equity exposure) | |
Europe | |
United Kingdom | 8.5% |
France | 4.1 |
Italy | 2.9 |
Portugal | 1.5 |
Other | 2.6 |
Subtotal | 19.6% |
Pacific | |
Japan | 0.8% |
Other | 0.3 |
Subtotal | 1.1% |
Emerging Markets | |
Russia | 3.9% |
India | 2.2 |
Other | 2.4 |
Subtotal | 8.5% |
North America | |
United States | 66.0% |
Canada | 4.8 |
Subtotal | 70.8% |
13
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, 2008, Through January 31, 2018
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2018 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Energy Fund Investor Shares | 8.75% | 1.32% | 1.31% | $11,392 | |
• • • • • • • • | Spliced Energy Index | 13.73 | 0.57 | 0.44 | 10,452 |
– – – – | Global Natural Resources Funds | ||||
Average | 8.89 | -1.04 | -2.47 | 7,784 | |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 | |
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 | 8.84% | 1.39% | 1.38% | $57,331 |
Spliced Energy Index | 13.73 | 0.57 | 0.44 | 52,260 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 128,619 |
See Financial Highlights for dividend and capital gains information.
14
Energy Fund
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/energyfundx17x1.jpg)
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2017
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 Date | One Year | Five Years | Ten Years | |
Investor Shares | 5/23/1984 | 3.17% | 1.77% | -0.12% |
Admiral Shares | 11/12/2001 | 3.26 | 1.84 | -0.06 |
15
Energy Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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 (95.8%)1 | |||
United States (62.6%) | |||
Electric Utilities (1.5%) | |||
OGE Energy Corp. | 2,160,637 | 69,572 | |
Avangrid Inc. | 1,073,085 | 52,281 | |
Edison International | 443,229 | 27,715 | |
149,568 | |||
Energy Equipment & Services (7.2%) | |||
Schlumberger Ltd. | 3,796,512 | 279,347 | |
Halliburton Co. | 4,547,850 | 244,220 | |
Patterson-UTI Energy | |||
Inc. | 4,059,185 | 95,878 | |
Baker Hughes a GE Co. | 1,949,939 | 62,690 | |
* | Liberty Oilfield Services | ||
Inc. Class A | 1,037,086 | 22,961 | |
705,096 | |||
Multi-Utilities (1.1%) | |||
Sempra Energy | 1,011,209 | 108,220 | |
Oil, Gas & Consumable Fuels (51.9%) | |||
Integrated Oil & Gas (17.2%) | |||
Exxon Mobil Corp. | 9,954,391 | 869,018 | |
Chevron Corp. | 4,918,239 | 616,501 | |
Occidental Petroleum | |||
Corp. | 2,520,098 | 188,932 | |
Oil & Gas Exploration & Production (26.0%) | |||
Pioneer Natural | |||
Resources Co. | 2,475,682 | 452,827 | |
EOG Resources Inc. | 2,820,226 | 324,326 | |
* | Diamondback Energy | ||
Inc. | 2,110,079 | 264,815 | |
EQT Corp. | 2,587,150 | 140,456 | |
* | Concho Resources Inc. | 864,099 | 136,044 |
* | Newfield Exploration Co. | 4,157,216 | 131,617 |
ConocoPhillips | 2,135,382 | 125,582 | |
Anadarko Petroleum | |||
Corp. | 1,816,328 | 109,071 |
Cimarex Energy Co. | 933,921 | 104,786 | |
Cabot Oil & Gas Corp. | 3,909,817 | 103,024 | |
Hess Corp. | 2,011,450 | 101,598 | |
* | Callon Petroleum Co. | 7,522,070 | 85,376 |
* | Antero Resources Corp. | 4,170,579 | 81,034 |
Devon Energy Corp. | 1,712,358 | 70,840 | |
* | Energen Corp. | 1,153,776 | 60,262 |
* | SRC Energy Inc. | 6,019,803 | 59,897 |
Noble Energy Inc. | 1,634,662 | 49,890 | |
* | Parsley Energy Inc. | ||
Class A | 1,630,148 | 38,471 | |
* | Extraction Oil & Gas Inc. | 2,245,379 | 31,660 |
Marathon Oil Corp. | 1,528,189 | 27,798 | |
* | QEP Resources Inc. | 2,205,553 | 20,644 |
* | Continental Resources | ||
Inc. | 350,128 | 19,443 | |
Apache Corp. | 9,391 | 421 | |
Oil & Gas Refining & Marketing (6.9%) | |||
Valero Energy Corp. | 2,713,123 | 260,378 | |
Marathon Petroleum | |||
Corp. | 2,949,594 | 204,318 | |
Phillips 66 | 1,842,868 | 188,710 | |
Andeavor | 163,166 | 17,648 | |
HollyFrontier Corp. | 74,491 | 3,573 | |
Oil & Gas Storage & Transportation (1.8%) | |||
Kinder Morgan Inc. | 5,954,231 | 107,057 | |
Targa Resources Corp. | 1,386,943 | 66,574 | |
Williams Cos. Inc. | 52,221 | 1,639 | |
5,064,230 | |||
Other (0.9%) | |||
2 | Vanguard Energy ETF | 578,000 | 58,996 |
* | Silver Run Acquisition | ||
Corp. II Class A | 2,355,582 | 24,074 | |
83,070 | |||
Total United States | 6,110,184 |
16
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
International (33.2%) | |||
Argentina (0.2%) | |||
YPF SA ADR | 791,893 | 19,124 | |
Australia (0.2%) | |||
Oil Search Ltd. | 2,682,207 | 16,359 | |
* | Santos Ltd. | 864,666 | 3,543 |
* | WorleyParsons Ltd. | 203,293 | 2,375 |
Woodside Petroleum Ltd. | 31,390 | 838 | |
23,115 | |||
Austria (0.0%) | |||
OMV AG | 58,532 | 3,769 | |
Brazil (0.9%) | |||
* | Petroleo Brasileiro SA | ||
ADR | 5,744,877 | 76,752 | |
* | Petroleo Brasileiro SA | 726,332 | 4,860 |
* | Petroleo Brasileiro SA | ||
Preference Shares | 740,600 | 4,584 | |
86,196 | |||
Canada (4.7%) | |||
Suncor Energy Inc. | 4,221,380 | 153,025 | |
TransCanada Corp. | |||
(New York Shares) | 2,268,055 | 104,421 | |
Encana Corp. | 5,720,044 | 70,814 | |
Canadian Natural | |||
Resources Ltd. (New | |||
York Shares) | 1,822,608 | 62,242 | |
* | Seven Generations | ||
Energy Ltd. Class A | 1,927,359 | 26,874 | |
PrairieSky Royalty Ltd. | |||
(Toronto Shares) | 605,648 | 14,999 | |
Suncor Energy Inc. | |||
(New York Shares) | 193,971 | 7,027 | |
Enbridge Inc. | 191,049 | 6,994 | |
TransCanada Corp. | 88,972 | 4,096 | |
Canadian Natural | |||
Resources Ltd. | 116,008 | 3,960 | |
PrairieSky Royalty Ltd. | 93,253 | 2,290 | |
456,742 | |||
China (0.9%) | |||
CNOOC Ltd. ADR | 411,538 | 64,694 | |
CNOOC Ltd. | 4,100,717 | 6,446 | |
China Petroleum & | |||
Chemical Corp. | 6,829,600 | 5,904 |
Kunlun Energy Co. Ltd. | 2,838,000 | 2,815 | |
China Longyuan | |||
Power Group Corp. | |||
Ltd. | 3,665,000 | 2,675 | |
* | GCL-Poly Energy | ||
Holdings Ltd. | 14,929,000 | 2,567 | |
Huaneng Renewables | |||
Corp. Ltd. | 7,424,000 | 2,566 | |
PetroChina Co. Ltd. | 306,000 | 241 | |
87,908 | |||
Colombia (0.0%) | |||
^ | Ecopetrol SA ADR | 194,214 | 3,665 |
Denmark (0.0%) | |||
Vestas Wind Systems | |||
A/S | 57,522 | 3,924 | |
Finland (0.0%) | |||
Neste Oyj | 53,248 | 3,685 | |
France (4.0%) | |||
^ | TOTAL SA ADR | 6,396,489 | 371,380 |
TOTAL SA | 300,313 | 17,412 | |
388,792 | |||
Germany (0.8%) | |||
3 | Innogy SE | 2,008,668 | 76,577 |
Greece (0.1%) | |||
Motor Oil Hellas Corinth | |||
Refineries SA | 105,053 | 2,625 | |
Hellenic Petroleum SA | 227,504 | 2,484 | |
5,109 | |||
Hungary (0.0%) | |||
* | MOL Hungarian Oil & | ||
Gas plc | 260,286 | 3,179 | |
India (2.1%) | |||
Reliance Industries Ltd. | 8,498,508 | 128,231 | |
Power Grid Corp. of | |||
India Ltd. | 24,820,469 | 75,565 | |
GAIL India Ltd. | 384,356 | 2,889 | |
Hindustan Petroleum | |||
Corp. Ltd. | 456,370 | 2,848 | |
Vedanta Ltd. | 63,882 | 341 | |
209,874 |
17
Energy Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Israel (0.0%) | |||
Oil Refineries Ltd. | 5,022,286 | 2,379 | |
Italy (2.9%) | |||
^ | Eni SPA ADR | 5,844,847 | 211,700 |
Tenaris SA ADR | 1,792,699 | 62,745 | |
Eni SPA | 254,750 | 4,586 | |
279,031 | |||
Japan (0.8%) | |||
Inpex Corp. | 4,906,668 | 63,991 | |
JXTG Holdings Inc. | 884,200 | 5,887 | |
Idemitsu Kosan Co. Ltd. | 82,700 | 3,104 | |
Cosmo Energy Holdings | |||
Co. Ltd. | 75,700 | 2,980 | |
Showa Shell Sekiyu KK | 27,300 | 388 | |
76,350 | |||
Norway (0.5%) | |||
^ | Statoil ASA ADR | 1,551,537 | 36,368 |
Statoil ASA | 254,494 | 5,963 | |
Aker BP ASA | 106,220 | 3,074 | |
Subsea 7 SA | 133,137 | 2,074 | |
47,479 | |||
Poland (0.1%) | |||
Polski Koncern | |||
Naftowy ORLEN SA | 123,362 | 4,001 | |
^ | Grupa Lotos SA | 156,681 | 2,777 |
6,778 | |||
Portugal (1.4%) | |||
Galp Energia SGPS SA | 7,314,919 | 139,732 | |
Russia (3.8%) | |||
Lukoil PJSC ADR | 2,637,748 | 174,288 | |
Rosneft Oil Co. PJSC | |||
GDR | 22,682,954 | 139,070 | |
Gazprom PJSC ADR | 6,841,484 | 34,445 | |
Gazprom PJSC | 2,455,004 | 6,261 | |
Tatneft PJSC ADR | 56,283 | 3,414 | |
AK Transneft OAO | |||
Preference Shares | 971 | 3,109 | |
Surgutneftegas OJSC | 3,903,300 | 1,995 | |
LUKOIL PJSC | 23,865 | 1,583 | |
Surgutneftegas OAO | |||
Preference Shares | 2,971,833 | 1,569 | |
Tatneft PJSC | 155,950 | 1,568 | |
Novatek PJSC GDR | 9,431 | 1,257 | |
368,559 | |||
South Korea (0.1%) | |||
SK Innovation Co. Ltd. | 21,341 | 4,087 | |
GS Holdings Corp. | 47,019 | 3,055 | |
S-Oil Corp. | 23,381 | 2,693 | |
9,835 |
Spain (0.5%) | |||
Iberdrola SA (Madrid | |||
Shares) | 5,530,491 | 45,017 | |
* | Repsol SA | 305,107 | 5,743 |
* | Iberdrola SA | 123,336 | 1,004 |
51,764 | |||
Sweden (0.6%) | |||
* | Lundin Petroleum AB | 2,238,814 | 55,856 |
Taiwan (0.0%) | |||
Formosa Petrochemical | |||
Corp. | 258,000 | 1,096 | |
Thailand (0.2%) | |||
* | PTT Exploration and | ||
Production PCL (Local) | 961,000 | 3,649 | |
PTT PCL (Foreign) | 220,000 | 3,454 | |
Thai Oil PCL (Foreign) | 947,700 | 3,100 | |
* | PTT PCL | 166,300 | 2,611 |
IRPC PCL (Foreign) | 9,601,800 | 2,252 | |
15,066 | |||
Turkey (0.1%) | |||
Tupras Turkiye Petrol | |||
Rafinerileri AS | 92,224 | 2,829 | |
KOC Holding AS | 577,586 | 2,810 | |
5,639 | |||
United Kingdom (8.3%) | |||
Royal Dutch Shell plc | |||
ADR | 6,112,866 | 429,368 | |
BP plc ADR | 6,888,098 | 294,742 | |
Royal Dutch Shell plc | |||
Class A | 797,762 | 27,969 | |
Royal Dutch Shell plc | |||
Class B | 637,782 | 22,624 | |
BP plc | 2,594,219 | 18,508 | |
Royal Dutch Shell plc | |||
Class A (Amsterdam | |||
Shares) | 341,772 | 12,002 | |
Petrofac Ltd. | 378,693 | 2,853 | |
808,066 | |||
Total International | 3,239,289 | ||
Total Common Stocks | |||
(Cost $5,594,959) | 9,349,473 | ||
Temporary Cash Investments (4.8%)1 | |||
Money Market Fund (2.0%) | |||
4,5 | Vanguard Market | ||
Liquidity Fund, | |||
1.545% | 1,922,653 | 192,265 |
18
Energy Fund
Face | Market | ||
Amount | Value • | ||
($000) | ($000) | ||
Repurchase Agreements (2.0%) | |||
RBS Securities, Inc. | |||
1.300%, 2/1/18 (Dated | |||
1/31/18, Repurchase | |||
Value $103,504,000, | |||
collateralized by U. S. | |||
Treasury Bill 0.000%, | |||
5/24/18, and U.S. | |||
Treasury Note/Bond | |||
0.625%, 4/30/18, with | |||
a value of $105,571,000) | 103,500 | 103,500 | |
Societe Generale 1.320%, | |||
2/1/18 (Dated 1/31/18, | |||
Repurchase Value | |||
$93,603,000, collateralized | |||
by Federal Home Loan | |||
Bank 3.000%, 9/11/26, | |||
Federal Home Loan | |||
Mortgage Corp. | |||
3.652%–5.750%, | |||
1/1/20– 6/1/29, and U.S. | |||
Treasury Note/Bond | |||
1.250%–1.375%, | |||
4/30/19–5/31/20, with a | |||
value of $95,472,000) | 93,600 | 93,600 | |
197,100 | |||
U. S. Government and Agency Obligations (0.8%) | |||
6 | Federal Home Loan | ||
Bank Discount Notes, | |||
1.303%, 2/27/18 | 75,000 | 74,931 | |
7 | United States Treasury | ||
Bill, 1.122%, 2/8/18 | 60 | 60 | |
7 | United States Treasury | ||
Bill, 1.432%, 4/26/18 | 100 | 100 | |
7 | United States Treasury | ||
Bill, 1.462%, 5/17/18 | 3,700 | 3,684 | |
7 | United States Treasury | ||
Bill, 1.446%, 5/31/18 | 3,881 | 3,862 | |
82,637 | |||
Total Temporary Cash Investments | |||
(Cost $472,018) | 472,002 | ||
Total Investments (100.6%) | |||
(Cost $6,066,977) | 9,821,475 |
Amount | |
($000) | |
Other Assets and Liabilities (-0.6%) | |
Other Assets | |
Investment in Vanguard | 521 |
Receivables for Investment Securities Sold 39,910 | |
Receivables for Accrued Income | 3,642 |
Receivables for Capital Shares Issued | 4,737 |
Variation Margin Receivable— | |
Futures Contracts | 86 |
Other Assets | 719 |
Total Other Assets | 49,615 |
Liabilities | |
Payables for Investment Securities | |
Purchased | (47,212) |
Payables to Investment Advisor | (3,169) |
Collateral for Securities on Loan | (21,965) |
Payables for Capital Shares Redeemed | (15,523) |
Payables to Vanguard | (19,497) |
Total Liabilities | (107,366) |
Net Assets (100%) | 9,763,724 |
19
Energy Fund
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 6,878,539 |
Overdistributed Net Investment Income | (28,829) |
Accumulated Net Realized Losses | (844,037) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 3,754,498 |
Futures Contracts | 3,504 |
Foreign Currencies | 49 |
Net Assets | 9,763,724 |
Investor Shares—Net Assets | |
Applicable to 53,364,876 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 2,968,122 |
Net Asset Value Per Share— | |
Investor Shares | $55.62 |
Amount | |
($000) | |
Admiral Shares—Net Assets | |
Applicable to 65,122,689 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 6,795,602 |
Net Asset Value Per Share— | |
Admiral Shares | $104.35 |
• 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 $21,210,000.
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 97.5% and 3.1%, respectively, of net assets.
2 Considered an affiliated company of the fund as the issuer is
another member of The Vanguard Group.
3 Security exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be sold in
transactions exempt from registration, normally to qualified
institutional buyers. At January 31, 2018, the value of this
security represented 0.8% of net assets.
4 Affiliated money market fund available only to Vanguard funds
and certain trusts and accounts managed by Vanguard. Rate
shown is the 7-day yield.
5 Includes $21,965,000 of collateral received for securities
on loan.
6 The issuer operates under a congressional charter; its
securities are generally neither guaranteed by the U.S.
Treasury nor backed by the full faith and credit of the
U.S. government.
7 Securities with a value of $7,173,000 have been segregated as
initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
20
Energy Fund
Derivative Financial Instruments Outstanding as of Period End | ||||
Futures Contracts | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Long Futures Contracts | ||||
E-mini S&P 500 Index | March 2018 | 1,197 | 169,124 | 3,504 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized
gain (loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Energy Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 301,872 |
Interest 2 | 3,893 |
Securities Lending—Net | 4,591 |
Total Income | 310,356 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 13,947 |
Performance Adjustment | 79 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 5,650 |
Management and Administrative—Admiral Shares | 8,325 |
Marketing and Distribution—Investor Shares | 502 |
Marketing and Distribution—Admiral Shares | 452 |
Custodian Fees | 1,555 |
Auditing Fees | 38 |
Shareholders’ Reports and Proxy—Investor Shares | 378 |
Shareholders’ Reports and Proxy—Admiral Shares | 177 |
Trustees’ Fees and Expenses | 20 |
Total Expenses | 31,123 |
Net Investment Income | 279,233 |
Realized Net Gain (Loss) | |
Investment Securities Sold 2 | 53,231 |
Futures Contracts | 21,444 |
Foreign Currencies | 35 |
Realized Net Gain (Loss) | 74,710 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities 2 | 397,506 |
Futures Contracts | 2,961 |
Foreign Currencies | 79 |
Change in Unrealized Appreciation (Depreciation) | 400,546 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 754,489 |
1 Dividends are net of foreign withholding taxes of $13,094,000.
2 Dividend income, interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from affiliated
companies of the fund were $1,659,000, $1,034,000, ($20,000), and $566,000, respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
22
Energy Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 279,233 | 200,059 |
Realized Net Gain (Loss) | 74,710 | (357,201) |
Change in Unrealized Appreciation (Depreciation) | 400,546 | 2,823,815 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 754,489 | 2,666,673 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (84,836) | (63,588) |
Admiral Shares | (197,679) | (137,420) |
Realized Capital Gain | ||
Investor Shares | — | — |
Admiral Shares | — | — |
Total Distributions | (282,515) | (201,008) |
Capital Share Transactions | ||
Investor Shares | (619,766) | (63,208) |
Admiral Shares | (771,839) | 159,725 |
Net Increase (Decrease) from Capital Share Transactions | (1,391,605) | 96,517 |
Total Increase (Decrease) | (919,631) | 2,562,182 |
Net Assets | ||
Beginning of Period | 10,683,355 | 8,121,173 |
End of Period1 | 9,763,724 | 10,683,355 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($28,829,000) and ($25,571,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
23
Energy Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $52.70 | $40.43 | $51.53 | $63.85 | $62.66 |
Investment Operations | |||||
Net Investment Income | 1.4771,2 | .982 | 1.096 | 1.276 | 1.291 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 3.035 | 12.275 | (11.118) | (9.436) | 2.413 |
Total from Investment Operations | 4.512 | 13.257 | (10.022) | (8.160) | 3.704 |
Distributions | |||||
Dividends from Net Investment Income | (1.592) | (.987) | (1.078) | (1.206) | (1.277) |
Distributions from Realized Capital Gains | — | — | — | (2.954) | (1.237) |
Total Distributions | (1.592) | (.987) | (1.078) | (4.160) | (2.514) |
Net Asset Value, End of Period | $55.62 | $52.70 | $40.43 | $51.53 | $63.85 |
Total Return3 | 8.75% | 32.73% | -19.53% | -13.16% | 5.88% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,968 | $3,452 | $2,693 | $3,334 | $4,138 |
Ratio of Total Expenses to Average Net Assets4 | 0.38% | 0.41% | 0.37% | 0.37% | 0.38% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.86%2 | 1.97% | 2.20% | 1.84% | 1.97% |
Portfolio Turnover Rate | 24% | 29% | 23% | 31% | 17% |
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 $.342 and 0.67%, respectively,
from income received as a result of the General Electric Co. and Baker Hughes Inc. merger in July 2017.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.00%, 0.03%, 0.03%, 0.03%, and 0.04%.
See accompanying Notes, which are an integral part of the Financial Statements.
24
Energy Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $98.88 | $75.85 | $96.69 | $119.83 | $117.63 |
Investment Operations | |||||
Net Investment Income | 2.8151,2 | 1.918 | 2.113 | 2.479 | 2.530 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 5.730 | 23.035 | (20.872) | (17.726) | 4.491 |
Total from Investment Operations | 8.545 | 24.953 | (18.759) | (15.247) | 7.021 |
Distributions | |||||
Dividends from Net Investment Income | (3.075) | (1.923) | (2.081) | (2.351) | (2.500) |
Distributions from Realized Capital Gains | — | — | — | (5.542) | (2.321) |
Total Distributions | (3.075) | (1.923) | (2.081) | (7.893) | (4.821) |
Net Asset Value, End of Period | $104.35 | $98.88 | $75.85 | $96.69 | $119.83 |
Total Return3 | 8.84% | 32.83% | -19.48% | -13.11% | 5.94% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $6,796 | $7,231 | $5,428 | $6,569 | $7,540 |
Ratio of Total Expenses to Average Net Assets4 | 0.30% | 0.33% | 0.31% | 0.31% | 0.32% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.94%2 | 2.05% | 2.26% | 1.90% | 2.03% |
Portfolio Turnover Rate | 24% | 29% | 23% | 31% | 17% |
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 $.643 and 0.67%, respectively,
from income received as a result of the General Electric Co. and Baker Hughes Inc. merger in July 2017.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.00%, 0.03%, 0.03%, 0.03%, and 0.04%.
See accompanying Notes, which are an integral part of the Financial Statements.
25
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
26
Energy Fund
entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2018, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, 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.
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, 2015–2018), 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 event 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
27
Energy Fund
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.
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, 2018, 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), shareholder reporting, and the proxy. 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 $604,000 for the year ended January 31, 2018.
For the year ended January 31, 2018, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net increase of $79,000 (0.00%) 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
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Energy Fund
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, 2018, the fund had contributed to Vanguard capital in the amount of $521,000, representing 0.01% of the fund’s net assets and 0.21% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—United States | 6,110,184 | — | — |
Common Stocks—International | 2,027,280 | 1,212,009 | — |
Temporary Cash Investments | 192,265 | 279,737 | — |
Futures Contracts—Assets1 | 86 | — | — |
Total | 8,329,815 | 1,491,746 | — |
1 Represents variation margin on the last day of the reporting period. |
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.
For tax purposes, at January 31, 2018, the fund had $14,392,000 of ordinary income available for distribution. The fund used capital loss carryforwards of $66,205,000 to offset taxable capital gains realized during the year ended January 31, 2018. At January 31, 2018, the fund had available capital losses totaling $839,189,000 that may be carried forward indefinitely to offset future net capital gains.
29
Energy Fund
At January 31, 2018, the cost of investment securities for tax purposes was $6,092,969,000. Net unrealized appreciation of investment securities for tax purposes was $3,728,506,000, consisting of unrealized gains of $3,826,743,000 on securities that had risen in value since their purchase and $98,237,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2018, the fund purchased $2,199,623,000 of investment securities and sold $3,510,211,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2018 | 2017 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 425,153 | 8,257 | 790,047 | 16,338 |
Issued in Lieu of Cash Distributions | 79,692 | 1,521 | 59,916 | 1,108 |
Redeemed | (1,124,611) | (21,913) | (913,171) | (18,558) |
Net Increase (Decrease)—Investor Shares | (619,766) | (12,135) | (63,208) | (1,112) |
Admiral Shares | ||||
Issued | 954,935 | 9,930 | 1,369,010 | 14,893 |
Issued in Lieu of Cash Distributions | 180,333 | 1,835 | 126,344 | 1,246 |
Redeemed | (1,907,107) | (19,772) | (1,335,629) | (14,570) |
Net Increase (Decrease)—Admiral Shares | (771,839) | (8,007) | 159,725 | 1,569 |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2018, 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 Shareholders of Vanguard Energy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Energy Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the five years in the period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
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![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/energyfundx34x1.jpg)
Special 2017 tax information (unaudited) for Vanguard Energy Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions of
the Internal Revenue Code.
The fund distributed $238,668,000 of qualified dividend income to shareholders during the
fiscal year.
For corporate shareholders, 62.1% 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 2018. (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, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 8.75% | 1.32% | 1.31% |
Returns After Taxes on Distributions | 7.89 | 0.35 | 0.43 |
Returns After Taxes on Distributions and Sale of Fund Shares | 5.57 | 0.86 | 1.00 |
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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, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Energy Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,148.39 | $2.00 |
Admiral Shares | 1,000.00 | 1,148.86 | 1.57 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.34 | $1.89 |
Admiral Shares | 1,000.00 | 1,023.74 | 1.48 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for
that period are 0.37% for Investor Shares and 0.29% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the
annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent
six-month period, then divided by the number of days in the most recent 12-month period (184/365).
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Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share.
For a fund, the weighted average price/book ratio of the stocks it holds.
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Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
Benchmark Information
Spliced Energy Index: S&P 500 Index through November 30, 2000; S&P Energy Sector Index
through May 31, 2010; MSCI All Country World Energy Index thereafter.
37
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
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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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008. Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
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P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2017, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
CFA® is a registered trademark owned by CFA Institute. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q510 032018 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/preciousmetalsx1x1.jpg)
Annual Report | January 31, 2018
Vanguard Precious Metals and Mining Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Advisor’s Report. | 6 |
Results of Proxy Voting. | 9 |
Fund Profile. | 11 |
Performance Summary. | 12 |
Financial Statements. | 14 |
Your Fund’s After-Tax Returns. | 27 |
About Your Fund’s Expenses. | 28 |
Glossary. | 30 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2018, Vanguard Precious Metals and Mining Fund returned –1.56%. That result significantly trailed the return of the benchmark S&P Global Custom Metals and Mining Index (+14.87%) but surpassed the average return of peer funds (–5.20%).
• Keep in mind that these negative 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, surged about 76% the previous fiscal year after a half decade of negative results.
• The fund’s high allocation to and selection in gold-mining stocks notably detracted from performance. The fund was also considerably hurt by having less exposure than the benchmark to diversified metals and mining companies.
• On a more positive note, relative to the benchmark, the fund benefited from its precious metals and minerals and silver holdings.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard Precious Metals and Mining Fund | -1.56% |
S&P Global Custom Metals and Mining Index | 14.87 |
Precious Metals Equity Funds Average | -5.20 |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Total Returns: Ten Years Ended January 31, 2018 | |
Average | |
Annual Return | |
Precious Metals and Mining Fund | -6.75% |
S&P Global Custom Metals and Mining Index | -1.95 |
Precious Metals Equity Funds Average | -4.51 |
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.
1
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Precious Metals and Mining Fund | 0.43% | 1.38% |
The fund expense ratio shown is from the prospectus dated May 25, 2017, and represents estimated costs for the current fiscal year. For
the fiscal year ended January 31, 2018, the fund’s expense ratio was 0.36%. 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 2017.
Peer group: Precious Metals Equity Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/preciousmetalsx5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
3
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Advisor’s Report
Vanguard Precious Metals and Mining Fund returned –1.56% for the fiscal year ended January 31, 2018. The fund lagged its customized benchmark, which returned 14.87%, but exceeded the average return of –5.20% for the precious metals-oriented funds peer group.
Market environment
Stock markets maintained a generally upward trend during the fiscal year, thanks to ongoing global economic growth that has helped drive up earnings. The Federal Reserve and the European Central Bank both took steps to start scaling back supportive measures for their economies.
Late in 2017, President Trump signed a major tax bill into law. Investors broadly welcomed the move, expecting lower taxes to provide a boost for business and economic growth both in the United States and abroad.
In this largely buoyant environment, shares in diversified metals and mining companies were the strongest performers over the 12 months, while gold, precious metals, and silver underperformed the benchmark.
The fund’s performance
Despite the strong returns for diversified metals and miners, the fund’s light exposure compared with the benchmark’s hurt performance, as did an overweight position in gold producers. A relatively large exposure to precious metals and silver detracted, although stock selection in both categories was positive.
In terms of detractors, the fund’s performance was held back by certain stocks that had exposure to heightened geopolitical risk and, therefore, operational uncertainty. Tahoe Resources, Eldorado Gold, and Acacia Mining all came under such pressure during the fiscal year.
A holding in Canadian copper miner Nevsun Resources also detracted. Despite this disappointing performance, Nevsun arguably has one of the best undeveloped copper deposits in its Timok project in Serbia.
Turning to contributors, Dominion Diamond was a significant performer following a cash takeover bid by The Washington Companies. Independence Group, an Australian gold, nickel, cobalt, and zinc producer, also contributed. The company is benefiting from revived industrial production as well as demand for nickel and cobalt because of heightened interest in electric vehicles. The firm has reached an inflection point in the lifecycle of its Nova nickel, copper, and cobalt assets; capital expenditures have come down, and the business has become more productive.
Similarly, KAZ Minerals has reached a capital expenditure cash-flow inflection point. KAZ is also benefiting from a supportive copper environment. Other contributors included IAMGOLD, which has executed on its business plan.
6
Portfolio activity
Amid ongoing recovery in global industrial production, we have been slowly increasing our exposure to diversified metals and miners, while trimming our presence in precious metals.
We added to our position in Glencore, which has benefited from a strong zinc market. However, the company is exposed to a difficult political backdrop in the Democratic Republic of the Congo, where it has some promising copper and cobalt assets.
We also increased our exposure to Rio Tinto. The company has a strong cash flow and is deleveraging its balance sheet. We are underweighted in the stock, which has a significant exposure to the iron ore market. We believe that all-time-high inventories in China and slowing demand will lead to lower iron ore prices, thus presenting a better buying opportunity.
We sold our position in BHP Billiton because of our persistent concerns about its management’s execution and strategy. Furthermore, we were not able to benefit from its oil exposure. BHP has been under pressure to unlock value, leading to share-price gains. We took advantage of a rally toward the end of the year to sell the stock. We instead recreated similar exposure to iron ore and copper through our positions in Southern Copper and Grupo Mexico and through some new additions to the portfolio, including KAZ Minerals and Fortescue Metals. In our opinion, these companies offer better opportunities.
We started a new position in Canadian zinc miner Trevali Mining. The company’s asset base significantly improved after it bought a portfolio of zinc assets from Glencore. Trevali has a solid management team whose interests are closely aligned with those of the company’s shareholders.
Other purchases in the diversified metals space included new positions in U.S.-listed Compass Minerals International, Mexico-based smelting and refining company Industrias Penoles, East Africa-focused Base Resources, Canadian-based Arizona Mining, and Australian mining company Independence Group.
Although we reduced our weighting in precious metals, we started new positions in some promising gold companies. One of those is Evolution Mining, an Australian gold producer. The company is well-run, with a focus on resources-into-reserves conversion, and has the potential for longer-term regional exploration.
Other new positions included Australian gold firms Regis Resources, Northern Star Resources, and Newcrest Mining. These firms’ management teams focus on reducing all-in sustaining costs and improving return on invested capital. They also have clean balance sheets and are not overlevered.
7
We sold our position in Canadian-listed Yamana Gold because of corporate governance concerns. We also sold a number of holdings because of possible geopolitical risk, including Torex Gold Resources (Mexico) and AngloGold Ashanti (Tanzania and South Africa).
Takeover activity resulted in some companies leaving the portfolio. For example, U.S. platinum miner Stillwater Mining was taken over by Sibanye. Elsewhere, Newcastle Gold was acquired in a three-way merger with Trek Mining and Anfield Gold to create Equinox Gold, while Integra Gold was acquired by Canada’s Eldorado Gold. And as mentioned earlier, The Washington Companies bought Dominion Diamond.
We sold our holding in Asanko Gold, locking in profits. Similarly, we sold out of Boliden at favorable valuations. We closed our position in First Majestic Silver over concerns about its acquisition strategy, cash flow, and productive ability. Further, we have been reducing Acacia Mining for some time, and we finally exited the position. We also sold some highly illiquid holdings, including Balmoral Resources, Bluestone Resources, and Atalaya Mining.
Portfolio positioning and outlook
Ongoing global growth suggests we are switching from a deflationary to an inflationary backdrop. In this environment, as copper tends to act as an inflation hedge, we look to increase our exposure to companies that are exposed to copper in the diversified metals and miners sphere. Overall, we expect to increase our weighting in diversified metals and miners relative to precious metals.
We expect one or two more years of stronger global growth and industrial production before rising input costs start to affect margins. In our view, many companies should benefit from strong free cash flow and deleveraging in the short term.
Risks remain, however, as cyclical companies are often tempted to use positive free cash flow for mergers and acquisitions. Indeed, as global growth and industrial production improve over the coming year, it is likely that smaller companies will pique the interest of larger, cyclical companies. Though we do hold some firms that could be interesting potential targets, holdings in the portfolio need to be compelling assets in their own right.
Jamie J. Horvat
Portfolio Manager
M&G Investment Management Limited
February 21, 2018
8
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries
of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Precious Metals and | |||||
Mining Fund | 134,843,574 | 9,843,366 | 10,095,140 | 29,209,656 | 73.3% |
9
Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Precious Metals and | |||||
Mining Fund | 40,843,642 | 10,413,097 | 103,525,340 | 29,209,656 | 22.2% |
10
Precious Metals and Mining Fund
Fund Profile
As of January 31, 2018
Portfolio Characteristics | |||
S&P | DJ | ||
Global | U.S. | ||
Custom | Total | ||
Metals and | Market | ||
Mining | FA | ||
Fund | Index | Index | |
Number of Stocks | 77 | 218 | 3,765 |
Median Market Cap | $3.0B | $14.1B | $73.6B |
Price/Earnings Ratio | 23.3x | 18.5x | 23.8x |
Price/Book Ratio | 1.6x | 1.7x | 3.2x |
Return on Equity | -1.5% | -0.1% | 14.9% |
Earnings Growth Rate | -11.1% | -10.4% | 9.1% |
Dividend Yield | 0.9% | 1.9% | 1.7% |
Foreign Holdings | 87.6% | 88.3% | 0.00% |
Turnover Rate | 35% | — | — |
Ticker Symbol | VGPMX | — | — |
Expense Ratio1 | 0.43% | — | — |
Short-Term Reserves | 1.7% | — | — |
Subindustry Diversification (% of equity | ||
exposure) | ||
S&P | ||
Global | ||
Custom | ||
Metals and | ||
Mining | ||
Fund | Index | |
Aluminum | 0.0% | 4.0% |
Agricultural Products | 2.0 | 0.0 |
Copper | 6.1 | 5.7 |
Diversified Metals & Mining | 11.9 | 42.7 |
Gold | 64.8 | 38.6 |
Precious Metals & Minerals | 7.1 | 4.8 |
Silver | 7.6 | 4.2 |
Steel | 0.5 | 0.0 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
| ||
Volatility Measures | ||
S&P | ||
Global | ||
Custom | DJ | |
Metals and | U.S. Total | |
Mining | Market | |
Index | FA Index | |
R-Squared | 0.90 | 0.01 |
Beta | 1.00 | 0.40 |
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) | ||
Newmont Mining Corp. | Gold | 6.8% |
Agnico Eagle Mines Ltd. Gold | 5.4 | |
B2Gold Corp. | Gold | 4.6 |
Randgold Resources | ||
Ltd. | Gold | 4.6 |
Franco-Nevada Corp. | Gold | 4.1 |
Kinross Gold Corp. | Gold | 3.5 |
Endeavour Mining Corp. | Gold | 3.1 |
Hochschild Mining plc | Silver | 3.1 |
Independence Group NL Diversified Metals & | ||
Mining | 2.8 | |
Nevsun Resources Ltd. | Copper | 2.7 |
Top Ten | 40.7% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratio shown is from the prospectus dated May 25, 2017, and represents estimated costs for the current fiscal year. For the fiscal year ended January 31, 2018, the expense ratio was 0.36%.
11
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, 2008, Through January 31, 2018
Initial Investment of $10,000
Average Annual Total Returns | ||||
Periods Ended January 31, 2018 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
Precious Metals and Mining Fund | -1.56% | -6.65% | -6.75% | $4,971 |
S&P Global Custom Metals and Mining | ||||
• • • • • • • • | ||||
Index | 14.87 | -3.32 | -1.95 | 8,216 |
– – – – Precious Metals Equity Funds Average | -5.20 | -8.78 | -4.51 | 6,304 |
Dow Jones U.S. Total Stock Market | ||||
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 |
Precious Metals Equity Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
See Financial Highlights for dividend and capital gains information.
12
Precious Metals and Mining Fund
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/preciousmetalsx15x1.jpg)
Average Annual Total Returns: Periods Ended December 31, 2017
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 Date | One Year | Five Years | Ten Years | |
Precious Metals and | ||||
Mining Fund | 5/23/1984 | 13.75% | -7.02% | -6.60% |
13
Precious Metals and Mining Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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 (98.7%) | |||
Agricultural Products (2.0%) | |||
Bunge Ltd. | 644,985 | 51,231 | |
Copper (6.1%) | |||
^,1 | Nevsun Resources | ||
Ltd. | 33,775,990 | 70,572 | |
Lundin Mining Corp. | 5,545,622 | 40,082 | |
Southern Copper Corp. | 678,330 | 32,933 | |
* | KAZ Minerals plc | 1,008,549 | 11,737 |
155,324 | |||
Diversified Metals & Mining (11.7%) | |||
Independence Group | |||
NL | 17,654,527 | 71,078 | |
Rio Tinto plc | 1,017,868 | 56,658 | |
Glencore plc | 7,063,150 | 40,482 | |
^,* | Trevali Mining Corp. | 27,500,000 | 36,220 |
Grupo Mexico SAB | |||
de CV Class B | 7,870,822 | 27,903 | |
*,1 | Base Resources Ltd. | 69,515,366 | 15,645 |
Compass Minerals | |||
International Inc. | 184,931 | 13,481 | |
*,1 | Neo Lithium Corp. | 7,678,100 | 12,984 |
* | Arizona Mining Inc. | 2,510,118 | 9,041 |
* | Orla Mining Ltd. | 5,714,300 | 7,619 |
* | Equinox Gold Corp. | 4,597,126 | 4,485 |
^,*,1 Osisko Metals Inc. | 6,575,000 | 4,170 | |
*,1 | Aguia Resources Ltd. | 7,705,882 | 1,875 |
301,641 | |||
Gold (63.9%) | |||
Newmont Mining Corp. | 4,330,620 | 175,433 | |
^ | Randgold Resources | ||
Ltd. ADR | 1,162,627 | 117,611 | |
* | B2Gold Corp. | 37,190,786 | 112,316 |
Franco-Nevada Corp. | 1,373,364 | 104,911 | |
Agnico Eagle Mines | |||
Ltd. | 2,095,594 | 99,080 |
* | Kinross Gold Corp. | 20,649,194 | 89,411 |
* | Endeavour Mining | ||
Corp. | 4,371,279 | 80,709 | |
Royal Gold Inc. | 723,226 | 64,367 | |
*,1 | SEMAFO Inc. | 20,803,148 | 61,564 |
* | IAMGOLD Corp. | 10,265,501 | 60,425 |
Newcrest Mining Ltd. | 3,080,111 | 56,330 | |
Barrick Gold Corp. | 3,604,233 | 51,829 | |
OceanaGold Corp. | 18,083,577 | 49,840 | |
^,* | Pretium Resources Inc. | 6,200,777 | 43,157 |
*,1 | Guyana Goldfields Inc. | 11,186,620 | 43,018 |
Alamos Gold Inc. | 6,734,248 | 40,271 | |
Agnico Eagle Mines | |||
Ltd. (Toronto Shares) | 814,545 | 38,535 | |
* | Saracen Mineral | ||
Holdings Ltd. | 31,715,213 | 38,279 | |
*,1 | Premier Gold Mines | ||
Ltd. | 10,858,207 | 30,632 | |
Northern Star | |||
Resources Ltd. | 6,465,904 | 30,240 | |
*,1 | Alacer Gold Corp. | 16,682,469 | 29,025 |
Goldcorp Inc. | 1,987,114 | 28,455 | |
*,1 | Roxgold Inc. | 29,570,296 | 26,685 |
Alamos Gold Inc. | |||
Class A | 3,627,542 | 21,736 | |
Tahoe Resources Inc. | 4,678,633 | 20,539 | |
^,* | Dacian Gold Ltd. | 8,595,089 | 19,001 |
^ | Osisko Gold Royalties | ||
Ltd. | 1,634,820 | 18,368 | |
Evolution Mining Ltd. | 6,206,125 | 14,295 | |
Tahoe Resources Inc. | |||
(Toronto Shares) | 2,689,463 | 11,873 | |
*,1 | Beadell Resources Ltd. | 83,211,152 | 10,085 |
*,1 | Nighthawk Gold Corp. | 17,775,860 | 9,683 |
^,* | Barkerville Gold Mines | ||
Ltd. | 16,770,771 | 9,544 | |
* | Eldorado Gold Corp. | 7,013,293 | 9,117 |
14
Precious Metals and Mining Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | Gold Road Resources | ||
Ltd. | 12,341,066 | 7,983 | |
^,* | TMAC Resources Inc. | 955,700 | 6,892 |
* | B2Gold Corp. | ||
(Toronto Shares) | 1,860,800 | 5,628 | |
*,1 | Troilus Gold Corp. | 2,798,780 | 4,551 |
* | Osisko Gold Royalties | ||
Warrants Expire | |||
02/26/2019 | 231,787 | 196 | |
* | Primero Mining Corp. | ||
Warrants Expire | |||
06/25/2018 | 638,250 | 3 | |
1,641,617 | |||
Other (0.0%) | |||
*,2 | Americas Silver Corp. | ||
Warrants Expire | |||
06/09/2021 | 7,108,333 | 121 | |
*,2 | Nighthawk Gold Corp. | ||
Warrants Expire | |||
09/02/2018 | 5,729,647 | — | |
* | Osisko Mining Inc. | ||
Warrants Expire | |||
08/25/2018 | 4,500,000 | — | |
* | Osisko Metals Inc. | ||
Warrants Expire | |||
07/18/2019 | 3,287,500 | — | |
* | Troilus Gold Inc. | ||
Warrants Expire | |||
5/21/2020 | 3,048,780 | — | |
* | Barkerville Gold Mines | ||
Warrants Expire | |||
11/18/2018 | 263,158 | — | |
*,2,3 Rescue Radio Corp. | 15,955 | — | |
121 | |||
Precious Metals & Minerals (7.0%) | |||
*,1 | Osisko Mining Inc. | 18,547,050 | 53,681 |
^,*,1 Dalradian Resources | |||
Inc. | 45,625,000 | 45,996 | |
Fresnillo plc | 2,076,917 | 39,764 | |
Industrias Penoles | |||
SAB de CV | 1,040,706 | 24,120 | |
Lucara Diamond Corp. | 6,088,724 | 12,623 | |
^,* | Mountain Province | ||
Diamonds Inc. | 1,435,700 | 3,980 | |
180,164 | |||
Silver (7.5%) | |||
Hochschild Mining plc | 24,351,353 | 79,310 | |
*,1 | Fortuna Silver Mines | ||
Inc. | 10,080,774 | 48,519 | |
* | MAG Silver Corp. | 2,703,673 | 29,015 |
Wheaton Precious | |||
Metals Corp. | 1,208,644 | 26,109 | |
*,1 | Americas Silver Corp. | 2,369,444 | 9,497 |
192,450 |
Steel (0.5%) | ||
Fortescue Metals Group | ||
Ltd. | 3,303,268 | 13,118 |
Total Common Stocks | ||
(Cost $2,151,122) | 2,535,666 | |
Temporary Cash Investment (3.0%) | ||
Money Market Fund (3.0%) | ||
4,5 Vanguard Market | ||
Liquidity Fund, 1.545% | ||
(Cost $75,588) | 755,874 | 75,587 |
Total Investments (101.7%) | ||
(Cost $2,226,710) | 2,611,253 | |
Other Assets and Liabilities (-1.7%) | ||
Other Assets | 4,204 | |
Liabilities 5 | (46,983) | |
(42,779) | ||
Net Assets (100%) | ||
Applicable to 242,951,701 outstanding | ||
$.001 par value shares of beneficial | ||
interest (unlimited authorization) | 2,568,474 | |
Net Asset Value Per Share | $10.57 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers | 2,057,484 | |
Affiliated Vanguard Fund | 75,587 | |
Other Affiliated Issuers | 478,182 | |
Total Investments in Securities | 2,611,253 | |
Investment in Vanguard | 142 | |
Receivables for Investment | ||
Securities Sold | 175 | |
Receivables for Accrued Income | 371 | |
Receivables for Capital Shares Issued | 3,249 | |
Other Assets | 267 | |
Total Assets | 2,615,457 | |
Liabilities | ||
Payables for Investment | ||
Securities Purchased | 5,608 | |
Collateral for Securities on Loan | 32,497 | |
Payables to Investment Advisor | 468 | |
Payables for Capital Shares Redeemed | 2,070 | |
Payables to Vanguard | 5,826 | |
Other Liabilities | 514 | |
Total Liabilities | 46,983 | |
Net Assets | 2,568,474 |
15
Precious Metals and Mining Fund
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 4,307,910 |
Overdistributed Net Investment Income | (111,067) |
Accumulated Net Realized Losses | (2,012,935) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 384,543 |
Foreign Currencies | 23 |
Net Assets | 2,568,474 |
• 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 $27,513,000.
* 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 $121,000, representing 0.0%
of net assets.
3 Certain of the fund’s securities are valued using significant
unobservable inputs.
4 Affiliated money market fund available only to Vanguard funds
and certain trusts and accounts managed by Vanguard. Rate
shown is the 7-day yield.
5 Includes $32,497,000 of collateral received for securities
on loan.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
16
Precious Metals and Mining Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends Received from Unaffiliated Issuers1 | 15,582 |
Dividends Received from Affiliated Issuers2 | 3,372 |
Interest Received from Affiliated Vanguard Fund | 930 |
Securities Lending—Net | 1,523 |
Total Income | 21,407 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 3,504 |
Performance Adjustment | (63) |
The Vanguard Group—Note C | |
Management and Administrative | 5,022 |
Marketing and Distribution | 439 |
Custodian Fees | 113 |
Auditing Fees | 33 |
Shareholders’ Reports and Proxy | 260 |
Trustees’ Fees and Expenses | 7 |
Total Expenses | 9,315 |
Net Investment Income | 12,092 |
Realized Net Gain (Loss) | |
Investment Securities Sold—Unaffiliated Issuers 3 | (63,216) |
Investment Securities Sold—Affiliated Issuers | (22,314) |
Foreign Currencies | (322) |
Realized Net Gain (Loss) | (85,852) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Unaffiliated Issuers 3 | 23,579 |
Investment Securities—Affiliated Issuers | 1,406 |
Foreign Currencies | 36 |
Change in Unrealized Appreciation (Depreciation) | 25,021 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (48,739) |
1 Dividends are net of foreign withholding taxes of $537,000. | |
2 Dividends are net of foreign withholding taxes of $341,000. | |
3 Includes precious metals. |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Precious Metals and Mining Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 12,092 | 15,861 |
Realized Net Gain (Loss) | (85,852) | (289,478) |
Change in Unrealized Appreciation (Depreciation) | 25,021 | 1,394,398 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (48,739) | 1,120,781 |
Distributions | ||
Net Investment Income | (591) | (39,024) |
Realized Capital Gain | — | — |
Total Distributions | (591) | (39,024) |
Capital Share Transactions | ||
Issued | 813,768 | 1,114,214 |
Issued in Lieu of Cash Distributions | 540 | 36,059 |
Redeemed | (808,977) | (1,084,078) |
Net Increase (Decrease) from Capital Share Transactions | 5,331 | 66,195 |
Total Increase (Decrease) | (43,999) | 1,147,952 |
Net Assets | ||
Beginning of Period | 2,612,473 | 1,464,521 |
End of Period1 | 2,568,474 | 2,612,473 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($111,067,000) and ($143,537,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
18
Precious Metals and Mining Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $10.74 | $6.22 | $9.59 | $10.38 | $15.46 |
Investment Operations | |||||
Net Investment Income | .0491 | .0661,2 | .1751,3 | .130 | .2431 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (.217) | 4.615 | (3.397) | (.920) | (5.315) |
Total from Investment Operations | (.168) | 4.681 | (3.222) | (.790) | (5.072) |
Distributions | |||||
Dividends from Net Investment Income | (. 002) | (.161) | (.148) | — | (. 007) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Return of Capital | — | — | — | — | (.001) |
Total Distributions | (. 002) | (.161) | (.148) | — | (. 008) |
Net Asset Value, End of Period | $10.57 | $10.74 | $6.22 | $9.59 | $10.38 |
Total Return4 | -1.56% | 75.99% | -34.07% | -7.61% | -32.82% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,568 | $2,612 | $1,465 | $2,087 | $2,302 |
Ratio of Total Expenses to Average Net Assets5 | 0.36% | 0.43% | 0.35% | 0.29% | 0.25% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 0.47% | 0.65%2 | 2.22% 3 | 1.33% | 2.10% |
Portfolio Turnover Rate | 35% | 29% | 8% | 62% | 34% |
1 Calculated based on average shares outstanding.
2 Net investment income per share and the ratio of net investment income to average net assets include $.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 0.00%, 0.06%, (0.02%), (0.08%), and (0.09%).
See accompanying Notes, which are an integral part of the Financial Statements.
19
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, 2015–2018), 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
20
Precious Metals and Mining Fund
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 event 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, 2018, or at any time during the period then ended.
7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
B. M&G Investment Management Limited provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the S&P Global Custom Metals and Mining Index for the preceding three years. For the year ended January 31, 2018, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before a decrease of $63,000 (0.00%) 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.
21
Precious Metals and Mining 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, 2018, the fund had contributed to Vanguard capital in the amount of $142,000, representing 0.01% of the fund’s net assets and 0.06% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 2,029,665 | 506,001 | — |
Temporary Cash Investments | 75,587 | — | — |
Total | 2,105,252 | 506,001 | — |
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.
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, 2018, the fund realized gains on the sale of passive foreign investment companies of $21,375,000, 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, 2018, had unrealized appreciation of $133,725,000.
For tax purposes, at January 31, 2018, the fund had $28,201,000 of ordinary income available for distribution. The fund had available capital losses totaling $2,012,967,000 that may be carried forward indefinitely to offset future net capital gains.
22
Precious Metals and Mining Fund
At January 31, 2018, the cost of investment securities for tax purposes was $2,360,435,000. Net unrealized appreciation of investment securities for tax purposes was $250,818,000, consisting of unrealized gains of $406,927,000 on securities that had risen in value since their purchase and $156,109,000 in unrealized losses on securities that had fallen in value since their purchase.
The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, and contains provisions that make significant changes to the Internal Revenue Code. In applying the provisions of the TCJA, the fund is required to recognize income from certain foreign investment holdings resulting in a temporary difference that may materially increase the fund’s ordinary income available for distribution, offset by a decrease in the unrealized appreciation on investment securities for tax purposes. Management of the fund is currently assessing the impact, if any, that these provisions may have on the fund.
F. During the year ended January 31, 2018, the fund purchased $926,459,000 of investment securities and sold $857,038,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2018 | 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 77,469 | 111,872 |
Issued in Lieu of Cash Distributions | 52 | 4,303 |
Redeemed | (77,802) | (108,532) |
Net Increase (Decrease) in Shares Outstanding | (281) | 7,643 |
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 | Realized | Jan. 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Aguia Resources Ltd. | 2,373 | — | — | — | (498) | — | — | 1,875 |
Alacer Gold Corp. | NA1 | 16,371 | — | — | (1,657) | — | — | 29,025 |
Americas Silver Corp. | 8,048 | — | — | — | 1,449 | — | — | 9,497 |
Base Resources | — | 13,884 | — | — | 1,761 | — | — | 15,645 |
Beadell Resources | ||||||||
Ltd. | NA1 | 7,238 | — | — | (7,021) | — | — | 10,085 |
Dalradian Resources | ||||||||
Inc. | 46,633 | — | — | — | (637) | — | — | 45,996 |
23
Precious Metals and Mining Fund
Current Period Transactions | ||||||||
Jan. 31, | Proceeds | Realized | Jan. 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Dominion Diamond | ||||||||
Corp. | 65,235 | — | 84,393 | (23,397) | 42,555 | 520 | — | — |
Fortuna Silver Mines | ||||||||
Inc. | NA1 | 17,581 | — | — | (8,446) | — | — | 48,519 |
Guyana Goldfields Inc. | NA1 | 28,415 | — | — | (7,446) | — | — | 43,018 |
Hochschild Mining | ||||||||
plc | 83,056 | — | 7,789 | (2,014) | 6,057 | 700 | — | NA2 |
Neo Lithium Corp. | — | 11,122 | 7,297 | 2,859 | 6,300 | — | — | 12,984 |
Nevsun Resources | ||||||||
Ltd | 113,348 | — | 5,142 | (1,341) | (36,293) | 1,222 | — | 70,572 |
Nighthawk Gold | ||||||||
Corp. | NA1 | 6,093 | — | — | 580 | — | — | 9,683 |
Osisko Metals Inc. | — | 4,071 | — | — | 99 | — | — | 4,170 |
Osisko Mining Inc. | 24,355 | 27,287 | — | — | 2,039 | — | — | 53,681 |
Premier Gold Mines | ||||||||
Ltd. | 32,001 | — | 10,093 | 3,434 | 5,290 | — | — | 30,632 |
Roxgold Inc. | 34,541 | — | — | — | (7,856) | — | — | 26,685 |
SEMAFO Inc. | 82,882 | 8,641 | 20,723 | (1,936) | (7,300) | — | — | 61,564 |
Trevali Mining Corp. | — | 24,740 | 11,480 | — | — | NA3 | ||
Troilus Gold Corp | — | 3,917 | 412 | 91 | 955 | — | — | 4,551 |
Vanguard Market | ||||||||
Liquidity Fund | 163,010 | NA 4 | NA 4 | (10) | (5) | 930 | — | 75,587 |
Total | 655,482 | (22,314) | 1,406 | 3,372 | — | 553,769 |
1 Not applicable—at January 31, 2017, the issuer was not an affiliated company of the fund.
2 Not applicable—at January 31, 2018, the security was still held, but the issuer was no longer an affiliated company of the fund.
3 Not applicable—at January 31, 2017, and January 31, 2018, the issuer was not an affiliated company of the fund, but it was
affiliated during the year.
4 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, 2018, that would require recognition or disclosure in these financial statements.
24
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Precious Metals and Mining Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard Precious Metals and Mining Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the five years in the period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group of
Funds since 1975.
25
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/preciousmetalsx28x1.jpg)
Special 2017 tax information (unaudited) for Vanguard Precious Metals and Mining Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions of
the Internal Revenue Code.
The fund distributed $591,000 of qualified dividend income to shareholders during the fiscal year.
The fund designates to shareholders foreign source income of $13,415,000 and foreign taxes paid
of $878,000. Shareholders received more detailed information with their Form 1099-DIV in January
2018 to determine the calendar-year amounts to be included on their 2017 tax returns.
For corporate shareholders, 7.4% of investment income (dividend income plus short-term gains,
if any) qualifies for the dividends-received deduction.
26
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2018. (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, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | -1.56% | -6.65% | -6.75% |
Returns After Taxes on Distributions | -1.54 | -6.79 | -7.50 |
Returns After Taxes on Distributions and Sale of Fund Shares | -0.90 | -4.90 | -4.35 |
27
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
28
Six Months Ended January 31, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Precious Metals and Mining Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $994.36 | $1.66 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.54 | 1.68 |
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 0.33%. 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 (184/365).
29
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.
30
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
31
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
32
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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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they
are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008. Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
![]() | |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2017, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
Standard & Poor’s® and S&P® are trademarks of The | |
Text Telephone for People | McGraw-Hill Companies, Inc., and have been licensed |
Who Are Deaf or Hard of Hearing > 800-749-7273 | for use by The Vanguard Group, Inc. Vanguard mutual |
This material may be used in conjunction | funds are not sponsored, endorsed, sold, or promoted |
by Standard & Poor’s, and Standard & Poor’s makes no | |
with the offering of shares of any Vanguard | representation regarding the advisability of investing in |
fund only if preceded or accompanied by | the funds. |
the fund’s current prospectus. | |
All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
otherwise noted. | |
You can obtain a free copy of Vanguard’s proxy voting | |
guidelines by visiting vanguard.com/proxyreporting or by | |
calling Vanguard at 800-662-2739. The guidelines are | |
also available from the SEC’s website, sec.gov. In | |
addition, you may obtain a free report on how your fund | |
voted the proxies for securities it owned during the 12 | |
months ended June 30. To get the report, visit either | |
vanguard.com/proxyreporting or sec.gov. | |
You can review and copy information about your fund at | |
the SEC’s Public Reference Room in Washington, D.C. To | |
find out more about this public service, call the SEC at | |
202-551-8090. Information about your fund is also | |
available on the SEC’s website, and you can receive | |
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request in either of two ways: via email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
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© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q530 032018 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/healthcarefundx1x1.jpg)
Annual Report | January 31, 2018
Vanguard Health Care Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Advisor’s Report. | 6 |
Results of Proxy Voting. | 10 |
Fund Profile. | 12 |
Performance Summary. | 14 |
Financial Statements. | 16 |
Your Fund’s After-Tax Returns. | 32 |
About Your Fund’s Expenses. | 33 |
Glossary. | 35 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2018, Vanguard Health Care Fund returned 22.29% for Investors Shares and 22.35% for Admiral Shares. The fund’s results trailed the return of the MSCI All Country World Health Care Index (+24.26%) but exceeded the average return of peer funds (+21.68%).
• U.S. stocks hit record highs as investors cheered tax reform legislation, strong corporate profits, low unemployment, and solid economic growth. Health care stocks were among the period’s stronger performers.
• The fund’s advisor, Wellington Management Company llp, takes a value-oriented approach to its management of the portfolio.
• The fund’s pharmaceutical stocks lagged their counterparts in the benchmark, but its biotechnology holdings outperformed.
• For the ten years ended January 31, 2018, the fund posted an average annual return of about 13%, ahead of its comparative standards.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard Health Care Fund | |
Investor Shares | 22.29% |
Admiral™ Shares | 22.35 |
MSCI All Country World Health Care Index | 24.26 |
Global Health/Biotechnology Funds Average | 21.68 |
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, 2018 | |
Average | |
Annual Return | |
Health Care Fund Investor Shares | 12.68% |
Spliced Health Care Index | 10.23 |
Global Health/Biotechnology Funds Average | 10.91 |
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 | 0.37% | 0.32% | 1.23% |
The fund expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For
the fiscal year ended January 31, 2018, the fund’s expense ratios were 0.38% 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 2017.
Peer group: Global Health/Biotechnology Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/healthcarefundx5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
3
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/healthcarefundx7x1.jpg)
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Advisor’s Report
For the fiscal year ended January 31, 2018, Vanguard Health Care Fund returned 22.29% for Investor Shares and 22.35% for Admiral Shares. The fund underperformed the 24.26% return of its benchmark, the MSCI All Country World Health Care Index, but outperformed the 21.68% 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.
Medical technology was the index’s top-performing subsector during the period; health care services came in second. Biopharma mid-caps and biopharma large-caps lagged. Small-cap biopharmaceuticals are not meaningfully represented in the benchmark.
Our successes
Stock selection was strongest in the biopharma mid-cap subsector. Our underweighted allocation to biopharma large-caps helped the fund’s relative performance.
Alnylam Pharmaceuticals, in the biopharma mid-cap subsector, was the fund’s top relative performer. In the third quarter of 2017, Alnylam reported excellent Phase 3 results for its lead small interfering RNA (siRNA) drug Patisiran for the treatment of hereditary ATTR amyloidosis, a rare genetic disorder that affects the heart and other organs and the nervous system, leading to early death. The results provide strong proof of concept for Alnylam’s RNA interference program and bode well for the company’s other late-stage therapeutics, including Givosiran and Inclisiran.
Another top contributor to the fund’s relative performance during the period was Vertex Pharmaceuticals, in the biopharma large-cap subsector. Shares of Vertex returned more than 94% for the year as the company announced positive clinical data from three different three-drug combination regimens for cystic fibrosis—a significant milestone in the treatment of the disease. We trimmed our large position into this strength but remain enthusiastic about both the breakthrough nature of the results and the possibility that this combination regimen could treat the majority of cystic fibrosis patients.
Japanese large-cap biopharma Chugai Pharmaceutical also boosted the fund’s relative results, returning over 80% for the year. Chugai, and its partner Roche, received approval for novel hemophilia drug Hemlibra for patients with factor VIII inhibitors and also reported positive Phase 3 results in patients without inhibitors to factor VIII. We expect the company to disrupt the hemophilia space.
6
Our shortfalls
Stock selection was weakest in the biopharma large-cap and health care services subsectors. An underweighted allocation to medical technology stocks (the benchmark’s best-performing subsector) also detracted. And the fund’s frictional cash position (roughly 3% of assets) held back relative results.
Among biopharma large-cap companies, our positions in Allergan and Incyte weighed on relative results, as did our avoidance of benchmark constituents AbbVie and Novo Nordisk, both of which performed well during the period.
Allergan’s shares declined amid investor concern over early generic entries for some of its legacy franchises. Most notable of these is the potential entry in 2018 of a generic product for dry eye disease that would compete with the company’s blockbuster drug Restasis. We had already factored in such competition into our base case assumptions, but this competition did come earlier than we originally expected. Although the company’s near-term earnings will decline, we believe the market underestimates the durability and growth rate of the majority of Allergan’s business—especially its market-leading medical aesthetics franchise. We also believe that Allergan’s compelling pipeline opportunities, particularly its Phase 3 migraine and depression assets, aren’t adequately priced into its stock.
In the health care services subsector, our positions in Walgreens Boots Alliance and Envision Healthcare detracted most. Shares of pharmacies, including Walgreens Boots Alliance, fell on concerns that Amazon might enter the drug supply chain business. Amazon has shown no sign that it intends to enter this space. Even if it did so, however, we believe it would pose more of a threat to the front-end of the pharmacy business than it would to the more specialized and heavily regulated back-end prescription business. We maintain conviction in Walgreens’ strategy of entering into innovative partnerships, such as its collaboration with UnitedHealth Group on urgent care clinics, to drive long-term profit growth.
The fund’s positioning and outlook
At the end of the fiscal year, we held about 25% 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 were primarily domiciled in Japan, the United Kingdom, Switzerland, Belgium, and Israel, but many of them operate globally. We believe this strategy provides diversification for shareholders over the long term.
The portfolio consisted of 85 companies across all subsectors of health care. This figure was up from a year ago, when we held 75 equity names, because we took advantage of valuation opportunities to initiate modest positions in a number
7
of Chinese health care and biopharma stocks, including BeiGene, Bluebird Bio, and Galapagos. The fund’s ten largest holdings represented a significant portion—about 40%—of its assets.
The health care sector has generally performed well since the November 2016 U.S. elections. To an extent, its performance has been driven by a recovery in valuations as election-year worries abated. There were, however, two other, more important drivers at play: significant biopharmaceutical innovation, and better-than-expected growth trends across medical technology and many health care service subsectors.
We believe many of these trends will continue into 2018, though we know uncertainties remain. We are mindful of the risks posed for some biopharma companies by intensifying competition, enhanced transparency, realigned incentives, and ongoing challenges with affordability.
Regarding efforts to repeal the Affordable Care Act (ACA), we believe that many if not most of the millions of Americans who obtained insurance coverage in the past few years will retain coverage in some form. That said, with the 2017 Tax Cut and Jobs Bill’s repeal of the ACA’s individual mandate, the number of Americans without health insurance is likely to trend upward over time.
We seek companies that look to provide solutions to the challenges facing the health care delivery system globally by shifting focus from volumes to value. Over the long term, the tailwinds of innovation, an aging population, and the globalization of demand for cutting-edge, Western-style health care should continue to drive growth. And we believe that we are favorably positioned with the resources to capitalize on this.
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. This should enable our team to identify pockets of opportunity in health care 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 16, 2018
8
Major Portfolio Changes | |
Year ended January 31, 2018 | |
Additions | Comments |
Danaher | Danaher Corporation has historically been seen as an industrials |
company, but their business lines in the health care sector now | |
represent the majority of their revenue. Within life sciences, | |
they have targeted markets that offer good organic growth from | |
long-cycled industry trends and relatively low cyclicality, resulting | |
in high recurring revenues and free cash flow growth. We are | |
particularly attracted to Danaher’s strong management team, | |
corporate culture, and demonstrated ability to improve business | |
performance. | |
CVS Health | We initiated a new position in CVS Health toward the end of the |
period. The fund has held CVS previously. We decided to reenter | |
CVS in late 2017. The stock had underperformed significantly in | |
the prior 12 months, allowing us a nice valuation entry opportunity; | |
in addition, we believe the CVS/Aetna merger will allow CVS to | |
use its real estate footprint to move more aggressively to low- | |
acuity patient care in a low-cost setting. | |
Essilor | We initiated a new position in French medical technology company |
Essilor, which dominates the manufacturing of eyeglass lenses | |
globally. The proposed vertical merger of Luxottica, which | |
dominates eyeglass frames, should lead to increasingly innovative | |
solutions for vision correction. | |
Reductions | Comments |
Becton Dickinson | We eliminated Becton Dickinson. While we remain positive |
on its fundamentals, the company has a large integration ahead | |
of it with the Bard acquisition. Its near-term leverage has also | |
increased significantly. We are keeping our eye on this name | |
but have decided to not own it until we see a more positive | |
risk-reward profile. | |
Olympus | We eliminated our position in Olympus, a Japan-based medical |
equipment company, and invested the proceeds into Sysmex and | |
Terumo, as we believe their innovation in diagnostics (Sysmex) | |
and hospital supplies (Terumo) offer more upside. |
9
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries
of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Health Care Fund | 297,664,953 | 16,357,040 | 21,242,269 | 33,863,276 | 80.6% |
10
Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Health Care Fund | 86,886,122 | 26,082,934 | 222,295,206 | 33,863,276 | 23.5% |
11
Health Care Fund
Fund Profile
As of January 31, 2018
Share-Class Characteristics | ||
Investor | Admiral | |
Shares | Shares | |
Ticker Symbol | VGHCX | VGHAX |
Expense Ratio1 | 0.37% | 0.32% |
30-Day SEC Yield | 1.09% | 1.14% |
Portfolio Characteristics | |||
MSCI | DJ | ||
ACWI | U.S. Total | ||
Health | Market | ||
Fund | Care | FA Index | |
Number of Stocks | 86 | 173 | 3,765 |
Median Market Cap | $50.8B | $89.9B | $73.6B |
Price/Earnings Ratio | 26.1x | 25.2x | 23.8x |
Price/Book Ratio | 3.2x | 3.8x | 3.2x |
Return on Equity | 13.4% | 16.6% | 14.9% |
Earnings Growth | |||
Rate | -0.4% | 3.3% | 9.1% |
Dividend Yield | 1.5% | 1.8% | 1.7% |
Foreign Holdings | 24.5% | 33.4% | 0.0% |
Turnover Rate | 11% | — | — |
Short-Term Reserves | 3.0% | — | — |
Volatility Measures | ||
MSCI | DJ | |
ACWI | U.S. Total | |
Health | Market | |
Care | FA Index | |
R-Squared | 0.93 | 0.58 |
Beta | 1.01 | 0.94 |
These measures show the degree and timing of the fund’s | ||
fluctuations compared with the indexes over 36 months. |
Ten Largest Holdings (% of total net assets) | ||
Bristol-Myers Squibb Co. Pharmaceuticals | 6.2% | |
UnitedHealth Group Inc. | Managed Health | |
Care | 5.9 | |
AstraZeneca plc | Pharmaceuticals | 5.1 |
Allergan plc | Pharmaceuticals | 4.8 |
Eli Lilly & Co. | Pharmaceuticals | 4.1 |
Merck & Co. Inc. | Pharmaceuticals | 3.1 |
Vertex Pharmaceuticals | ||
Inc. | Biotechnology | 2.8 |
Medtronic plc | Health Care | |
Equipment | 2.7 | |
Mylan NV | Pharmaceuticals | 2.6 |
Biogen Inc. | Biotechnology | 2.6 |
Top Ten | 39.9% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2018, the expense ratios were 0.38% for Investor Shares and 0.33% for Admiral Shares.
12
Health Care Fund
Subindustry Diversification (% of equity | ||
exposure) | ||
MSCI | ||
ACWI | ||
Health | ||
Fund | Care | |
Biotechnology | 15.4% | 17.3% |
Consumer Staples | 1.9 | 0.0 |
Health Care Distributors | 3.6 | 2.1 |
Health Care Equipment | 11.8 | 15.2 |
Health Care Facilities | 3.7 | 1.4 |
Health Care Services | 0.4 | 3.2 |
Health Care Supplies | 0.8 | 2.2 |
Health Care Technology | 2.6 | 0.7 |
Life Sciences Tools & | ||
Services | 3.0 | 4.6 |
Managed Health Care | 11.6 | 9.1 |
Pharmaceuticals | 44.9 | 44.2 |
Real Estate | 0.3 | 0.0 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Market Diversification (% of equity exposure) | |
Emerging Markets | 0.4% |
Europe | |
United Kingdom | 5.8% |
Switzerland | 4.4 |
Belgium | 2.2 |
Other | 1.8 |
Subtotal | 14.2% |
Middle East | |
Israel | 1.3% |
North America | |
United States | 74.7% |
Pacific | |
Japan | 9.4% |
13
Health Care Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2008, Through January 31, 2018
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2018 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Health Care Fund Investor Shares | 22.29% | 17.36% | 12.68% | $33,006 | |
• • • • • • • • | Spliced Health Care Index | 24.26 | 13.52 | 10.23 | 26,479 |
– – – – | Global Health/Biotechnology Funds | ||||
Average | 21.68 | 15.61 | 10.91 | 28,168 | |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 | |
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 | 22.35% | 17.42% | 12.74% | $165,926 |
Spliced Health Care Index | 24.26 | 13.52 | 10.23 | 132,397 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 128,619 |
See Financial Highlights for dividend and capital gains information.
14
Health Care Fund
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/healthcarefundx17x1.jpg)
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2017
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 Date | One Year | Five Years | Ten Years | |
Investor Shares | 5/23/1984 | 19.61% | 17.68% | 11.73% |
Admiral Shares | 11/12/2001 | 19.66 | 17.74 | 11.79 |
15
Health Care Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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 (97.0%) | |||
United States (72.5%) | |||
Biotechnology (14.2%) | |||
* | Vertex Pharmaceuticals | ||
Inc. | 8,248,558 | 1,376,437 | |
* | Biogen Inc. | 3,636,003 | 1,264,638 |
* | Regeneron | ||
Pharmaceuticals Inc. | 2,905,225 | 1,065,201 | |
*,1 | Alnylam | ||
Pharmaceuticals Inc. | 6,670,468 | 867,028 | |
* | Incyte Corp. | 9,466,973 | 854,773 |
*,1 | Alkermes plc | 9,069,176 | 518,485 |
*,1 | Agios Pharmaceuticals | ||
Inc. | 4,353,124 | 342,852 | |
*,1 | TESARO Inc. | 2,996,631 | 202,153 |
* | Ionis Pharmaceuticals | ||
Inc. | 2,119,180 | 111,299 | |
* | Portola Pharmaceuticals | ||
Inc. | 2,009,962 | 103,131 | |
*,^,1 Prothena Corp. plc | 2,150,294 | 89,882 | |
* | Bluebird Bio Inc. | 378,528 | 77,560 |
*,^ | Ironwood | ||
Pharmaceuticals Inc. | |||
Class A | 4,594,407 | 68,043 | |
* | BeiGene Ltd. ADR | 305,865 | 41,521 |
6,983,003 | |||
Equity Real Estate Investment Trusts | |||
(REITs) (0.3%) | |||
Alexandria Real Estate | |||
Equities Inc. | 1,162,300 | 150,750 | |
Food & Staples Retailing (1.8%) | |||
Walgreens Boots | |||
Alliance Inc. | 8,048,160 | 605,705 | |
CVS Health Corp. | 3,626,218 | 285,347 | |
891,052 |
Health Care Equipment & Supplies (10.6%) | |||
Medtronic plc | 15,408,784 | 1,323,460 | |
Abbott Laboratories | 18,155,881 | 1,128,569 | |
* | Boston Scientific Corp. | 39,670,204 | 1,109,179 |
Baxter International Inc. | 6,230,791 | 448,804 | |
Danaher Corp. | 3,798,100 | 384,672 | |
Stryker Corp. | 1,654,500 | 271,967 | |
* | Hologic Inc. | 4,014,000 | 171,398 |
* | DexCom Inc. | 2,606,600 | 151,704 |
* | Intuitive Surgical Inc. | 166,328 | 71,799 |
Dentsply Sirona Inc. | 1,026,390 | 62,415 | |
* | Edwards Lifesciences | ||
Corp. | 466,355 | 59,031 | |
5,182,998 | |||
Health Care Providers & Services (18.8%) | |||
UnitedHealth Group Inc. 12,196,185 | 2,887,813 | ||
McKesson Corp. | 7,162,604 | 1,209,621 | |
Cigna Corp. | 5,049,352 | 1,052,032 | |
* | HCA Healthcare Inc. | 10,018,378 | 1,013,459 |
Aetna Inc. | 4,051,023 | 756,812 | |
Universal Health | |||
Services Inc. Class B | 4,644,600 | 564,319 | |
Cardinal Health Inc. | 6,936,246 | 497,953 | |
Anthem Inc. | 1,973,833 | 489,215 | |
* | WellCare Health Plans | ||
Inc. | 1,061,400 | 223,297 | |
* | Envision Healthcare | ||
Corp. | 5,773,390 | 207,784 | |
*,1 | Acadia Healthcare | ||
Co. Inc. | 4,601,355 | 156,814 | |
* | Centene Corp. | 668,300 | 71,668 |
Humana Inc. | 215,600 | 60,763 | |
* | LifePoint Health Inc. | 341,100 | 16,867 |
* | Community Health | ||
Systems Inc. CVR | 18,834,700 | 132 | |
9,208,549 |
16
Health Care Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Health Care Technology (2.5%) | |||
* | Cerner Corp. | 11,669,617 | 806,721 |
*,1 | athenahealth Inc. | 2,234,165 | 279,963 |
*,1 | Allscripts Healthcare | ||
Solutions Inc. | 9,423,593 | 140,506 | |
1,227,190 | |||
Life Sciences Tools & Services (2.9%) | |||
Thermo Fisher | |||
Scientific Inc. | 3,389,165 | 759,546 | |
* | Illumina Inc. | 1,418,888 | 330,090 |
* | IQVIA Holdings Inc. | 1,602,521 | 163,762 |
Agilent Technologies | |||
Inc. | 1,423,050 | 104,494 | |
* | PRA Health Sciences | ||
Inc. | 601,636 | 54,785 | |
1,412,677 | |||
Pharmaceuticals (21.4%) | |||
Bristol-Myers Squibb | |||
Co. | 48,547,412 | 3,039,068 | |
Allergan plc | 13,074,873 | 2,356,876 | |
Eli Lilly & Co. | 24,660,415 | 2,008,591 | |
Merck & Co. Inc. | 25,838,244 | 1,530,916 | |
*,1 | Mylan NV | 29,844,042 | 1,278,817 |
*,^,1 Medicines Co. | 5,564,220 | 184,343 | |
* | Nektar Therapeutics | ||
Class A | 1,334,600 | 111,586 | |
10,510,197 | |||
Total United States | 35,566,416 | ||
International (24.5%) | |||
Belgium (2.2%) | |||
1 | UCB SA | 11,830,703 | 1,031,202 |
* | Galapagos NV | 282,879 | 33,595 |
1,064,797 | |||
China (0.3%) | |||
Shanghai Fosun | |||
Pharmaceutical Group | |||
Co. Ltd. | 15,039,500 | 87,392 | |
Sino Biopharmaceutical | |||
Ltd. | 25,310,000 | 46,427 | |
*,2 | Wuxi Biologics Cayman | ||
Inc. | 2,435,500 | 16,738 | |
150,557 | |||
Denmark (0.8%) | |||
* | Genmab A/S | 1,423,515 | 260,483 |
H Lundbeck A/S | 2,386,693 | 121,660 | |
382,143 | |||
France (0.6%) | |||
Essilor International | |||
Cie Generale | |||
d’Optique SA | 2,204,229 | 312,925 |
Israel (1.3%) | |||
^ | Teva Pharmaceutical | ||
Industries Ltd. ADR | 30,844,901 | 629,544 | |
Japan (9.1%) | |||
1 | Eisai Co. Ltd. | 16,719,425 | 951,518 |
Chugai Pharmaceutical | |||
Co. Ltd. | 15,610,000 | 825,023 | |
Shionogi & Co. Ltd. | 13,215,654 | 731,494 | |
Takeda Pharmaceutical | |||
Co. Ltd. | 10,581,700 | 619,810 | |
Ono Pharmaceutical | |||
Co. Ltd. | 18,832,660 | 465,303 | |
Astellas Pharma Inc. | 34,367,700 | 451,977 | |
Sysmex Corp. | 1,716,700 | 135,135 | |
Kyowa Hakko Kirin | |||
Co. Ltd. | 5,952,900 | 116,132 | |
Nippon Shinyaku | |||
Co. Ltd. | 1,318,400 | 90,421 | |
Terumo Corp. | 1,799,300 | 88,066 | |
4,474,879 | |||
Netherlands (0.3%) | |||
Koninklijke Philips NV | 3,110,045 | 126,766 | |
South Africa (0.1%) | |||
Aspen Pharmacare | |||
Holdings Ltd. | 1,140,383 | 26,059 | |
Switzerland (4.2%) | |||
Novartis AG | 13,576,941 | 1,225,415 | |
Roche Holding AG | 2,938,470 | 726,021 | |
Roche Holding AG | |||
(Bearer) | 376,066 | 93,972 | |
* | Idorsia Ltd. | 809,587 | 25,082 |
2,070,490 | |||
United Kingdom (5.6%) | |||
AstraZeneca plc | 35,892,482 | 2,491,449 | |
Smith & Nephew plc | 8,976,157 | 161,515 | |
^ | Hikma Pharmaceuticals | ||
plc | 7,939,027 | 109,179 | |
2,762,143 | |||
Total International | 12,000,303 | ||
Total Common Stocks | |||
(Cost $27,822,521) | 47,566,719 |
17
Health Care Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Temporary Cash Investments (3.3%) | |||
Money Market Fund (0.3%) | |||
3,4 Vanguard Market | |||
Liquidity Fund, | |||
1.545% | 1,664,276 | 166,428 | |
Face | |||
Amount | |||
($000) | |||
Repurchase Agreements (1.4%) | |||
Bank of America | |||
Securities, LLC | |||
1.360%, 2/1/18 (Dated | |||
1/31/18, Repurchase | |||
Value $132,105,000, | |||
collateralized by Federal | |||
Home Loan Mortgage | |||
Corp. 3.000%, 3/1/30, | |||
Federal National Mortgage | |||
Assn. 3.000%–3.500%, | |||
6/1/30–1/1/48, with a | |||
value of $134,742,000) | 132,100 | 132,100 | |
Bank of Nova Scotia | |||
1.310%, 2/1/18 (Dated | |||
1/31/18, Repurchase | |||
Value $117,204,000, | |||
collateralized by U. S. | |||
Treasury Note/Bond | |||
0.875%–1.875%, 7/31/19– | |||
2/28/22, with a value of | |||
$119,548,000) | 117,200 | 117,200 | |
Barclays Capital Inc. | |||
1.350%, 2/1/18 (Dated | |||
1/31/18, Repurchase | |||
Value $112,404,000, | |||
collateralized by U. S. | |||
Treasury Note/Bond | |||
0.000%–9.125%, 5/15/18– | |||
5/15/43, with a value of | |||
$114,648,000) | 112,400 | 112,400 |
Face | Market | |
Amount | Value • | |
($000) | ($000) | |
BNP Paribas Securities Corp. | ||
1.330%, 2/1/18 (Dated | ||
1/31/18, Repurchase Value | ||
$85,503,000, collateralized | ||
by U. S. Treasury Note/ | ||
Bond 1.375%–2.500%, | ||
9/30/19–2/15/46, | ||
Government National | ||
Mortgage Assn. 2.250%– | ||
4.500%, 5/20/35–12/20/47, | ||
Federal National Mortgage | ||
Assn. 2.846%–4.500%, | ||
8/1/25–1/1/48, Federal | ||
Home Loan Mortgage | ||
Corp. 3.000%– 6.000%, | ||
12/1/25–2/1/48, with a | ||
value of $87,210,000) | 85,500 | 85,500 |
HSBC Bank USA | ||
1.310%, 2/1/18 (Dated | ||
1/31/18, Repurchase Value | ||
$76,303,000, collateralized | ||
by Federal National | ||
Mortgage Assn. 4.000%, | ||
12/1/41–7/1/47, with a | ||
value of $77,828,000) | 76,300 | 76,300 |
RBC Capital Markets LLC | ||
1.310%, 2/1/18 (Dated | ||
1/31/18, Repurchase Value | ||
$106,504,000, collateralized | ||
by Federal Home Loan | ||
Mortgage Corp. 3.000%– | ||
4.000%, 6/1/32–1/1/48, | ||
Federal National Mortgage | ||
Assn. 2.348%–4.500%, | ||
11/1/32–2/1/48, with a | ||
value of $108,630,000) 106,500 | 106,500 |
18
Health Care Fund
Face | Market | ||
Amount | Value • | ||
($000) | ($000) | ||
Wells Fargo & Co. | |||
1.360%, 2/1/18 (Dated | |||
1/31/18, Repurchase | |||
Value $55,802,000, | |||
collateralized by Federal | |||
National Mortgage Assn. | |||
3.500%, 12/1/47, with | |||
a value of $56,916,000) | 55,800 | 55,800 | |
685,800 | |||
Commercial Paper (1.6%) | |||
5 | Apple Inc., | ||
1.493%, 2/7/18 | 250,000 | 249,950 | |
5 | Apple Inc., | ||
1.534%, 3/13/18 | 75,000 | 74,871 | |
General Electric Co., | |||
1.553%, 2/27/18 | 150,000 | 149,836 | |
5 | Microsoft Corp., | ||
1.402%, 2/1/18 | 79,674 | 79,671 | |
5 | Microsoft Corp., | ||
1.423%, 2/12/18 | 150,000 | 149,937 | |
5 | Wal-Mart Stores, Inc., | ||
1.502%, 2/20/18 | 72,800 | 72,744 | |
777,009 | |||
Total Temporary Cash Investments | |||
(Cost $1,629,221) | 1,629,237 | ||
Total Investments (100.3%) | |||
(Cost $29,451,742) | 49,195,956 | ||
Other Assets and Liabilities (-0.3%) | |||
Other Assets 4 | 244,787 | ||
Liabilities 4 | (373,921) | ||
(129,134) | |||
Net Assets (100%) | 49,066,822 |
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 42,985,965 |
Affiliated Vanguard Funds | 166,428 |
Other Affiliated Issuers | 6,043,563 |
Total Investments in Securities | 49,195,956 |
Investment in Vanguard | 2,577 |
Receivables for Investment | |
Securities Sold | 169,193 |
Receivables for Accrued Income | 63,296 |
Receivables for Capital Shares Issued | 9,617 |
Other Assets | 104 |
Total Assets | 49,440,743 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 75,456 |
Collateral for Securities on Loan | 166,446 |
Payables to Investment Advisor | 20,456 |
Payables for Capital Shares Redeemed | 57,843 |
Payables to Vanguard | 53,720 |
Total Liabilities | 373,921 |
Net Assets | 49,066,822 |
19
Health Care Fund
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 28,323,291 |
Overdistributed Net Investment Income | (102,645) |
Accumulated Net Realized Gains | 1,099,592 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 19,744,214 |
Foreign Currencies | 2,370 |
Net Assets | 49,066,822 |
Investor Shares—Net Assets | |
Applicable to 45,625,299 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 9,853,130 |
Net Asset Value Per Share— | |
Investor Shares | $215.96 |
Admiral Shares—Net Assets | |
Applicable to 430,544,875 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 39,213,692 |
Net Asset Value Per Share— | |
Admiral Shares | $91.08 |
• 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 $154,466,000.
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, 2018, the value of this
security represented 0.0% of net assets.
3 Affiliated money market fund available only to Vanguard
funds and certain trusts and accounts managed by Vanguard.
Rate shown is the 7-day yield.
4 Includes $166,446,000 of collateral received for securities
on loan, of which $166,428,000 is held in Vanguard Market
Liquidity Fund and $18,000 is held in cash.
5 Security exempt from registration under Section 4(2) of
the Securities Act of 1933. Such securities may be sold in
transactions exempt from registration only to dealers in that
program or other “accredited investors.” At January 31, 2018,
the aggregate value of these securities was $627,173,000,
representing 1.3% of net assets.
ADR—American Depositary Receipt.
CVR—Contingent Value Rights.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Health Care Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends Received from Unaffiliated Issuers1 | 615,863 |
Dividends Received from Affiliated Issuers2 | 30,234 |
Interest | 14,224 |
Securities Lending—Net | 880 |
Total Income | 661,201 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 68,071 |
Performance Adjustment | 20,182 |
The Vanguard Group—Note C | |
Management and Administrative—Investor Shares | 16,588 |
Management and Administrative—Admiral Shares | 48,975 |
Marketing and Distribution—Investor Shares | 1,479 |
Marketing and Distribution—Admiral Shares | 1,655 |
Custodian Fees | 922 |
Auditing Fees | 37 |
Shareholders’ Reports and Proxy—Investor Shares | 884 |
Shareholders’ Reports and Proxy—Admiral Shares | 571 |
Trustees’ Fees and Expenses | 79 |
Total Expenses | 159,443 |
Net Investment Income | 501,758 |
Realized Net Gain (Loss) | |
Investment Securities Sold—Unaffiliated Issuers | 2,458,963 |
Investment Securities Sold—Affiliated Issuers | 389,034 |
Foreign Currencies | (442) |
Realized Net Gain (Loss) | 2,847,555 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Unaffiliated Issuers | 4,587,078 |
Investment Securities—Affiliated Issuers | 1,446,140 |
Foreign Currencies | 2,549 |
Change in Unrealized Appreciation (Depreciation) | 6,035,767 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,385,080 |
1 Dividends are net of foreign withholding taxes of $14,649,000. | |
2 Dividends are net of foreign withholding taxes of $6,284,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
21
Health Care Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 501,758 | 476,102 |
Realized Net Gain (Loss) | 2,847,555 | 3,502,054 |
Change in Unrealized Appreciation (Depreciation) | 6,035,767 | (2,688,729) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,385,080 | 1,289,427 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (91,668) | (91,432) |
Admiral Shares | (384,798) | (337,537) |
Realized Capital Gain1 | ||
Investor Shares | (606,232) | (710,003) |
Admiral Shares | (2,282,680) | (2,437,191) |
Total Distributions | (3,365,378) | (3,576,163) |
Capital Share Transactions | ||
Investor Shares | (1,099,749) | (780,048) |
Admiral Shares | 795,332 | (1,103,458) |
Net Increase (Decrease) from Capital Share Transactions | (304,417) | (1,883,506) |
Total Increase (Decrease) | 5,715,285 | (4,170,242) |
Net Assets | ||
Beginning of Period | 43,351,537 | 47,521,779 |
End of Period2 | 49,066,822 | 43,351,537 |
1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $271,874,000 and $132,789,000, 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 ($102,645,000) and ($107,645,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
22
Health Care Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $189.88 | $200.67 | $216.14 | $191.63 | $152.58 |
Investment Operations | |||||
Net Investment Income | 2.1621 | 2.039 | 1.934 | 2.941 | 2.350 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 38.929 | 2.951 | .566 | 49.127 | 53.058 |
Total from Investment Operations | 41.091 | 4.990 | 2.500 | 52.068 | 55.408 |
Distributions | |||||
Dividends from Net Investment Income | (2.059) | (1.854) | (2.611) | (2.115) | (2.357) |
Distributions from Realized Capital Gains | (12.952) | (13.926) | (15.359) | (25.443) | (14.001) |
Total Distributions | (15.011) | (15.780) | (17.970) | (27.558) | (16.358) |
Net Asset Value, End of Period | $215.96 | $189.88 | $200.67 | $216.14 | $191.63 |
Total Return2 | 22.29% | 2.71% | 0.49% | 28.15% | 37.66% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $9,853 | $9,636 | $10,916 | $11,660 | $9,905 |
Ratio of Total Expenses to Average Net Assets3 | 0.38% | 0.37% | 0.36% | 0.34% | 0.35% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.02% | 0.98% | 0.84% | 1.44% | 1.33% |
Portfolio Turnover Rate | 11% | 12% | 18% | 20% | 21% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.04% for fiscal 2018, 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.
23
Health Care Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $80.09 | $84.64 | $91.17 | $80.84 | $64.37 |
Investment Operations | |||||
Net Investment Income | . 9381 | .908 | .868 | 1.290 | 1.040 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 16.436 | 1.244 | .236 | 20.715 | 22.378 |
Total from Investment Operations | 17.374 | 2.152 | 1.104 | 22.005 | 23.418 |
Distributions | |||||
Dividends from Net Investment Income | (.920) | (.828) | (1.155) | (.942) | (1.042) |
Distributions from Realized Capital Gains | (5.464) | (5.874) | (6.479) | (10.733) | (5.906) |
Total Distributions | (6.384) | (6.702) | (7.634) | (11.675) | (6.948) |
Net Asset Value, End of Period | $91.08 | $80.09 | $84.64 | $91.17 | $80.84 |
Total Return2 | 22.35% | 2.76% | 0.54% | 28.20% | 37.74% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $39,214 | $33,715 | $36,606 | $34,371 | $24,821 |
Ratio of Total Expenses to Average Net Assets3 | 0.33% | 0.32% | 0.31% | 0.29% | 0.30% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.07% | 1.03% | 0.89% | 1.49% | 1.38% |
Portfolio Turnover Rate | 11% | 12% | 18% | 20% | 21% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.04% for fiscal 2018, 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.
24
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
25
Health Care Fund
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, 2015–2018), 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 event 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, 2018, or at any time during the period then ended.
26
Health Care Fund
8. Other: Dividend income is recorded on the ex-dividend date. 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), shareholder reporting, and the proxy. 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, 2018, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before an increase of $20,182,000 (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, 2018, the fund had contributed to Vanguard capital in the amount of $2,577,000, representing 0.01% of the fund’s net assets and 1.03% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
27
Health Care Fund
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—United States | 35,566,416 | — | — |
Common Stocks—International | 629,544 | 11,370,759 | — |
Temporary Cash Investments | 166,428 | 1,462,809 | — |
Total | 36,362,388 | 12,833,568 | — |
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 $19,849,000 from overdistributed net investment income and $109,069,000 from accumulated net realized gains to paid-in capital.
For tax purposes, at January 31, 2018, the fund had $111,451,000 of ordinary income and $1,024,203,000 of long-term capital gains available for distribution.
At January 31, 2018, the cost of investment securities for tax purposes was $29,540,605,000. Net unrealized appreciation of investment securities for tax purposes was $19,655,351,000, consisting of unrealized gains of $20,879,661,000 on securities that had risen in value since their purchase and $1,224,310,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2018, the fund purchased $4,972,161,000 of investment securities and sold $8,541,671,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2018 | 2017 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 1,154,125 | 5,549 | 1,313,938 | 6,581 |
Issued in Lieu of Cash Distributions | 659,513 | 3,250 | 760,856 | 4,044 |
Redeemed | (2,913,387) | (13,922) | (2,854,842) | (14,276) |
Net Increase (Decrease)—Investor Shares | (1,099,749) | (5,123) | (780,048) | (3,651) |
Admiral Shares | ||||
Issued | 2,793,811 | 31,646 | 2,173,067 | 25,669 |
Issued in Lieu of Cash Distributions | 2,402,452 | 28,052 | 2,517,721 | 31,739 |
Redeemed | (4,400,931) | (50,129) | (5,794,246) | (68,911) |
Net Increase (Decrease)—Admiral Shares | 795,332 | 9,569 | (1,103,458) | (11,503) |
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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 | Realized | Jan. 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Acadia Healthcare | ||||||||
Co. Inc. | NA1 | 30,010 | — | — | (15,114) | — | — | 156,814 |
Agios | ||||||||
Pharmaceuticals Inc. | 154,118 | 47,166 | — | — | 141,568 | — | — | 342,852 |
Alkermes plc | 470,442 | 18,895 | — | — | 29,148 | — | — | 518,485 |
Allscripts Healthcare | ||||||||
Solutions Inc. | 131,139 | — | 26,188 | 758 | 34,797 | — | — | 140,506 |
Alnylam | ||||||||
Pharmaceuticals Inc. | 341,889 | — | 212,806 | 35,109 | 702,836 | — | — | 867,028 |
athenahealth Inc. | 289,067 | 17,992 | 30,605 | 1,661 | 1,848 | — | — | 279,963 |
Eisai Co. Ltd. | 828,954 | 97,823 | — | — | 24,741 | 18,157 | — | 951,518 |
Incyte Corp. | 1,249,252 | 41,017 | 155,621 | 75,544 | (355,419) | — | — | NA2 |
Medicines Co. | 200,590 | — | — | — | (16,247) | — | — | 184,343 |
Mylan NV | 1,144,717 | 16,789 | 34,017 | (20,064) | 171,392 | — | — | 1,278,817 |
Prothena Corp. plc | 105,278 | — | — | — | (15,396) | — | — | 89,882 |
TESARO Inc. | NA1 | 345,608 | — | — | (143,455) | — | — | 202,153 |
UCB SA | 783,433 | 36,150 | 1,645 | 57 | 213,207 | 12,077 | — | 1,031,202 |
Vanguard Market | ||||||||
Liquidity Fund | 88,012 | NA 3 | NA 3 | (18) | (1) | — | — | 166,428 |
Vertex | ||||||||
Pharmaceuticals | ||||||||
Inc. | 1,136,089 | — | 727,874 | 295,987 | 672,235 | — | — | NA2 |
Total | 6,922,980 | 389,034 | 1,446,140 | 30,234 | — | 6,209,991 | ||
1 Not applicable—at January 31, 2017, the issuer was not an affiliated company of the fund. | ||||||||
2 Not applicable—at January 31, 2018, the security was still held, but 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, 2018, that would require recognition or disclosure in these financial statements.
29
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Health Care Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard Health Care Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the five years in the period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group
of Funds since 1975.
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![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/healthcarefundx33x1.jpg)
Special 2017 tax information (unaudited) for Vanguard Health Care Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions
of the Internal Revenue Code.
The fund distributed $2,718,262,000 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 $632,250,000 of qualified dividend income to shareholders during the
fiscal year.
For corporate shareholders, 45.3% 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 2018. (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, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 22.29% | 17.36% | 12.68% |
Returns After Taxes on Distributions | 20.17 | 14.84 | 11.03 |
Returns After Taxes on Distributions and Sale of Fund Shares | 14.41 | 13.54 | 10.20 |
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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, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Health Care Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,060.09 | $1.92 |
Admiral Shares | 1,000.00 | 1,060.32 | 1.66 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.34 | $1.89 |
Admiral Shares | 1,000.00 | 1,023.59 | 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 (184/365).
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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.
36
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
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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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008. Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
![]() | |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2017, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
CFA® is a registered trademark owned by CFA Institute. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q520 032018 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx1x1.jpg)
Annual Report | January 31, 2018
Vanguard REIT Index Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Results of Proxy Voting. | 6 |
Fund Profile. | 9 |
Performance Summary. | 10 |
Financial Statements. | 13 |
Your Fund’s After-Tax Returns. | 40 |
About Your Fund’s Expenses. | 41 |
Glossary. | 43 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx2x1.jpg)
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the 12 months ended January 31, 2018, Vanguard REIT Index Fund returned 0.45% for Investor Shares. Returns for ETF, Admiral, and Institutional Shares were a bit higher. The results were in line with those of the fund’s benchmark index but lower than the average return of peer funds.
• Top-performing subsectors included industrial REITs, hotel and resort REITs, specialized REITs, and residential REITs.
• The fund’s largest subsector, retail REITs, was the biggest detractor. Health care REITs also hurt performance, as did office REITs, diversified REITs, mortgage REITs, and diversified real estate activities.
• On February 1, 2018, the fund changed its name to Vanguard Real Estate Index Fund and its benchmark from the MSCI US REIT Index to the MSCI US Investable Market Real Estate 25/50 Transition Index.
• The fund is expected to complete its transition to its destination benchmark, MSCI
US Investable Market Real Estate 25/50 Index, during the third quarter of 2018.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard REIT Index Fund | |
Investor Shares | 0.45% |
ETF Shares | |
Market Price | 0.65 |
Net Asset Value | 0.59 |
Admiral™ Shares | 0.58 |
Institutional Shares | 0.60 |
MSCI US REIT Index | 0.70 |
Real Estate Funds Average | 2.65 |
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, 2018 | |
Average | |
Annual Return | |
REIT Index Fund Investor Shares | 7.08% |
REIT Spliced Index | 7.21 |
Real Estate Funds Average | 6.09 |
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% | 1.25% |
The fund expense ratios shown are from the prospectus dated September 26, 2017, and represent estimated costs for the current fiscal
year. For the fiscal year ended January 31, 2018, 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 2017.
Peer group: Real Estate Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
3
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and
guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx7x1.jpg)
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
* Results are for all funds within the same trust. |
Proposal 2—Approve a manager-of-managers arrangement with third-party investment advisors.
This arrangement enables the fund to enter into and materially amend investment advisory arrangements with third-party investment advisors, subject to the approval of the fund’s board of trustees and certain conditions imposed by the Securities and Exchange Commission, while avoiding the costs and delays associated with obtaining future shareholder approval.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
REIT Index Fund | 559,889,574 | 21,146,116 | 16,912,120 | 138,870,970 | 76.0% |
6
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries
of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
REIT Index Fund | 562,115,638 | 20,716,853 | 15,115,320 | 138,870,970 | 76.3% |
Proposal 4—Change the investment objective of Vanguard REIT Index Fund.
The revised investment objective will broaden the fund’s investable universe to include real estate-related investments, such as certain specialized real estate investment trusts (REITs) and real estate management and development companies. The fund will continue to invest in publicly traded equity REITs.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
REIT Index Fund | 535,225,893 | 36,724,554 | 25,921,900 | 138,946,434 | 72.6% |
Proposal 5—Reclassify the diversification status of the REIT Index Fund to nondiversified.
Reclassifying the fund’s diversification status to nondiversified, as defined by the Investment Company Act of 1940, aligns the fund’s diversification status with that of Vanguard’s other sector equity index funds and enables the fund to track its benchmark more closely.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
REIT Index Fund | 531,277,052 | 35,754,603 | 30,840,692 | 138,946,434 | 72.1% |
7
Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
REIT Index Fund | 108,580,304 | 40,616,166 | 448,675,877 | 138,946,434 | 14.7% |
8
REIT Index Fund
Fund Profile
As of January 31, 2018
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 | |||
MSCI US | Market | ||
Fund | REIT Index | FA Index | |
Number of Stocks | 184 | 152 | 3,765 |
Median Market Cap | $9.8B | $9.8B | $73.6B |
Price/Earnings Ratio | 32.5x | 32.5x | 23.8x |
Price/Book Ratio | 2.1x | 2.2x | 3.2x |
Return on Equity | 5.9% | 5.9% | 14.9% |
Earnings Growth Rate | 18.3% | 17.1% | 9.1% |
Dividend Yield | 4.2% | 4.2% | 1.7% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 6% | — | — |
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 | 7.3% | 7.2% |
Health Care REITs | 11.1 | 11.2 |
Hotel & Resort REITs | 7.2 | 7.2 |
Industrial REITs | 7.7 | 7.8 |
Office REITs | 13.2 | 13.2 |
Residential REITs | 16.2 | 16.2 |
Retail REITs | 19.0 | 19.1 |
Specialized REITs | 18.3 | 18.1 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Volatility Measures | ||
DJ | ||
U.S. Total | ||
MSCI US | Market | |
REIT Index | FA Index | |
R-Squared | 1.00 | 0.20 |
Beta | 1.00 | 0.58 |
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) | ||
Vanguard REIT II Index | ||
Fund | Other | 10.1% |
Simon Property Group | ||
Inc. | Retail REITs | 5.5 |
Equinix Inc. | Specialized REITs | 3.9 |
Prologis Inc. | Industrial REITs | 3.8 |
Public Storage | Specialized REITs | 3.3 |
AvalonBay Communities | ||
Inc. | Residential REITs | 2.6 |
Digital Realty Trust Inc. | Specialized REITs | 2.5 |
Equity Residential | Residential REITs | 2.5 |
Welltower Inc. | Health Care REITs | 2.4 |
Ventas Inc. | Health Care REITs | 2.2 |
Top Ten | 38.8% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratios shown are from the prospectus dated September 26, 2017, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2018, 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.
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, 2008, Through January 31, 2018
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx12x1.jpg)
Average Annual Total Returns | |||||
Periods Ended January 31, 2018 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
REIT Index Fund Investor Shares | 0.45% | 7.38% | 7.08% | $19,820 | |
• • • • • • • • | REIT Spliced Index | 0.70 | 7.62 | 7.21 | 20,061 |
– – – – | Real Estate Funds Average | 2.65 | 7.05 | 6.09 | 18,068 |
Dow Jones U.S. Total Stock Market | |||||
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 | |
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 | 0.59% | 7.52% | 7.22% | $20,085 |
REIT Spliced Index | 0.70 | 7.62 | 7.21 | 20,061 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 |
See Financial Highlights for dividend and capital gains information.
10
REIT Index Fund
Average Annual Total Returns | ||||
Periods Ended January 31, 2018 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Admiral Shares | 0.58% | 7.53% | 7.23% | $20,092 |
REIT Spliced Index | 0.70 | 7.62 | 7.21 | 20,061 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 |
Final Value | ||||
One | Five | Ten | of a $5,000,000 | |
Year | Years | Years | Investment | |
REIT Index Fund Institutional Shares | 0.60% | 7.54% | 7.25% | $10,065,377 |
REIT Spliced Index | 0.70 | 7.62 | 7.21 | 10,030,667 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 12,861,866 |
Cumulative Returns of ETF Shares: January 31, 2008, Through January 31, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
REIT Index Fund ETF Shares Market Price | 0.65% | 43.70% | 101.23% |
REIT Index Fund ETF Shares Net Asset Value | 0.59 | 43.72 | 100.85 |
REIT Spliced Index | 0.70 | 44.39 | 100.61 |
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx13x1.jpg)
For a benchmark description, see the Glossary.
11
REIT Index Fund
Average Annual Total Returns: Periods Ended December 31, 2017
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 Date | One Year | Five Years | Ten Years | |
Investor Shares | 5/13/1996 | 4.83% | 9.10% | 7.50% |
ETF Shares | 9/23/2004 | |||
Market Price | 4.90 | 9.24 | 7.65 | |
Net Asset Value | 4.95 | 9.24 | 7.64 | |
Admiral Shares | 11/12/2001 | 4.94 | 9.24 | 7.65 |
Institutional Shares | 12/2/2003 | 4.93 | 9.26 | 7.67 |
12
REIT Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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) (99.7%)1 | |||
Diversified REITs (6.5%) | |||
2 | VEREIT Inc. | 64,219,038 | 462,377 |
2 | WP Carey Inc. | 7,042,783 | 456,443 |
2 | Liberty Property Trust | 9,715,589 | 402,322 |
2 | Forest City Realty | ||
Trust Inc. Class A | 14,066,431 | 330,139 | |
2 | Colony NorthStar Inc. | ||
Class A | 34,496,621 | 309,780 | |
2 | STORE Capital Corp. | 11,268,795 | 276,198 |
2 | Gramercy Property | ||
Trust | 10,008,749 | 252,621 | |
2 | Spirit Realty Capital Inc. | 30,213,620 | 246,845 |
Empire State Realty | |||
Trust Inc. | 8,833,493 | 172,695 | |
PS Business Parks Inc. | 1,346,490 | 164,420 | |
2 | Washington REIT | 5,072,246 | 145,371 |
2 | Lexington Realty Trust | 14,272,272 | 128,736 |
2 | Alexander & Baldwin Inc. | 4,527,983 | 120,082 |
Select Income REIT | 4,423,132 | 98,901 | |
American Assets | |||
Trust Inc. | 2,330,116 | 82,160 | |
2 | Global Net Lease Inc. | 4,439,092 | 81,413 |
*,2 | iStar Inc. | 4,285,982 | 45,217 |
2 | Investors Real Estate | ||
Trust | 7,943,254 | 45,038 | |
2 | Armada Hoffler | ||
Properties Inc. | 2,968,441 | 42,716 | |
2 | Gladstone Commercial | ||
Corp. | 1,825,278 | 34,680 | |
One Liberty Properties | |||
Inc. | 923,188 | 22,563 | |
2,3 | Winthrop Realty Trust | 1,892,511 | 12,674 |
3,933,391 |
Health Care REITs (10.0%) | |||
2 | Welltower Inc. | 24,309,940 | 1,457,867 |
2 | Ventas Inc. | 23,466,917 | 1,313,443 |
2 | HCP Inc. | 30,901,425 | 744,106 |
2 | Healthcare Trust of | ||
America Inc. Class A | 13,226,106 | 365,173 | |
^,2 | Omega Healthcare | ||
Investors Inc. | 12,998,348 | 351,475 | |
2 | Medical Properties | ||
Trust Inc. | 23,996,197 | 313,870 | |
2 | Senior Housing | ||
Properties Trust | 15,656,540 | 271,328 | |
2 | Healthcare Realty | ||
Trust Inc. | 8,161,360 | 243,780 | |
2 | Sabra Health Care | ||
REIT Inc. | 11,584,960 | 209,688 | |
2 | Physicians Realty Trust | 11,705,534 | 190,800 |
2 | National Health | ||
Investors Inc. | 2,702,796 | 190,628 | |
2 | LTC Properties Inc. | 2,608,825 | 106,910 |
*,2 | Quality Care | ||
Properties Inc. | 6,187,006 | 83,525 | |
2 | CareTrust REIT Inc. | 5,007,883 | 79,575 |
2 | Universal Health Realty | ||
Income Trust | 852,760 | 56,751 | |
2 | New Senior Investment | ||
Group Inc. | 5,415,396 | 41,482 | |
Community Healthcare | |||
Trust Inc. | 823,398 | 21,935 | |
MedEquities Realty | |||
Trust Inc. | 21,942 | 240 | |
6,042,576 | |||
Hotel & Resort REITs (6.4%) | |||
2 | Host Hotels & Resorts | ||
Inc. | 48,763,141 | 1,012,323 |
13
REIT Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
2 | Hospitality Properties | ||
Trust | 10,851,373 | 308,288 | |
Park Hotels & Resorts | |||
Inc. | 10,619,284 | 307,003 | |
2 | Apple Hospitality REIT | ||
Inc. | 13,967,455 | 272,226 | |
2 | RLJ Lodging Trust | 11,515,062 | 266,228 |
2 | Sunstone Hotel | ||
Investors Inc. | 14,856,672 | 250,335 | |
2 | Ryman Hospitality | ||
Properties Inc. | 3,036,342 | 232,432 | |
2 | LaSalle Hotel Properties | 7,462,032 | 227,890 |
^,2 | Pebblebrook Hotel Trust | 4,545,872 | 177,289 |
2 | Xenia Hotels & Resorts | ||
Inc. | 7,038,057 | 156,245 | |
2 | DiamondRock | ||
Hospitality Co. | 13,203,576 | 155,274 | |
^,2 | MGM Growth | ||
Properties LLC Class A | 4,559,294 | 127,934 | |
2 | Chesapeake Lodging | ||
Trust | 3,965,417 | 108,533 | |
2 | Summit Hotel | ||
Properties Inc. | 6,873,685 | 106,473 | |
2 | Chatham Lodging Trust | 2,991,303 | 67,005 |
2 | Hersha Hospitality Trust | ||
Class A | 2,758,524 | 51,171 | |
2 | Ashford Hospitality | ||
Trust Inc. | 6,417,798 | 41,331 | |
2 | Ashford Hospitality | ||
Prime Inc. | 1,683,590 | 15,186 | |
3,883,166 | |||
Industrial REITs (7.0%) | |||
2 | Prologis Inc. | 35,041,769 | 2,281,569 |
2 | Duke Realty Corp. | 23,453,606 | 619,410 |
2 | DCT Industrial Trust Inc. | 6,135,346 | 363,151 |
2 | First Industrial Realty | ||
Trust Inc. | 7,903,235 | 243,894 | |
2 | EastGroup Properties | ||
Inc. | 2,261,807 | 196,347 | |
2 | STAG Industrial Inc. | 6,081,468 | 153,983 |
2 | Rexford Industrial | ||
Realty Inc. | 4,688,849 | 139,212 | |
2 | Terreno Realty Corp. | 3,452,267 | 122,901 |
2 | Monmouth Real Estate | ||
Investment Corp. | 4,414,865 | 75,450 | |
4,195,917 | |||
Office REITs (11.8%) | |||
2 | Boston Properties Inc. | 10,172,751 | 1,258,471 |
2 | Vornado Realty Trust | 11,231,751 | 805,092 |
2 | Alexandria Real Estate | ||
Equities Inc. | 6,173,438 | 800,695 | |
2 | SL Green Realty Corp. | 6,520,718 | 655,463 |
2 | Kilroy Realty Corp. | 6,480,664 | 462,201 |
2 | Douglas Emmett Inc. | 10,195,625 | 394,265 |
2 | Hudson Pacific | ||
Properties Inc. | 10,237,127 | 327,281 | |
2 | Highwoods | ||
Properties Inc. | 6,808,734 | 326,002 | |
2 | Cousins Properties Inc. | 27,689,442 | 249,205 |
*,2 | Equity Commonwealth | 8,179,351 | 244,644 |
2 | JBG SMITH Properties | 6,234,285 | 210,407 |
2 | Brandywine Realty | ||
Trust | 11,561,642 | 207,416 | |
2 | Paramount Group Inc. | 13,361,147 | 200,818 |
2 | Piedmont Office | ||
Realty Trust Inc. | |||
Class A | 9,591,447 | 187,225 | |
2 | Corporate Office | ||
Properties Trust | 6,557,654 | 179,024 | |
2 | Columbia Property | ||
Trust Inc. | 7,991,890 | 174,942 | |
2 | Mack-Cali Realty Corp. | 5,626,477 | 112,923 |
2 | Government Properties | ||
Income Trust | 6,341,924 | 108,827 | |
2 | Franklin Street | ||
Properties Corp. | 6,709,340 | 68,033 | |
2 | Tier REIT Inc. | 3,156,761 | 61,273 |
2 | Easterly Government | ||
Properties Inc. | 2,570,960 | 53,553 | |
2 | NorthStar Realty | ||
Europe Corp. | 3,461,673 | 41,298 | |
^,2 | New York REIT Inc. | 11,065,751 | 22,353 |
City Office REIT Inc. | 36,182 | 423 | |
7,151,834 | |||
Other (10.1%) 4 | |||
5,6 | Vanguard REIT II | ||
Index Fund | 319,564,620 | 6,126,412 | |
Residential REITs (14.5%) | |||
2 | AvalonBay | ||
Communities Inc. | 9,099,460 | 1,550,548 | |
2 | Equity Residential | 24,219,826 | 1,492,184 |
2 | Essex Property | ||
Trust Inc. | 4,351,564 | 1,013,827 | |
2 | Mid-America | ||
Apartment | |||
Communities Inc. | 7,482,116 | 713,570 | |
2 | UDR Inc. | 17,632,878 | 644,129 |
2 | Camden Property Trust | 6,110,328 | 528,910 |
2 | Equity LifeStyle | ||
Properties Inc. | 5,449,307 | 470,384 | |
2 | Sun Communities Inc. | 5,209,883 | 462,846 |
Invitation Homes Inc. | 20,523,490 | 461,573 | |
2 | Apartment Investment | ||
& Management Co. | 10,347,089 | 432,922 | |
2 | American Campus | ||
Communities Inc. | 8,992,886 | 345,867 |
14
REIT Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
American Homes 4 | |||
Rent Class A | 15,403,655 | 320,242 | |
2 | Education Realty | ||
Trust Inc. | 4,825,738 | 159,394 | |
2 | Independence Realty | ||
Trust Inc. | 5,386,855 | 49,505 | |
2 | Altisource Residential | ||
Corp. | 3,339,861 | 36,772 | |
2 | Preferred Apartment | ||
Communities Inc. | |||
Class A | 2,128,550 | 35,483 | |
2 | NexPoint Residential | ||
Trust Inc. | 1,181,115 | 31,311 | |
2 | UMH Properties Inc. | 1,989,854 | 26,624 |
8,776,091 | |||
Retail REITs (17.0%) | |||
2 | Simon Property | ||
Group Inc. | 20,485,745 | 3,346,756 | |
2 | Realty Income Corp. | 18,085,210 | 961,952 |
GGP Inc. | 40,692,368 | 937,145 | |
2 | Regency Centers Corp. | 10,090,461 | 634,791 |
2 | Federal Realty | ||
Investment Trust | 4,503,806 | 544,060 | |
2 | Macerich Co. | 7,923,454 | 511,617 |
2 | Kimco Realty Corp. | 27,436,723 | 436,518 |
2 | National Retail | ||
Properties Inc. | 9,832,170 | 390,140 | |
2 | Brixmor Property | ||
Group Inc. | 19,667,407 | 319,202 | |
2 | Taubman Centers Inc. | 4,000,760 | 246,647 |
2 | Weingarten Realty | ||
Investors | 8,047,603 | 237,807 | |
2 | Retail Properties of | ||
America Inc. | 15,225,560 | 183,468 | |
2 | Urban Edge Properties | 7,499,839 | 175,346 |
2 | DDR Corp. | 20,593,044 | 167,216 |
^,2 | Tanger Factory Outlet | ||
Centers Inc. | 6,257,741 | 157,570 | |
2 | Acadia Realty Trust | 5,512,826 | 135,395 |
2 | Retail Opportunity | ||
Investments Corp. | 6,708,521 | 123,236 | |
2 | Kite Realty Group Trust | 5,640,079 | 95,092 |
2 | Agree Realty Corp. | 1,888,563 | 90,915 |
2 | Washington Prime | ||
Group Inc. | 12,249,276 | 80,600 | |
2 | Ramco-Gershenson | ||
Properties Trust | 5,230,075 | 69,142 | |
^,2 | Seritage Growth | ||
Properties Class A | 1,656,254 | 68,238 | |
^,2 | CBL & Associates | ||
Properties Inc. | 11,279,589 | 62,714 | |
2 | Getty Realty Corp. | 2,210,497 | 58,003 |
Alexander’s Inc. | 151,680 | 55,114 | |
^,2 | Pennsylvania REIT | 4,604,672 | 51,388 |
Saul Centers Inc. | 863,796 | 47,276 | |
Urstadt Biddle | |||
Properties Inc. Class A | 1,941,812 | 37,710 | |
2 | Whitestone REIT | 2,541,312 | 33,393 |
2 | Cedar Realty Trust Inc. | 6,016,739 | 30,746 |
Urstadt Biddle | |||
Properties Inc. | 58,856 | 1,012 | |
10,290,209 | |||
Specialized REITs (16.4%) | |||
2 | Equinix Inc. | 5,139,614 | 2,339,501 |
2 | Public Storage | 10,315,604 | 2,019,383 |
2 | Digital Realty Trust Inc. | 13,523,503 | 1,513,956 |
2 | Extra Space Storage Inc. | 8,305,266 | 693,324 |
2 | Iron Mountain Inc. | 17,463,249 | 611,738 |
2 | Gaming and Leisure | ||
Properties Inc. | 11,769,370 | 428,876 | |
2 | CyrusOne Inc. | 5,719,883 | 329,980 |
2 | CubeSmart | 11,879,087 | 327,031 |
2 | EPR Properties | 4,857,523 | 286,885 |
2 | Life Storage Inc. | 3,070,334 | 255,145 |
CoreSite Realty Corp. | 2,258,499 | 244,641 | |
2 | GEO Group Inc. | 8,180,153 | 184,462 |
2 | CoreCivic Inc. | 7,790,614 | 180,820 |
2 | QTS Realty Trust | ||
Inc. Class A | 3,208,137 | 159,765 | |
2 | Four Corners | ||
Property Trust Inc. | 4,035,148 | 95,230 | |
2 | National Storage | ||
Affiliates Trust | 3,250,784 | 82,472 | |
American Tower Corp. | 374,399 | 55,299 | |
Crown Castle | |||
International Corp. | 281,799 | 31,778 | |
Weyerhaeuser Co. | 798,075 | 29,960 | |
* | SBA Communications | ||
Corp. Class A | 89,423 | 15,604 | |
Lamar Advertising Co. | |||
Class A | 99,067 | 7,133 | |
Rayonier Inc. | 128,561 | 4,173 | |
Uniti Group Inc. | 205,774 | 3,257 | |
Outfront Media Inc. | 118,763 | 2,660 | |
Potlatch Corp. | 43,144 | 2,282 | |
CatchMark Timber | |||
Trust Inc. Class A | 52,661 | 694 | |
InfraREIT Inc. | 18,868 | 358 | |
Farmland Partners Inc. | 37,658 | 307 | |
9,906,714 | |||
Total Equity Real Estate | |||
Investment Trusts (REITs) | |||
(Cost $56,272,161) | 60,306,310 |
15
REIT Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Real Estate Management & Development (0.1%) | |||
Diversified Real Estate Activities (0.0%) | |||
* | St. Joe Co. | 36,173 | 680 |
* | Tejon Ranch Co. | 13,022 | 284 |
RMR Group Inc. Class A | 3,774 | 245 | |
* | Five Point Holdings | ||
LLC Class A | 13,721 | 189 | |
1,398 | |||
Real Estate Development (0.0%) | |||
* | Howard Hughes Corp. | 46,590 | 5,868 |
* | Forestar Group Inc. | 7,566 | 185 |
6,053 | |||
Real Estate Operating Companies (0.0%) | |||
Kennedy-Wilson | |||
Holdings Inc. | 119,900 | 2,128 | |
* | FRP Holdings Inc. | 1,499 | 75 |
2,203 | |||
Real Estate Services (0.1%) | |||
* | CBRE Group Inc. Class A | 339,140 | 15,495 |
Jones Lang LaSalle Inc. | 33,811 | 5,287 | |
Realogy Holdings Corp. | 180,046 | 4,953 | |
HFF Inc. Class A | 32,816 | 1,615 | |
RE/MAX Holdings Inc. | |||
Class A | 13,887 | 685 | |
* | Marcus & Millichap Inc. | 13,511 | 441 |
* | Altisource Portfolio | ||
Solutions SA | 12,757 | 357 | |
28,833 | |||
Total Real Estate Management | |||
& Development (Cost $38,412) | 38,487 | ||
Temporary Cash Investment (0.3%)1 | |||
Money Market Fund (0.3%) | |||
7,8 | Vanguard Market | ||
Liquidity Fund, 1.545% | |||
(Cost $164,289) | 1,642,857 | 164,286 | |
Total Investments (100.1%) | |||
(Cost $56,474,862) | 60,509,083 |
Amount | ||
($000) | ||
Other Assets and Liabilities (-0.1%) | ||
Other Assets 9 | 304,722 | |
Liabilities 8 | (360,433) | |
(55,711) | ||
Net Assets (100%) | 60,453,372 | |
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers | 3,167,045 | |
Affiliated Issuers | 51,215,626 | |
Vanguard REIT II Index Fund | 6,126,412 | |
Total Investments in Securities | 60,509,083 | |
Investment in Vanguard | 3,508 | |
Receivables for Investment | ||
Securities Sold | 174,520 | |
Receivables for Accrued Income | 50,300 | |
Receivables for Capital Shares Issued | 69,121 | |
Unrealized Appreciation—Swap Contracts | 203 | |
Other Assets 9 | 7,070 | |
Total Assets | 60,813,805 | |
Liabilities | ||
Payables for Investment Securities | ||
Purchased | 191,834 | |
Collateral for Securities on Loan | 87,582 | |
Payables for Capital Shares Redeemed | 43,105 | |
Payables to Vanguard | 30,500 | |
Unrealized Depreciation—Swap Contracts | 262 | |
Other Liabilities | 7,150 | |
Total Liabilities | 360,433 | |
Net Assets | 60,453,372 |
16
REIT Index Fund
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 56,315,907 |
Undistributed Net Investment Income | 103,303 |
Accumulated Net Realized Gains | — |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 4,034,221 |
Swap Contracts | (59) |
Net Assets | 60,453,372 |
Investor Shares—Net Assets | |
Applicable to 81,183,890 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 2,143,108 |
Net Asset Value Per Share— | |
Investor Shares | $26.40 |
ETF Shares—Net Assets | |
Applicable to 407,429,973 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 32,377,223 |
Net Asset Value Per Share—ETF Shares $79.47 | |
Admiral Shares—Net Assets | |
Applicable to 157,659,649 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 17,756,674 |
Net Asset Value Per Share— | |
Admiral Shares | $112.63 |
Amount | |
($000) | |
Institutional Shares—Net Assets | |
Applicable to 469,046,290 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 8,176,367 |
Net Asset Value Per Share— | |
Institutional Shares | $17.43 |
• 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 $85,635,000.
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 Security value determined using significant unobservable
inputs.
4 “Other” represents securities that are not classified by the
fund’s benchmark index.
5 Considered an affiliated company of the fund as the issuer
is another member of The Vanguard Group.
6 Represents a wholly owned subsidiary of the fund.
See Notes to Financial Statements.
7 Affiliated money market fund available only to Vanguard funds
and certain trusts and accounts managed by Vanguard. Rate
shown is the 7-day yield.
8 Includes $87,582,000 of collateral received for securities
on loan.
9 Cash of $7,070,000 has been segregated as collateral
for open swap contracts.
REIT—Real Estate Investment Trust.
17
REIT Index Fund
Derivative Financial Instruments Outstanding as of Period End | |||||
Total Return Swaps | |||||
Floating | Unrealized | ||||
Notional | Interest Rate | Appreciation | |||
Termination | Amount | Received | (Depreciation) | ||
Reference Entity | Date | Counterparty | ($000) | (Paid)1 | ($000) |
Gaming And Leisure | |||||
Properties | 3/21/18 | GSCM | 55,524 | (2.106%) | 187 |
Federal Realty Investment Trust | 3/2/18 | GSCM | 31,494 | (1.573%) | (86) |
Retail Opportunity | |||||
Investments Corp. | 3/2/18 | GSCM | 9,720 | (1.573%) | 16 |
Kimco Realty Corp. | 3/2/18 | GSCM | 9,717 | (1.573%) | (12) |
Brixmor Property Group Inc. | 3/2/18 | GSCM | 6,980 | (1.573%) | (164) |
(59) | |||||
GSCM—Goldman Sachs Capital Management. | |||||
1 Payment received/paid quarterly. |
Unrealized appreciation (depreciation) on open swap contracts is required to be treated as ordinary income (loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
18
REIT Index Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends Received from Unaffiliated Issuers | 26,396 |
Dividends Received from Affiliated Issuers | 1,893,522 |
Dividends Received from Vanguard REIT II Index Fund | 70,790 |
Interest | 15 |
Securities Lending—Net | 920 |
Total Income | 1,991,643 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 4,269 |
Management and Administrative—Investor Shares | 5,483 |
Management and Administrative—ETF Shares | 31,453 |
Management and Administrative—Admiral Shares | 18,790 |
Management and Administrative—Institutional Shares | 7,123 |
Marketing and Distribution—Investor Shares | 428 |
Marketing and Distribution—ETF Shares | 1,958 |
Marketing and Distribution—Admiral Shares | 1,457 |
Marketing and Distribution—Institutional Shares | 207 |
Custodian Fees | 616 |
Auditing Fees | 42 |
Shareholders’ Reports and Proxy—Investor Shares | 337 |
Shareholders’ Reports and Proxy—ETF Shares | 5,396 |
Shareholders’ Reports and Proxy—Admiral Shares | 857 |
Shareholders’ Reports and Proxy—Institutional Shares | 270 |
Trustees’ Fees and Expenses | 47 |
Total Expenses | 78,733 |
Net Investment Income | 1,912,910 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received from Unaffiliated Issuers | 627 |
Capital Gain Distributions Received from Affiliated Issuers | 345,564 |
Capital Gain Distributions Received from Vanguard REIT II Index Fund | 9,589 |
Investment Securities Sold—Unaffiliated Issuers | (15,044) |
Investment Securities Sold—Affiliated Issuers | 1,959,843 |
Investment Securities Sold—Vanguard REIT II Index Fund | — |
Futures Contracts | 230 |
Swap Contracts | (12,145) |
Realized Net Gain (Loss) | 2,288,664 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Unaffiliated Issuers | (79,043) |
Investment Securities—Affiliated Issuers | (3,542,133) |
Investment Securities—Vanguard REIT II Index Fund | (209,458) |
Swap Contracts | 810 |
Change in Unrealized Appreciation (Depreciation) | (3,829,824) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 371,750 |
See accompanying Notes, which are an integral part of the Financial Statements. |
19
REIT Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 1,912,910 | 1,637,151 |
Realized Net Gain (Loss) | 2,288,664 | 2,373,668 |
Change in Unrealized Appreciation (Depreciation) | (3,829,824) | 2,177,388 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 371,750 | 6,188,207 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (69,040) | (73,006) |
ETF Shares | (1,025,920) | (913,086) |
Admiral Shares | (545,730) | (491,479) |
Institutional Shares | (244,477) | (213,737) |
Realized Capital Gain | ||
Investor Shares | (983) | (18,164) |
ETF Shares | (14,088) | (218,412) |
Admiral Shares | (7,496) | (117,607) |
Institutional Shares | (3,343) | (50,930) |
Return of Capital | ||
Investor Shares | (28,709) | (33,133) |
ETF Shares | (426,390) | (411,208) |
Admiral Shares | (226,815) | (221,353) |
Institutional Shares | (101,603) | (96,185) |
Total Distributions | (2,694,594) | (2,858,300) |
Capital Share Transactions | ||
Investor Shares | (383,660) | (198,893) |
ETF Shares | 138,764 | 4,811,962 |
Admiral Shares | 75,811 | 2,316,263 |
Institutional Shares | 678,950 | 564,537 |
Net Increase (Decrease) from Capital Share Transactions | 509,865 | 7,493,869 |
Total Increase (Decrease) | (1,812,979) | 10,823,776 |
Net Assets | ||
Beginning of Period | 62,266,351 | 51,442,575 |
End of Period1 | 60,453,372 | 62,266,351 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $103,303,000 and $87,705,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
20
REIT Index Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $27.38 | $25.59 | $28.73 | $22.37 | $22.66 |
Investment Operations | |||||
Net Investment Income | .7611 | .746 | .711 | .645 | .579 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (.614) | 2.324 | (2.851) | 6.650 | .025 |
Total from Investment Operations | .147 | 3.070 | (2.140) | 7.295 | .604 |
Distributions | |||||
Dividends from Net Investment Income | (.788) | (.752) | (. 695) | (. 624) | (. 626) |
Distributions from Realized Capital Gains | (.011) | (.187) | — | — | — |
Return of Capital | (. 328) | (. 341) | (. 305) | (. 311) | (. 268) |
Total Distributions | (1.127) | (1.280) | (1.000) | (.935) | (.894) |
Net Asset Value, End of Period | $26.40 | $27.38 | $25.59 | $28.73 | $22.37 |
Total Return2 | 0.45% | 12.07% | -7.44% | 33.29% | 2.78% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $2,143 | $2,603 | $2,621 | $3,231 | $2,482 |
Ratio of Total Expenses to Average Net Assets | 0.26% | 0.26% | 0.26% | 0.26% | 0.24% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.87% | 2.60% | 2.66% | 2.56% | 2.51% |
Portfolio Turnover Rate 3 | 6% | 7% | 11% | 8% | 11% |
1 Calculated based on average shares outstanding.
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital
shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
REIT Index Fund
Financial Highlights
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $82.43 | $77.05 | $86.49 | $67.36 | $68.24 |
Investment Operations | |||||
Net Investment Income | 2.4991 | 2.334 | 2.217 | 2.011 | 1.814 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (1.945) | 7.022 | (8.533) | 20.038 | .097 |
Total from Investment Operations | .554 | 9.356 | (6.316) | 22.049 | 1.911 |
Distributions | |||||
Dividends from Net Investment Income | (2.458) | (2.353) | (2.170) | (1.947) | (1.955) |
Distributions from Realized Capital Gains | (.034) | (.563) | — | — | — |
Return of Capital | (1.022) | (1.060) | (.954) | (.972) | (.836) |
Total Distributions | (3.514) | (3.976) | (3.124) | (2.919) | (2.791) |
Net Asset Value, End of Period | $79.47 | $82.43 | $77.05 | $86.49 | $67.36 |
Total Return | 0.59% | 12.25% | -7.31% | 33.41% | 2.93% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $32,377 | $33,527 | $27,007 | $29,487 | $18,528 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.12% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 3.01% | 2.74% | 2.80% | 2.70% | 2.65% |
Portfolio Turnover Rate2 | 6% | 7% | 11% | 8% | 11% |
1 Calculated based on average shares outstanding.
2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital
shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
22
REIT Index Fund
Financial Highlights
Admiral Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $116.83 | $109.19 | $122.58 | $95.46 | $96.70 |
Investment Operations | |||||
Net Investment Income | 3.5381 | 3.306 | 3.142 | 2.852 | 2.569 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (2.761) | 9.966 | (12.105) | 28.403 | .148 |
Total from Investment Operations | .777 | 13.272 | (8.963) | 31.255 | 2.717 |
Distributions | |||||
Dividends from Net Investment Income | (3.483) | (3.333) | (3.076) | (2.758) | (2.772) |
Distributions from Realized Capital Gains | (.048) | (.798) | — | — | — |
Return of Capital | (1.447) | (1.501) | (1.351) | (1.377) | (1.185) |
Total Distributions | (4.978) | (5.632) | (4.427) | (4.135) | (3.957) |
Net Asset Value, End of Period | $112.63 | $116.83 | $109.19 | $122.58 | $95.46 |
Total Return2 | 0.58% | 12.23% | -7.30% | 33.46% | 2.94% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $17,757 | $18,337 | $15,029 | $15,725 | $7,987 |
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.12% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 3.01% | 2.74% | 2.80% | 2.70% | 2.65% |
Portfolio Turnover Rate 3 | 6% | 7% | 11% | 8% | 11% |
1 Calculated based on average shares outstanding.
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
3 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.
23
REIT Index Fund
Financial Highlights
Institutional Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $18.08 | $16.90 | $18.97 | $14.78 | $14.97 |
Investment Operations | |||||
Net Investment Income | . 5681 | .515 | .489 | .444 | .400 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (.444) | 1.540 | (1.870) | 4.390 | .025 |
Total from Investment Operations | .124 | 2.055 | (1.381) | 4.834 | .425 |
Distributions | |||||
Dividends from Net Investment Income | (. 542) | (. 519) | (. 479) | (. 430) | (. 431) |
Distributions from Realized Capital Gains | (.007) | (.123) | — | — | — |
Return of Capital | (. 225) | (. 233) | (. 210) | (. 214) | (.184) |
Total Distributions | (.774) | (. 875) | (. 689) | (. 644) | (. 615) |
Net Asset Value, End of Period | $17.43 | $18.08 | $16.90 | $18.97 | $14.78 |
Total Return2 | 0.60% | 12.23% | -7.27% | 33.43% | 2.97% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $8,176 | $7,799 | $6,785 | $6,788 | $3,922 |
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.10% | 0.10% | 0.10% | 0.08% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 3.03% | 2.76% | 2.82% | 2.72% | 2.67% |
Portfolio Turnover Rate 3 | 6% | 7% | 11% | 8% | 11% |
1 Calculated based on average shares outstanding.
2 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable transaction fees.
3 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.
24
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.
As a part of its principal investment strategy, the fund attempts to replicate its benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through a wholly owned subsidiary—in the stocks that make up the index. Vanguard REIT II Index Fund (“REIT II”) is the wholly owned subsidiary in which the fund has invested a portion of its assets. For additional financial information about REIT II, refer to the accompanying financial statements.
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 affiliated Vanguard funds 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, 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 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).
25
REIT Index Fund
During the year ended January 31, 2018, 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, 2018.
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, 2018, 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.
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, 2015–2018), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
26
REIT Index Fund
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceeds a fund’s current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital.
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 event 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, 2018, 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. Income, capital gain, and return of capital distributions received from affiliated Vanguard funds are recorded on ex-dividend date. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.
27
REIT Index Fund
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses), shareholder reporting, and the proxy. 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, 2018, the fund had contributed to Vanguard capital in the amount of $3,508,000, representing 0.01% of the fund’s net assets and 1.40% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 60,332,123 | — | 12,674 |
Temporary Cash Investments | 164,286 | — | — |
Swap Contracts—Assets | — | 203 | — |
Swap Contracts—Liabilities | — | (262) | — |
Total | 60,496,409 | (59) | 12,674 |
D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or
28
REIT Index Fund
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, 2018, the fund realized $2,274,899,000 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.
At January 31, 2018, the cost of investment securities for tax purposes was $56,474,862,000. Net unrealized appreciation of investment securities for tax purposes was $4,034,221,000, consisting of unrealized gains of $7,363,984,000 on securities that had risen in value since their purchase and $3,329,763,000 in unrealized losses on securities that had fallen in value since their purchase.
E. During the year ended January 31, 2018, the fund purchased $17,565,462,000 of investment securities and sold $17,239,938,000 of investment securities, other than temporary cash investments. Purchases and sales include $11,723,571,000 and $13,354,982,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
F. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2018 | 2017 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 362,805 | 13,160 | 565,677 | 20,200 |
Issued in Lieu of Cash Distributions | 92,491 | 3,378 | 117,019 | 4,262 |
Redeemed | (838,956) | (30,421) | (881,589) | (31,830) |
Net Increase (Decrease)—Investor Shares | (383,660) | (13,883) | (198,893) | (7,368) |
ETF Shares | ||||
Issued | 7,194,688 | 86,125 | 9,698,505 | 115,071 |
Issued in Lieu of Cash Distributions | — | — | — | — |
Redeemed | (7,055,924) | (85,400) | (4,886,543) | (58,900) |
Net Increase (Decrease)—ETF Shares | 138,764 | 725 | 4,811,962 | 56,171 |
Admiral Shares | ||||
Issued | 3,635,103 | 30,947 | 4,651,310 | 39,078 |
Issued in Lieu of Cash Distributions | 685,946 | 5,875 | 737,270 | 6,295 |
Redeemed | (4,245,238) | (36,118) | (3,072,317) | (26,057) |
Net Increase (Decrease)—Admiral Shares | 75,811 | 704 | 2,316,263 | 19,316 |
Institutional Shares | ||||
Issued | 2,396,349 | 131,716 | 1,775,348 | 96,049 |
Issued in Lieu of Cash Distributions | 324,780 | 17,972 | 334,740 | 18,463 |
Redeemed | (2,042,179) | (111,955) | (1,545,551) | (84,706) |
Net Increase (Decrease)—Institutional Shares | 678,950 | 37,733 | 564,537 | 29,806 |
29
REIT Index Fund
G. 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 | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Acadia Realty Trust | 196,914 | 28,683 | 48,242 | 1,587 | (43,547) | 4,865 | 1,382 | 135,395 |
Agree Realty Corp. | 93,077 | 20,640 | 25,664 | 4,360 | (1,498) | 3,371 | — | 90,915 |
Alexander & Baldwin | ||||||||
Inc. | NA2 | 201,333 | 25,838 | (10) | (55,179) | 13,447 | — | 120,082 |
Alexandria Real | ||||||||
Estate Equities Inc. | 661,333 | 221,376 | 197,697 | 37,183 | 78,500 | 13,750 | 2,233 | 800,695 |
Altisource | ||||||||
Residential Corp. | — | 57,067 | 9,713 | (1,311) | (9,271) | 512 | — | 36,772 |
American Assets | ||||||||
Trust Inc. | 111,900 | 14,275 | 25,124 | 5,288 | (24,180) | 2,699 | — | NA3 |
American Campus | ||||||||
Communities Inc. | 485,474 | 69,659 | 112,815 | 12,718 | (109,169) | 8,131 | — | 345,867 |
American Homes | ||||||||
4 Rent Class A | 364,865 | 77,842 | 97,853 | 11,667 | (36,279) | 1,744 | — | NA3 |
Apartment | ||||||||
Investment & | ||||||||
Management Co. | 526,976 | 68,330 | 138,950 | 21,720 | (45,154) | 8,895 | 7,834 | 432,922 |
Apple Hospitality | ||||||||
REIT Inc. | 254,259 | 105,187 | 78,219 | (541) | (8,460) | 17,170 | — | 272,226 |
Armada Hoffler | ||||||||
Properties Inc. | 35,538 | 16,260 | 11,388 | 295 | 2,011 | 2,373 | — | 42,716 |
Ashford Hospitality | ||||||||
Prime Inc. | 23,972 | 6,547 | 6,863 | (1,229) | (7,241) | 524 | 180 | 15,186 |
Ashford Hospitality | ||||||||
Trust Inc. | 56,353 | 5,923 | 12,353 | 1,788 | (10,380) | (82) | — | 41,331 |
AvalonBay | ||||||||
Communities Inc. | 1,821,329 | 257,391 | 510,044 | 65,333 | (83,461) | 41,813 | 13,938 | 1,550,548 |
Boston Properties | ||||||||
Inc. | 1,539,727 | 198,158 | 394,758 | 40,443 | (125,099) | 32,906 | 549 | 1,258,471 |
Brandywine | ||||||||
Realty Trust | 215,857 | 28,404 | 60,499 | 6,413 | 17,241 | 4,943 | 3,310 | 207,416 |
Brixmor Property | ||||||||
Group Inc. | 561,990 | 56,348 | 125,897 | (20,157) | (152,963) | 19,381 | — | 319,202 |
Camden Property | ||||||||
Trust | 559,077 | 108,646 | 161,111 | 23,643 | (1,345) | 15,285 | 3,979 | 528,910 |
30
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Care Capital | ||||||||
Properties Inc. | 158,877 | 10,542 | 12,576 | 2,967 | 26,832 | 6,472 | — | — |
CareTrust REIT Inc. | 71,948 | 26,780 | 22,022 | 3,650 | (781) | 3,175 | — | 79,575 |
CBL & Associates | ||||||||
Properties Inc. | 134,770 | 15,989 | 24,284 | (8,860) | (54,901) | 10,495 | — | 62,714 |
Cedar Realty Trust | ||||||||
Inc. | 38,029 | 7,212 | 8,527 | 50 | (6,018) | 819 | — | 30,746 |
Chatham Lodging | ||||||||
Trust | 59,483 | 17,860 | 16,564 | (749) | 6,975 | 3,267 | 208 | 67,005 |
Chesapeake | ||||||||
Lodging Trust | 117,765 | 14,232 | 30,722 | 2,443 | 4,815 | 5,472 | 394 | 108,533 |
Colony NorthStar | ||||||||
Inc. Class A | 559,904 | 69,934 | 140,564 | (42,002) | (137,492) | 8,421 | 30,986 | 309,780 |
Columbia Property | ||||||||
Trust Inc. | 199,767 | 31,316 | 52,427 | (1,043) | (2,671) | 3,729 | — | 174,942 |
CoreCivic Inc. | 250,483 | 40,384 | 58,528 | (7,650) | (43,869) | 12,204 | — | 180,820 |
CoreSite Realty | ||||||||
Corp. | 223,642 | 34,831 | 71,250 | 28,423 | 28,995 | 6,422 | — | NA3 |
Corporate Office | ||||||||
Properties Trust | 230,818 | 36,985 | 58,915 | 4,976 | (34,840) | 6,637 | — | 179,024 |
Cousins Properties | ||||||||
Inc. | 217,444 | 88,223 | 72,951 | 4,656 | 11,833 | 2,742 | 4,448 | 249,205 |
CubeSmart | 344,856 | 45,345 | 94,046 | 19,888 | 10,988 | 12,358 | 71 | 327,031 |
CyrusOne Inc. | NA2 | 176,035 | 85,813 | 23,778 | 25,675 | 981 | — | 329,980 |
DCT Industrial | ||||||||
Trust Inc. | 308,386 | 50,350 | 94,939 | 27,046 | 72,308 | 8,362 | 82 | 363,151 |
DDR Corp. | 361,296 | 29,846 | 59,826 | (13,112) | (150,988) | 2,865 | — | 167,216 |
DiamondRock | ||||||||
Hospitality Co. | 173,307 | 21,142 | 44,993 | 1,283 | 4,535 | 6,922 | — | 155,274 |
Digital Realty | ||||||||
Trust Inc. | 1,312,413 | 208,999 | 436,187 | 103,977 | 324,754 | 45,653 | 2,127 | 1,513,956 |
Douglas | ||||||||
Emmett Inc. | 415,539 | 75,509 | 106,137 | 25,653 | (16,299) | 2,314 | — | 394,265 |
Duke Realty Corp. | 653,127 | 102,471 | 199,516 | 39,738 | 23,590 | 10,391 | 30,227 | 619,410 |
DuPont Fabros | ||||||||
Technology Inc. | 274,547 | 46,666 | 23,450 | 16,423 | (108,314) | (682) | — | — |
Easterly | ||||||||
Government | ||||||||
Properties Inc. | 53,384 | 14,295 | 17,222 | 1,345 | 1,751 | 1,276 | — | 53,553 |
31
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
EastGroup | ||||||||
Properties Inc. | 178,153 | 30,262 | 52,408 | 13,138 | 27,202 | 6,156 | 4 | 196,347 |
Education Realty | ||||||||
Trust Inc. | 224,847 | 26,208 | 54,153 | 5,614 | (43,122) | 5,053 | — | 159,394 |
EPR Properties | 360,230 | 95,698 | 96,041 | 13,532 | (86,534) | 17,502 | 1,171 | 286,885 |
Equinix Inc. | 2,094,111 | 494,513 | 652,096 | 121,787 | 281,186 | 44,821 | — | 2,339,501 |
Equity | ||||||||
Commonwealth | 281,565 | 43,756 | 72,304 | 6,515 | (14,888) | — | — | 244,644 |
Equity LifeStyle | ||||||||
Properties Inc. | 458,547 | 71,495 | 135,905 | 40,121 | 36,126 | 7,184 | 4,241 | 470,384 |
Equity Residential | 1,700,169 | 241,536 | 486,952 | 48,329 | (10,898) | 46,264 | 8,028 | 1,492,184 |
Essex Property | ||||||||
Trust Inc. | 1,124,304 | 164,205 | 330,384 | 66,713 | (11,011) | 27,528 | 5,253 | 1,013,827 |
Extra Space | ||||||||
Storage Inc. | 693,628 | 100,359 | 206,007 | 60,821 | 44,523 | 28,863 | 25 | 693,324 |
Federal Realty | ||||||||
Investment Trust | 767,656 | 94,894 | 218,343 | 21,639 | (121,786) | 19,955 | — | 544,060 |
FelCor Lodging | ||||||||
Trust Inc. | 74,919 | 6,061 | 77,231 | (1,232) | (2,517) | (603) | — | — |
First Industrial | ||||||||
Realty Trust Inc. | 231,273 | 36,708 | 68,055 | 17,763 | 26,205 | 5,142 | 1,916 | 243,894 |
First Potomac | ||||||||
Realty Trust | 45,915 | 3,471 | 4,484 | 5 | (44,907) | 894 | — | — |
Forest City Realty | ||||||||
Trust Inc. Class A | NA2 | 62,712 | 166,364 | 12,014 | 3,207 | 685 | 6,572 | 330,139 |
Four Corners | ||||||||
Property Trust Inc. | 95,138 | 18,960 | 26,891 | 4,388 | 3,635 | 3,646 | — | 95,230 |
Franklin Street | ||||||||
Properties Corp. | 98,735 | 9,909 | 20,619 | (1,397) | (18,595) | 1,641 | — | 68,033 |
Gaming and Leisure | ||||||||
Properties Inc. | 451,949 | 49,441 | 143,247 | 5,772 | 64,961 | 30,877 | 499 | 428,876 |
GEO Group Inc. | 238,351 | 53,748 | 62,543 | 6,100 | (51,194) | 9,425 | — | 184,462 |
Getty Realty Corp. | 53,660 | 17,451 | 15,834 | 2,608 | 118 | 2,581 | — | 58,003 |
GGP Inc. | NA2 | 202,377 | 270,444 | 24,203 | (112,262) | 38,272 | — | NA3 |
Gladstone | ||||||||
Commercial Corp. | 35,673 | 9,954 | 9,684 | 1,003 | (2,266) | 1,090 | — | 34,680 |
Global Net | ||||||||
Lease Inc. | 100,412 | 28,797 | 25,196 | (1,187) | (16,328) | 8,013 | — | 81,413 |
Government | ||||||||
Properties Income | ||||||||
Trust | 105,148 | 49,947 | 34,080 | 668 | (12,856) | 6,030 | — | 108,827 |
32
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Gramercy Property | ||||||||
Trust | 283,551 | 62,189 | 85,356 | 8,520 | (16,283) | 11,654 | 509 | 252,621 |
HCP Inc. | 1,057,091 | 142,725 | 247,923 | (15,664) | (192,123) | 50,918 | — | 744,106 |
Healthcare | ||||||||
Realty Trust Inc. | 267,885 | 54,166 | 77,397 | 11,002 | (11,877) | 3,615 | 2,464 | 243,780 |
Healthcare Trust | ||||||||
of America Inc. | ||||||||
Class A | 306,954 | 186,332 | 108,004 | 14,275 | (34,384) | 10,033 | 1,032 | 365,173 |
Hersha Hospitality | ||||||||
Trust Class A | 65,320 | 6,690 | 16,175 | (144) | (4,520) | 2,185 | — | 51,171 |
Highwoods | ||||||||
Properties Inc. | 388,011 | 56,262 | 94,126 | 14,529 | (38,674) | 10,714 | 2,406 | 326,002 |
Hospitality | ||||||||
Properties Trust | 387,308 | 48,056 | 93,006 | 5,690 | (39,760) | 23,096 | 231 | 308,288 |
Host Hotels & | ||||||||
Resorts Inc. | 1,026,815 | 138,985 | 290,187 | 15,091 | 121,619 | 39,764 | 4,934 | 1,012,323 |
Hudson Pacific | ||||||||
Properties Inc. | 396,078 | 70,535 | 100,368 | 16,888 | (55,852) | 11,418 | — | 327,281 |
Independence | ||||||||
Realty Trust Inc. | 46,445 | 17,702 | 14,643 | 800 | (799) | 1,316 | 1,817 | 49,505 |
Investors Real | ||||||||
Estate Trust | 59,808 | 6,009 | 13,845 | (1,947) | (4,987) | (91) | 1,485 | 45,038 |
Iron Mountain Inc. | 685,207 | 127,825 | 193,037 | 7,958 | (16,215) | 41,487 | — | 611,738 |
iStar Inc. | 61,435 | 7,102 | 21,215 | (515) | (1,590) | — | — | 45,217 |
JBG SMITH | ||||||||
Properties | — | 248,557 | 43,879 | 1,842 | 4,549 | 2,870 | — | 210,407 |
Kilroy Realty Corp. | 528,491 | 93,603 | 134,371 | 24,320 | (49,842) | 7,491 | 1,469 | 462,201 |
Kimco Realty Corp. | 800,160 | 89,850 | 182,393 | (330) | (270,769) | 18,140 | 771 | 436,518 |
Kite Realty Group | ||||||||
Trust | 153,379 | 13,171 | 28,166 | (4,910) | (38,382) | 4,721 | 786 | 95,092 |
LaSalle Hotel | ||||||||
Properties | 261,084 | 30,913 | 65,204 | 1,705 | (608) | 7,905 | 6,624 | 227,890 |
Lexington Realty | ||||||||
Trust | 175,028 | 21,723 | 42,429 | 2,647 | (28,233) | 6,372 | — | 128,736 |
Liberty Property | ||||||||
Trust | 431,139 | 59,610 | 122,259 | 10,503 | 23,329 | 15,485 | 1,332 | 402,322 |
Life Storage Inc. | 284,634 | 38,673 | 72,837 | 13,424 | (8,749) | 11,370 | — | 255,145 |
LTC Properties Inc. | 136,343 | 20,497 | 34,535 | 6,285 | (21,680) | 4,578 | 658 | 106,910 |
Macerich Co. | 641,794 | 73,577 | 154,579 | 7,330 | (56,505) | 17,839 | 8,053 | 511,617 |
33
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Mack-Cali | ||||||||
Realty Corp. | 182,681 | 20,131 | 41,021 | (83) | (48,785) | 4,553 | — | 112,923 |
Medical Properties | ||||||||
Trust Inc. | 295,035 | 101,003 | 88,717 | 10,331 | (3,782) | 17,307 | 535 | 313,870 |
MGM Growth | ||||||||
Properties LLC | ||||||||
Class A | 113,887 | 43,181 | 37,907 | 2,466 | 6,307 | 5,770 | — | 127,934 |
Mid-America | ||||||||
Apartment | ||||||||
Communities Inc. | 825,028 | 116,411 | 242,769 | 46,268 | (31,368) | 22,877 | 5,802 | 713,570 |
Monmouth Real | ||||||||
Estate Investment | ||||||||
Corp. | 68,492 | 13,456 | 17,999 | 4,699 | 6,802 | 1,820 | 193 | 75,450 |
Monogram | ||||||||
Residential Trust Inc. 123,338 | 8,715 | 153,592 | 24,018 | (1,674) | 1,795 | — | — | |
National Health | ||||||||
Investors Inc. | 221,854 | 36,281 | 58,269 | 11,223 | (20,461) | 8,413 | 626 | 190,628 |
National Retail | ||||||||
Properties Inc. | 490,928 | 62,804 | 122,397 | 18,355 | (59,550) | 16,786 | 485 | 390,140 |
National Storage | ||||||||
Affiliates Trust | 72,371 | 20,026 | 19,870 | 1,974 | 7,971 | 2,507 | — | 82,472 |
New Senior | ||||||||
Investment | ||||||||
Group Inc. | 57,232 | 11,105 | 13,120 | (751) | (12,984) | — | — | 41,482 |
New York REIT Inc. | 126,386 | 11,951 | 23,526 | (3,049) | (89,409) | 22,282 | — | 22,353 |
NexPoint | ||||||||
Residential Trust Inc. | 30,185 | 8,020 | 10,448 | 989 | 2,565 | (104) | 379 | 31,311 |
NorthStar Realty | ||||||||
Europe Corp. | 55,954 | 5,926 | 20,701 | 2,622 | (2,503) | — | — | 41,298 |
Omega Healthcare | ||||||||
Investors Inc. | 474,785 | 59,969 | 115,445 | 17,125 | (84,959) | 24,223 | 454 | 351,475 |
One Liberty | ||||||||
Properties Inc. | 23,230 | 4,110 | 5,992 | 138 | 1,077 | 1,472 | 263 | NA3 |
Paramount | ||||||||
Group Inc. | 224,305 | 54,252 | 55,965 | 136 | (21,910) | 2,704 | 461 | 200,818 |
Park Hotels & | ||||||||
Resorts Inc. | NA 2 | 121,244 | 81,040 | 2,470 | 17,542 | 19,357 | — | NA3 |
Parkway Inc. | 71,947 | 5,853 | 71,480 | 1,412 | (7,732) | — | — | — |
Pebblebrook | ||||||||
Hotel Trust | 157,680 | 27,911 | 54,884 | 4,704 | 41,878 | 7,483 | — | 177,289 |
Pennsylvania REIT | 95,545 | 8,009 | 15,927 | (3,410) | (32,829) | 382 | — | 51,388 |
34
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Physicians | ||||||||
Realty Trust | 191,090 | 90,447 | 59,565 | 6,277 | (37,449) | 5,545 | — | 190,800 |
Piedmont Office | ||||||||
Realty Trust Inc. | ||||||||
Class A | 241,417 | 28,305 | 59,193 | 2,132 | (25,436) | 6,685 | 7,272 | 187,225 |
Preferred | ||||||||
Apartment | ||||||||
Communities Inc. | ||||||||
Class A | — | 47,932 | 2,452 | (259) | (9,738) | — | — | 35,483 |
Prologis Inc. | 1,970,078 | 318,476 | 650,735 | 126,565 | 517,185 | 48,312 | 20,269 | 2,281,569 |
PS Business | ||||||||
Parks Inc. | 174,220 | 24,745 | 52,004 | 13,881 | 3,578 | 4,906 | 197 | NA3 |
Public Storage | 2,425,257 | 442,710 | 645,270 | 143,225 | (346,539) | 90,498 | 149 | 2,019,383 |
QTS Realty Trust | ||||||||
Inc. Class A | 184,034 | 25,906 | 48,332 | 8,649 | (10,492) | 2,679 | — | 159,765 |
Quality Care | ||||||||
Properties Inc. | 132,027 | 14,400 | 29,121 | 826 | (34,607) | — | — | 83,525 |
RAIT Financial Trust | 24,668 | 1,333 | 5,546 | (41,874) | 21,419 | (638) | 8 | — |
Ramco- | ||||||||
Gershenson | ||||||||
Properties Trust | 98,801 | 9,517 | 20,644 | (1,297) | (17,235) | 4,932 | 206 | 69,142 |
Realty Income | ||||||||
Corp. | 1,180,027 | 200,881 | 298,933 | 46,545 | (166,568) | 37,406 | 752 | 961,952 |
Regency Centers | ||||||||
Corp. | 557,628 | 123,899 | 194,259 | 25,624 | 121,899 | 18,833 | 2,190 | 634,791 |
Retail Opportunity | ||||||||
Investments Corp. | 176,709 | 20,566 | 53,416 | 6,764 | (27,387) | 4,611 | — | 123,236 |
Retail Properties | ||||||||
of America Inc. | 271,987 | 29,648 | 68,019 | (3,427) | (46,721) | 10,864 | 597 | 183,468 |
Rexford Industrial | ||||||||
Realty Inc. | 114,769 | 25,711 | 35,363 | 8,548 | 25,547 | 2,687 | — | 139,212 |
RLJ Lodging Trust | 220,888 | 106,276 | 69,021 | 6,294 | 1,791 | 10,833 | — | 266,228 |
Ryman Hospitality | ||||||||
Properties Inc. | 215,012 | 28,209 | 58,728 | 8,551 | 39,388 | 9,921 | 99 | 232,432 |
Sabra Health | ||||||||
Care REIT Inc. | 126,889 | 46,304 | 56,911 | 4,383 | 89,023 | 6,518 | — | 209,688 |
Select Income REIT | 128,330 | 15,618 | 32,192 | 1,530 | (14,385) | 4,340 | — | NA3 |
Senior Housing | ||||||||
Properties Trust | 346,271 | 45,142 | 93,919 | 2,129 | (28,295) | 23,520 | 2,971 | 271,328 |
Seritage Growth | ||||||||
Properties Class A | 70,018 | 10,867 | 14,164 | 901 | 616 | 982 | 681 | 68,238 |
35
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Silver Bay Realty | ||||||||
Trust Corp. | 43,697 | 1,400 | 57,224 | 7,370 | 5,971 | 334 | — | — |
Simon Property | ||||||||
Group Inc. | 4,419,387 | 553,903 | 1,132,181 | 154,843 | (649,196) | 166,648 | — | 3,346,756 |
SL Green Realty | ||||||||
Corp. | 836,650 | 113,384 | 230,651 | 23,531 | (87,451) | 8,702 | 13,826 | 655,463 |
Spirit Realty Capital | ||||||||
Inc. | 386,215 | 39,893 | 94,367 | (10,216) | (74,680) | 16,411 | 2,525 | 246,845 |
STAG Industrial Inc. | 126,455 | 58,409 | 41,597 | 6,960 | 3,756 | 5,837 | — | 153,983 |
Starwood | ||||||||
Waypoint Homes | — | 22,755 | 46,855 | 4,381 | 20,860 | 1,240 | 138 | — |
STORE Capital | ||||||||
Corp. | 277,597 | 67,845 | 81,421 | 3,674 | 8,503 | 12,125 | 1,916 | 276,198 |
Summit Hotel | ||||||||
Properties Inc. | 106,021 | 34,983 | 31,567 | 5,722 | (8,686) | 4,850 | — | 106,473 |
Sun Communities | ||||||||
Inc. | 414,680 | 91,559 | 96,492 | 19,044 | 34,055 | 4,640 | — | 462,846 |
Sunstone Hotel | ||||||||
Investors Inc. | 244,027 | 38,614 | 66,052 | 8,823 | 24,923 | 8,494 | 2,689 | 250,335 |
Tanger Factory | ||||||||
Outlet Centers Inc. | 251,411 | 25,138 | 52,995 | 1,531 | (67,515) | 8,095 | — | 157,570 |
Taubman Centers | ||||||||
Inc. | 327,490 | 34,418 | 68,064 | 6,005 | (53,202) | 6,245 | 2,808 | 246,647 |
Terreno Realty | ||||||||
Corp. | 96,103 | 27,144 | 29,822 | 5,144 | 24,332 | 2,541 | 398 | 122,901 |
Tier REIT Inc. | 66,628 | 8,218 | 17,585 | 2,174 | 1,838 | 2,540 | — | 61,273 |
UDR Inc. | 714,332 | 101,513 | 207,782 | 30,272 | 5,794 | 19,840 | 3,874 | 644,129 |
UMH Properties Inc. | — | 40,829 | 7,176 | (313) | (6,716) | 47 | — | 26,624 |
Universal Health | ||||||||
Realty Income Trust | 61,745 | 7,944 | 18,036 | 4,743 | 355 | 1,405 | 1,111 | 56,751 |
Urban Edge | ||||||||
Properties | 212,935 | 52,716 | 54,397 | 7,114 | (43,022) | 4,073 | 2,950 | 175,346 |
Vanguard Market | ||||||||
Liquidity Fund | 149,286 | NA 4 | NA 4 | (76) | (3) | 648 | — | 164,286 |
Vanguard REIT II | ||||||||
Index Fund | — | 6,335,870 | — | — | (209,458) | 70,790 | 9,589 | 6,126,412 |
Ventas Inc. | 1,658,300 | 238,126 | 459,294 | 56,216 | (179,905) | 46,633 | 34,724 | 1,313,443 |
VEREIT Inc. | 616,630 | 94,723 | 159,939 | (14,153) | (74,884) | 25,105 | 1,041 | 462,377 |
Vornado Realty | ||||||||
Trust | 1,382,302 | 151,211 | 288,246 | 21,599 | (461,774) | 30,983 | — | 805,092 |
36
REIT Index Fund
Current Period Transactions | ||||||||
January 31, | Proceeds | Realized | January 31, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Washington Prime | ||||||||
Group Inc. | 135,898 | 13,022 | 27,821 | (6,890) | (33,609) | 5,896 | 7,797 | 80,600 |
Washington REIT | 177,272 | 27,574 | 45,663 | 3,366 | (17,178) | 5,026 | 1,666 | 145,371 |
Weingarten Realty | ||||||||
Investors | 331,196 | 37,696 | 77,499 | 5,074 | (58,660) | 4,604 | 15,404 | 237,807 |
Welltower Inc. | 1,816,108 | 279,649 | 495,331 | 46,594 | (189,153) | 48,554 | 42,223 | 1,457,867 |
Whitestone REIT | 30,721 | 12,236 | 8,175 | 749 | (2,138) | 494 | — | 33,393 |
Winthrop Realty | ||||||||
Trust | 15,172 | — | — | — | 341 | — | — | 12,674 |
WP Carey Inc. | 476,167 | 89,383 | 134,058 | 6,541 | 18,410 | 24,478 | 1,657 | 456,443 |
Xenia Hotels & | ||||||||
Resorts Inc. | 148,670 | 20,520 | 42,719 | 2,131 | 27,643 | 8,052 | — | 156,245 |
59,610,847 | 17,252,154 | 17,111,551 | 1,959,843 | (3,751,591) | 1,964,312 | 355,153 | 57,342,038 |
1 Does not include adjustments to related return of capital.
2 Not Applicable—at January 31, 2017, the issuer was not an affiliated company of the fund.
3 Not Applicable—at January 31, 2018, the security was still held, but the issuer was no longer an affiliated company of the fund.
4 Not Applicable—purchases and sales are for temporary cash investment purposes.
H. On February 1, 2018, the benchmark index of the fund was changed from the MSCI US REIT Index to the MSCI US Investable Market Real Estate 25/50 Transition Index. The fund is expected to complete its transition to its destination benchmark index, MSCI US Investable Market Real Estate 25/50 Index, during the third quarter of 2018. Additionally, the name of the fund was changed to Vanguard Real Estate Index Fund.
Management has determined that no other material events or transactions occurred subsequent to January 31, 2018, that would require recognition or disclosure in these financial statements.
37
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Real Estate Index Fund (formerly known as Vanguard REIT Index Fund)
Opinion on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard REIT Index Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the five years in the period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group
of Funds since 1975.
38
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/reitindexfundx41x1.jpg)
Special 2017 tax information (unaudited) for Vanguard REIT Index Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $25,911,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year. The fund designated $25,911,000 of its capital gain dividends as unrecaptured section 1250 gain distributions (25% rate gain).
The fund distributed $101,019,000 of qualified dividend income to shareholders during the fiscal year.
39
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 2018. (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, 2018
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 0.45% | 7.38% | 7.08% |
Returns After Taxes on Distributions | -0.80 | 6.11 | 5.84 |
Returns After Taxes on Distributions and Sale of Fund Shares | 0.21 | 5.18 | 5.05 |
40
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.
41
Six Months Ended January 31, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
REIT Index Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $967.28 | $1.29 |
ETF Shares | 1,000.00 | 967.96 | 0.60 |
Admiral Shares | 1,000.00 | 967.85 | 0.60 |
Institutional Shares | 1,000.00 | 967.73 | 0.50 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.89 | $1.33 |
ETF Shares | 1,000.00 | 1,024.60 | 0.61 |
Admiral Shares | 1,000.00 | 1,024.60 | 0.61 |
Institutional Shares | 1,000.00 | 1,024.70 | 0.51 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for
that period are 0.26% 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 (184/365).
42
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.
43
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 through January 31, 2018; MSCI
US Investable Market Real Estate 25/50 Transition Index thereafter.
44
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
45
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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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008. Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
![]() | |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2017, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
The funds or securities referred to herein are not | |
Text Telephone for People | sponsored, endorsed, or promoted by MSCI, and MSCI |
Who Are Deaf or Hard of Hearing > 800-749-7273 | bears no liability with respect to any such funds or |
This material may be used in conjunction | securities. The prospectus or the Statement of |
Additional Information contains a more detailed | |
with the offering of shares of any Vanguard | description of the limited relationship MSCI has with |
fund only if preceded or accompanied by | Vanguard and any related funds. |
the fund’s current prospectus. | |
All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
otherwise noted. | |
You can obtain a free copy of Vanguard’s proxy voting | |
guidelines by visiting vanguard.com/proxyreporting or by | |
calling Vanguard at 800-662-2739. The guidelines are | |
also available from the SEC’s website, sec.gov. In | |
addition, you may obtain a free report on how your fund | |
voted the proxies for securities it owned during the 12 | |
months ended June 30. To get the report, visit either | |
vanguard.com/proxyreporting or sec.gov. | |
You can review and copy information about your fund at | |
the SEC’s Public Reference Room in Washington, D.C. To | |
find out more about this public service, call the SEC at | |
202-551-8090. Information about your fund is also | |
available on the SEC’s website, and you can receive | |
copies of this information, for a fee, by sending a | |
request in either of two ways: via email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q1230 032018 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx1x1.jpg)
Annual Report | January 31, 2018
Vanguard Dividend Growth Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Advisor’s Report. | 6 |
Results of Proxy Voting. | 9 |
Fund Profile. | 10 |
Performance Summary. | 12 |
Financial Statements. | 14 |
Your Fund’s After-Tax Returns. | 25 |
About Your Fund’s Expenses. | 26 |
Trustees Approve Advisory Arrangement. | 28 |
Glossary. | 30 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard Dividend Growth Fund returned 23.65% for the 12 months ended January 31, 2018. It lagged its benchmark, the NASDAQ US Dividend Achievers Select Index, and also trailed the average return of its large-capitalization core fund peers.
• Stocks with growing dividend payments had a strong year, outpacing the results of the broad US Stock market, as measured by the Russell 3000 Index.
• For the period, the advisor’s overweighted allocation to energy and underweighted allocation to industrials dampened the fund’s performance compared with the benchmark.
• The advisor’s stock selections were strong in consumer staples and financials but fell short in health care and industrials.
• For the ten years ended January 31, the Dividend Growth Fund recorded an average annual return of 10.12%, well ahead of its benchmark index and the average annual return of peer funds.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard Dividend Growth Fund | 23.65% |
NASDAQ US Dividend Achievers Select Index | 26.19 |
Large-Cap Core Funds Average | 24.78 |
Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Total Returns: Ten Years Ended January 31, 2018 | |
Average | |
Annual Return | |
Dividend Growth Fund | 10.12% |
Dividend Growth Spliced Index | 8.69 |
Large-Cap Core Funds Average | 8.32 |
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 | 0.30% | 1.03% |
The fund expense ratio shown is from the prospectus dated May 25, 2017, and represents estimated costs for the current fiscal year. For
the fiscal year ended January 31, 2018, the fund’s expense ratio was 0.26%. The peer-group expense ratio is derived from data provided
by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.
Peer group: Large-Cap Core Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
3
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and
guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx7x1.jpg)
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Advisor’s Report
For the 12 months ended January 31, 2018, Vanguard Dividend Growth Fund returned 23.65% behind the 26.19% return of the NASDAQ US Dividend Achievers Select Index.
The investment environment
U.S. equities, as measured by the S&P 500 Index, rose 26.41%, boosted by strong economic fundamentals and the market’s continued confidence in tax reform, deregulation, and infrastructure spending. Non-U.S. equities also performed well, returning 28.20% as measured by the MSCI EAFE Index. Broad-based economic growth, supportive monetary policy, and benign inflation helped maintain a bullish sentiment globally.
By most measures, the fund’s relative performance during the fiscal year was challenged. Companies that demonstrated strong current earnings momentum did well, as did those that have become leaders in disintermediating large parts of the global economy (retail, drug distribution, global logistics).
Many of our holdings sit squarely in opposition to these headwinds or are in the crosshairs of disintermediation. Some of these trends will persist, and in those instances we’ll take appropriate action. But most will evolve along with a changing investment backdrop influenced by tax reform, geopolitical discord, higher rates, and tighter global policy.
We are pleased with the fund’s absolute performance and its consistency with our (and hopefully your) expectations in the current environment, but we remind ourselves that this is a long game. The story line of consistent dividend growth is a time-tested winner, and we intend on writing many good chapters in the years ahead.
The fund’s shortfalls
Sector allocation, a residual of our bottom-up stock selection process, weighed most on relative performance during the period, particularly our overweighted allocation to energy, underweighting of industrials, and a frictional cash position in an upward-trending market.
From a security selection perspective, holdings in health care and industrials hurt returns the most.
Our largest absolute detractors included Schlumberger (energy), Walgreens (consumer staples), Public Storage (real estate), and Cardinal Health (health care).
Schlumberger, the world’s largest oilfield services company, suffered from both pricing and cyclical headwinds. It had less exposure to the United States than some of its competitors, and U.S. growth has lately been an integral part of oilfield growth. International revenues were also down in 2017. However, we regard Schlumberger as a high-quality company and a leader in an ever-consolidating
6
arena. It was one of the few in its industry to produce free cash flow and returns on capital at the bottom of the cycle. We maintain an allocation to the stock based on the cyclically depressed fundamentals and expected growth from its international business.
U.S.-based global drug distributor Cardinal Health underperformed amid ongoing generic price deflation and heightened competition in the independent pharmacy market. But we believe the drug distribution industry should continue to profit from the generic drug wave. Also, Cardinal Health is well-positioned to benefit from the long-term demographic trend of people living longer and, thus, boosting sales volume. We find the current valuation attractive and still hold the stock.
Although we would prefer that all stocks in the fund perform well at all times, some will inevitably lag at one point or another. We assess a stock’s contribution to the fund over a longer period, with a consistent focus on dividend action.
The fund’s successes
Stock selection in financials, consumer staples, energy, and information technology were the biggest contributors over the fiscal year. Not owning utilities also helped.
Among the top absolute contributors were Microsoft (information technology), Visa (information technology), Nike (consumer discretionary), and Accenture (information technology).
Visa, also a top relative contributor, gained after reporting better-than-expected quarterly revenue and earnings from its European business and solid growth in payments and processed transactions. We believe the market underestimates Visa’s ability to sustain its returns on capital. The company has robust free cash flow, which should enable it to return more cash to shareholders. We also expect its European operations to be a major earnings driver over time.
Nike announced strategic goals to double growth innovation, speed, and direct relationships. We believe the company’s management is one of the strongest in its industry. It understands the direction of retail in the next five years—and is acting aggressively to turn others’ disruption into Nike’s gain. We believe the company is one of the world’s great franchises.
On a “run-rate” basis, the fund is expected to produce asset-weighted dividend growth of 6.1% for calendar year 2018. Our run-rate calculation is a rough estimate of potential dividend growth: It takes a company’s current
7
declared dividend rate, annualizes it, and compares it with the previous calendar year’s actual dividend rate. This calculation does not accurately reflect dividend increases that may be announced later in the year, nor does it take into account the dollar amounts of the increases. Therefore, companies in the early stages of dividend growth tend to show large percentage increases even if their absolute cash dividend is small.
The run-rate calculation also is not an accurate reflection of growth in the fund’s dividend payments to shareholders. Despite these shortcomings, we view this estimate as a reasonable report card.
Holdings with recent notable dividend run-rate increases included Honeywell and Accenture. On a run-rate basis, both increased their dividend by just under 10%, in line with their 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 achieve this 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. At the end of the period, the fund had significant absolute weights in industrials, consumer staples, and health care but less exposure (below 5%) to real estate, energy, and materials. We held no stocks in utilities or telecommunication services.
Working on behalf of the fund’s shareholders, we are constantly balancing performance with expectations. Do we better serve shareholders by delivering predictable results even though that can lead to stretches of weak relative performance, or does it pay to be focused on beating the index every day? Although there is some virtue to the latter approach, we prefer to look through a longer-term lens. With that mindset, we accept periods of relative underperformance in the face of factor headwinds.
Donald J. Kilbride
Senior Managing Director and
Equity Portfolio Manager
Wellington Management Company llp
February 12, 2018
8
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Dividend Growth Fund | 659,927,231 | 32,274,745 | 48,511,070 | 133,305,474 | 75.5% |
9
Dividend Growth Fund
Fund Profile
As of January 31, 2018
Portfolio Characteristics | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Number of Stocks | 45 | 177 | 3,765 |
Median Market Cap $90.5B | $66.1B | $73.6B | |
Price/Earnings Ratio | 24.7x | 26.4x | 23.8x |
Price/Book Ratio | 4.7x | 4.4x | 3.2x |
Return on Equity | 22.2% | 22.0% | 14.9% |
Earnings Growth Rate | 4.2% | 4.4% | 9.1% |
Dividend Yield | 1.9% | 1.8% | 1.7% |
Foreign Holdings | 5.0% | 0.0% | 0.0% |
Turnover Rate | 15% | — | — |
Ticker Symbol | VDIGX | — | — |
Expense Ratio1 | 0.30% | — | — |
30-Day SEC Yield | 1.80% | — | — |
Short-Term Reserves | 1.7% | — | — |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 0.94 | 0.87 |
Beta | 0.96 | 0.83 |
These measures show the degree and timing of the fund’s | ||
fluctuations compared with the indexes over 36 months. |
Sector Diversification (% of equity exposure) | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Consumer | |||
Discretionary | 13.1% | 8.8% | 12.9% |
Consumer Staples | 16.6 | 16.8 | 7.0 |
Energy | 4.3 | 0.0 | 5.7 |
Financials | 12.2 | 9.8 | 15.2 |
Health Care | 15.4 | 13.9 | 13.5 |
Industrials | 19.1 | 29.3 | 10.9 |
Information | |||
Technology | 10.6 | 13.6 | 23.3 |
Materials | 4.1 | 6.1 | 3.4 |
Real Estate | 4.6 | 0.0 | 3.6 |
Telecommunication | |||
Services | 0.0 | 0.1 | 1.8 |
Utilities | 0.0 | 1.6 | 2.7 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Ten Largest Holdings (% of total net assets) | ||
NIKE Inc. | Footwear | 4.1% |
Microsoft Corp. | Systems Software | 3.9 |
Chubb Ltd. | Property & Casualty | |
Insurance | 3.1 | |
Union Pacific Corp. | Railroads | 2.8 |
Accenture plc | IT Consulting & | |
Other Services | 2.8 | |
TJX Cos. Inc. | Apparel Retail | 2.7 |
United Parcel Service | Air Freight & | |
Inc. | Logistics | 2.7 |
Lockheed Martin Corp. | Aerospace & | |
Defense | 2.6 | |
Colgate-Palmolive Co. | Household Products | 2.6 |
Canadian National | ||
Railway Co. | Railroads | 2.5 |
Top Ten | 29.8% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratio shown is from the prospectus dated May 25, 2017, and represents estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2018, the expense ratio was 0.26%.
10
Dividend Growth Fund
Investment Focus
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx13x1.jpg)
11
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, 2008, Through January 31, 2018
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2018 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
Dividend Growth Fund | 23.65% | 14.05% | 10.12% | $26,211 | |
• • • • • • • • | Dividend Growth Spliced Index | 26.19 | 13.62 | 8.69 | 23,005 |
– – – – | Dow Large-Cap Jones Core U.S. Funds Total Stock Average Market | 24.78 | 14.01 | 8.32 | 22,242 |
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 | |
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.
12
Dividend Growth Fund
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx15x1.jpg)
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended December 31, 2017
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 Date | One Year | Five Years | Ten Years | |
Dividend Growth Fund | 5/15/1992 | 19.33% | 14.14% | 8.98% |
13
Dividend Growth Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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 (98.1%) | ||
Consumer Discretionary (12.8%) | ||
NIKE Inc. Class B | 20,738,411 | 1,414,774 |
TJX Cos. Inc. | 11,872,667 | 953,613 |
McDonald’s Corp. | 3,971,736 | 679,723 |
VF Corp. | 6,514,481 | 528,585 |
Starbucks Corp. | 8,896,501 | 505,410 |
Walt Disney Co. | 3,474,512 | 377,575 |
4,459,680 | ||
Consumer Staples (16.3%) | ||
Colgate-Palmolive Co. | 12,021,897 | 892,506 |
PepsiCo Inc. | 7,250,238 | 872,204 |
Coca-Cola Co. | 18,302,917 | 871,036 |
Costco Wholesale | ||
Corp. | 4,437,657 | 864,766 |
Diageo plc | 23,852,928 | 858,535 |
Walgreens Boots | ||
Alliance Inc. | 6,928,227 | 521,418 |
CVS Health Corp. | 5,390,730 | 424,197 |
Procter & Gamble Co. | 4,019,669 | 347,058 |
5,651,720 | ||
Energy (4.2%) | ||
Schlumberger Ltd. | 10,173,917 | 748,597 |
Exxon Mobil Corp. | 8,097,769 | 706,935 |
1,455,532 | ||
Financials (12.0%) | ||
Chubb Ltd. | 6,827,470 | 1,066,110 |
PNC Financial Services | ||
Group Inc. | 5,554,644 | 877,745 |
American Express Co. | 7,961,764 | 791,399 |
Marsh & McLennan | ||
Cos. Inc. | 9,146,784 | 763,939 |
BlackRock Inc. | 1,201,090 | 674,772 |
4,173,965 | ||
Health Care (15.1%) | ||
UnitedHealth Group Inc. | 3,555,748 | 841,930 |
Medtronic plc | 9,060,021 | 778,165 |
Cardinal Health Inc. | 10,616,371 | 762,149 |
Merck & Co. Inc. | 11,377,889 | 674,140 |
Johnson & Johnson | 4,842,227 | 669,148 |
McKesson Corp. | 3,480,585 | 587,801 |
Amgen Inc. | 3,139,995 | 584,196 |
Danaher Corp. | 3,400,598 | 344,413 |
5,241,942 | ||
Industrials (18.7%) | ||
Union Pacific Corp. | 7,208,127 | 962,285 |
United Parcel Service | ||
Inc. Class B | 7,331,106 | 933,396 |
Lockheed Martin Corp. | 2,565,152 | 910,244 |
Canadian National | ||
Railway Co. | 11,015,480 | 882,850 |
Honeywell | ||
International Inc. | 4,894,808 | 781,554 |
Northrop | ||
Grumman Corp. | 2,116,052 | 720,579 |
General | ||
Dynamics Corp. | 3,123,587 | 694,936 |
United Technologies | ||
Corp. | 4,477,121 | 617,888 |
6,503,732 | ||
Information Technology (10.4%) | ||
Microsoft Corp. | 14,094,662 | 1,339,134 |
Accenture plc Class A | 5,957,222 | 957,326 |
Visa Inc. Class A | 6,989,047 | 868,249 |
Automatic Data | ||
Processing Inc. | 3,556,861 | 439,735 |
3,604,444 | ||
Materials (4.0%) | ||
Praxair Inc. | 4,767,719 | 769,939 |
Ecolab Inc. | 4,450,596 | 612,758 |
1,382,697 | ||
Real Estate (4.6%) | ||
American Tower Corp. | 5,496,301 | 811,804 |
Public Storage | 3,924,694 | 768,298 |
1,580,102 | ||
Total Common Stocks | ||
(Cost $21,340,456) | 34,053,814 |
14
Dividend Growth Fund
Face | Market | |
Amount | Value • | |
($000) | ($000) | |
Temporary Cash Investments (1.7%) | ||
Repurchase Agreements (1.2%) | ||
RBS Securities, Inc. | ||
1.300%, 2/1/18 (Dated | ||
1/31/18, Repurchase | ||
Value $224,508,000, | ||
collateralized by U. S. | ||
Treasury Note/Bond | ||
0.625%, 4/30/18, | ||
with a value of | ||
$228,991,000) | 224,500 | 224,500 |
Societe Generale | ||
1.320%, 2/1/18 | ||
(Dated 1/31/18, | ||
Repurchase Value | ||
$202,507,000, | ||
collateralized by | ||
Federal Home Loan | ||
Mortgage Corp. | ||
3.500%–4.500%, | ||
4/1/47–9/1/47, | ||
Federal National | ||
Mortgage Assn. | ||
2.500%–4.500%, | ||
10/1/30–8/1/46, and | ||
U.S. Treasury | ||
Note/Bond | ||
1.250%–2.500%, | ||
1/31/20–5/15/24, | ||
with a value of | ||
$206,550,000) | 202,500 | 202,500 |
427,000 | ||
U. S. Government and Agency Obligations (0.5%) | ||
United States | ||
Treasury Bill, | ||
1.266%, 3/8/18 | 150,000 | 149,803 |
Total Temporary Cash Investments | ||
(Cost $576,816) | 576,803 | |
Total Investments (99.8%) | ||
(Cost $21,917,272) | 34,630,617 |
Amount | |
($000) | |
Other Assets and Liabilities (0.2%) | |
Other Assets | |
Investment in Vanguard | 1,821 |
Receivables for Investment | |
Securities Sold | 354,421 |
Receivables for Accrued Income | 36,085 |
Receivable for Capital Shares Issued | 6,288 |
Other Assets | 638 |
Total Other Assets | 399,253 |
Liabilities | |
Payables for Investment | |
Securities Purchased | (263,277) |
Payables to Investment Advisor | (7,723) |
Payables for Capital Shares Redeemed | (25,254) |
Payables to Vanguard | (27,124) |
Other Liabilities | (76) |
Total Liabilities | (323,454) |
Net Assets (100%) | |
Applicable to 1,246,074,562 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 34,706,416 |
Net Asset Value Per Share | $27.85 |
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 21,652,476 |
Undistributed Net Investment Income | 9,965 |
Accumulated Net Realized Gains | 330,073 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 12,713,345 |
Foreign Currencies | 557 |
Net Assets | 34,706,416 |
• See Note A in Notes to Financial Statements. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Growth Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 721,716 |
Interest 2 | 5,682 |
Securities Lending—Net | 160 |
Total Income | 727,558 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 42,135 |
Performance Adjustment | (3,906) |
The Vanguard Group—Note C | |
Management and Administrative | 38,684 |
Marketing and Distribution | 4,822 |
Custodian Fees | 263 |
Auditing Fees | 35 |
Shareholders’ Reports and Proxy | 1,237 |
Trustees’ Fees and Expenses | 53 |
Total Expenses | 83,323 |
Net Investment Income | 644,235 |
Realized Net Gain (Loss) | |
Investment Securities Sold 2 | 1,295,078 |
Foreign Currencies | 248 |
Realized Net Gain (Loss) | 1,295,326 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities 2 | 4,952,995 |
Foreign Currencies | 906 |
Change in Unrealized Appreciation (Depreciation) | 4,953,901 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 6,893,462 |
1 Dividends are net of foreign withholding taxes of $3,676,000. | |
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund | |
were $0, ($43,000), and $0, respectively. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Dividend Growth Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 644,235 | 575,480 |
Realized Net Gain (Loss) | 1,295,326 | 402,969 |
Change in Unrealized Appreciation (Depreciation) | 4,953,901 | 2,296,300 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 6,893,462 | 3,274,749 |
Distributions | ||
Net Investment Income | (629,709) | (579,527) |
Realized Capital Gain1 | (1,054,378) | (281,098) |
Total Distributions | (1,684,087) | (860,625) |
Capital Share Transactions | ||
Issued | 1,782,139 | 6,868,116 |
Issued in Lieu of Cash Distributions | 1,514,816 | 770,864 |
Redeemed | (4,432,447) | (5,052,269) |
Net Increase (Decrease) from Capital Share Transactions | (1,135,492) | 2,586,711 |
Total Increase (Decrease) | 4,073,883 | 5,000,835 |
Net Assets | ||
Beginning of Period | 30,632,533 | 25,631,698 |
End of Period2 | 34,706,416 | 30,632,533 |
1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $111,474,000 and $57,257,000, 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 $9,965,000 and ($4,809,000). |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Dividend Growth Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $23.72 | $21.78 | $22.47 | $20.45 | $17.52 |
Investment Operations | |||||
Net Investment Income | . 5141 | .446 | .442 | .430 | . 385 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 4.985 | 2.165 | .145 | 2.378 | 3.033 |
Total from Investment Operations | 5.499 | 2.611 | .587 | 2.808 | 3.418 |
Distributions | |||||
Dividends from Net Investment Income | (. 509) | (. 450) | (. 432) | (. 440) | (. 384) |
Distributions from Realized Capital Gains | (. 860) | (. 221) | (. 845) | (. 348) | (.104) |
Total Distributions | (1.369) | (.671) | (1.277) | (.788) | (.488) |
Net Asset Value, End of Period | $27.85 | $23.72 | $21.78 | $22.47 | $20.45 |
Total Return2 | 23.65% | 12.06% | 2.44% | 13.69% | 19.60% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $34,706 | $30,633 | $25,632 | $23,067 | $19,137 |
Ratio of Total Expenses to Average Net Assets3 | 0.26% | 0.30% | 0.33% | 0.32% | 0.31% |
Ratio of Net Investment Income | |||||
to Average Net Assets | 2.00% | 1.93% | 1.95% | 1.94% | 2.03% |
Portfolio Turnover Rate | 15% | 27% | 26% | 23% | 18% |
1 Calculated based on average shares outstanding. | |||||
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information | |||||
about any applicable account service fees. | |||||
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%), 0.03%, 0.04%, 0.03%, and 0.02%. |
See accompanying Notes, which are an integral part of the Financial Statements.
18
Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. 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.
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Dividend Growth 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, 2015–2018), 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 event 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, 2018, 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.
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Dividend Growth Fund
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, 2018, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets before a net decrease of $3,906,000 (0.01%) 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 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, 2018, the fund had contributed to Vanguard capital in the amount of $1,821,000, representing 0.01% of the fund’s net assets and 0.73% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 33,195,279 | 858,535 | — |
Temporary Cash Investments | — | 576,803 | — |
Total | 33,195,279 | 1,435,338 | — |
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.
21
Dividend Growth Fund
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 $61,054,000 from accumulated net realized gains to paid-in capital.
For tax purposes, at January 31, 2018, the fund had $115,175,000 of ordinary income and $249,452,000 of long-term capital gains available for distribution.
At January 31, 2018, the cost of investment securities for tax purposes was $21,917,272,000. Net unrealized appreciation of investment securities for tax purposes was $12,713,345,000, consisting of unrealized gains of $12,769,594,000 on securities that had risen in value since their purchase and $56,249,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended January 31, 2018, the fund purchased $4,889,281,000 of investment securities and sold $7,509,943,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2018 | 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 69,235 | 298,231 |
Issued in Lieu of Cash Distributions | 58,088 | 33,034 |
Redeemed | (172,613) | (216,755) |
Net Increase (Decrease) in Shares Outstanding | (45,290) | 114,510 |
H. Management has determined that no material events or transactions occurred subsequent to January 31, 2018, 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 Shareholders of Vanguard Dividend Growth Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Dividend Growth Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the five years in the period ended January 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group
of Funds since 1975.
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![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendgrowthfundx26x1.jpg)
Special 2017 tax information (unaudited) for Vanguard Dividend Growth Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions
of the Internal Revenue Code.
The fund distributed $997,088,000 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 $661,858,000 of qualified dividend income to shareholders during
the fiscal year.
For corporate shareholders, 72.3% 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 2018. (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, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 23.65% | 14.05% | 10.12% |
Returns After Taxes on Distributions | 22.09 | 12.98 | 9.42 |
Returns After Taxes on Distributions and Sale of Fund Shares | 14.87 | 11.07 | 8.21 |
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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, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Growth Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $1,123.97 | $1.28 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,024.00 | 1.22 |
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 0.24%. 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 (184/365).
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Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Dividend Growth Fund has renewed the fund’s investment advisory arrangement 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 that directed 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 advisor seeks to purchase these businesses when short-term dislocations have made the share price attractive. Wellington Management 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.
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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 expense ratio 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 the 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.
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Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share.
For a fund, the weighted average price/book ratio of the stocks it holds.
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Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
Benchmark Information
Dividend Growth Spliced Index: Russell 1000 Index through January 31, 2010; NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index) thereafter. Prior to December 6, 2002, the comparative benchmark was known as the Utilities Composite Index. The index weightings were: 40% S&P Utilities Index, 40% S&P Telephone Index, and 20% Lehman Brothers Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Brothers Utility Bond Index through March 31, 2000; 75% S&P Utilities Index and 25% S&P Telephone Index through December 31, 2001; and 75% S&P Utilities Index and 25% S&P Integrated Telecommunication Services Index through December 6, 2002.
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The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
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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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they
are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008. Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
![]() | |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2017, Bloomberg. All |
rights reserved. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q570 032018 |
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/dividendappreciationindex1x1.jpg)
Annual Report | January 31, 2018
Vanguard Dividend Appreciation Index Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Results of Proxy Voting. | 6 |
Fund Profile. | 8 |
Performance Summary. | 10 |
Financial Statements. | 13 |
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard Dividend Appreciation Index Fund returned about 26% for the 12 months ended January 31, 2018. It closely tracked its benchmark, the NASDAQ US Dividend Achievers Select Index, and outpaced the average return of its large-capitalization core fund peers.
• The target index consists of the stocks of companies that have a record of increasing dividends over time.
• Stocks with growing dividend payments posted strong returns over the fiscal year, outpacing the results of the broad U.S. market.
• Eight of the industry sectors represented in the fund had positive results. Industrials, the fund’s largest sector, was the top contributor, followed by technology and health care. Telecommunications and oil & gas were the only detractors.
• For the ten years ended January 31, the fund’s Investor Shares posted an average annual return of 9.44%, in line with the fund’s benchmark and well ahead of its peer average.
Total Returns: Fiscal Year Ended January 31, 2018 | |
Total | |
Returns | |
Vanguard Dividend Appreciation Index Fund | |
Investor Shares | 26.02% |
ETF Shares | |
Market Price | 26.15 |
Net Asset Value | 26.10 |
Admiral™ Shares | 26.11 |
NASDAQ US Dividend Achievers Select Index | 26.19 |
Large-Cap Core Funds Average | 24.78 |
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, 2018 | |
Average | |
Annual Return | |
Dividend Appreciation Index Fund Investor Shares | 9.44% |
NASDAQ US Dividend Achievers Select Index | 9.67 |
Large-Cap Core Funds Average | 8.32 |
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 | 0.17% | 0.08% | 0.08% | 1.07% |
The fund expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For
the fiscal year ended January 31, 2018, the fund’s expense ratios were 0.15% 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 2017.
Peer group: Large-Cap Core Funds.
2
CEO’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindex5x1.jpg)
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
When you start a new job, it’s natural to reflect on both the past and the future. And so it is in my case, having begun my service as just the fourth chief executive in Vanguard’s history.
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Making a real difference
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. Over the past 25 years, for example, Vanguard has lowered our funds’ asset-weighted average expense ratio
3
from 0.31% to 0.12%. And over the past decade, 94% of our funds have beaten the average annual return of their peers.1
Focused on your success
Vanguard is built for Vanguard investors—as a client-owned company, we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my new role as CEO, I intend to keep this priority front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
As I write this, we’ve experienced a period of pronounced market volatility. Strong economic growth and budding signs of inflation have raised concerns about a more aggressive Federal Reserve. Although volatility can test investors’ nerves, we sometimes think of this as “Vanguard weather”—a time when having a disciplined, low-cost, and long-term approach to investment management serves investors well.
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 25.84% | 14.28% | 15.72% |
Russell 2000 Index (Small-caps) | 17.18 | 12.12 | 13.33 |
Russell 3000 Index (Broad U.S. market) | 25.16 | 14.11 | 15.53 |
FTSE All-World ex US Index (International) | 29.63 | 10.20 | 7.48 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 2.15% | 1.14% | 2.01% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 3.52 | 1.97 | 2.69 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.91 | 0.41 | 0.25 |
CPI | |||
Consumer Price Index | 2.07% | 1.98% | 1.48% |
The performance data shown represent past performance, which is not a guarantee of future results.
1 For the ten-year period through December 31, 2017, 9 of 9 Vanguard money market funds, 56 of 60 bond funds, 21 of 22 balanced funds,
and 131 of 140 stock funds, or 217 of 231 Vanguard funds, outperformed their peer-group averages. Sources: Vanguard, based on data
from Lipper, a Thomson Reuters Company.
4
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make Vanguard the best place for you to invest through our high-quality funds and services, advice and
guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindex7x1.jpg)
Mortimer J. Buckley
President and Chief Executive Officer
February 15, 2018
5
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 2,503,465,695 | 87,490,567 | 96.6% |
Emerson U. Fullwood | 2,500,061,682 | 90,894,579 | 96.5% |
Amy Gutmann | 2,498,574,662 | 92,381,600 | 96.4% |
JoAnn Heffernan Heisen | 2,502,785,690 | 88,170,572 | 96.6% |
F. Joseph Loughrey | 2,501,562,489 | 89,393,773 | 96.6% |
Mark Loughridge | 2,503,584,454 | 87,371,807 | 96.6% |
Scott C. Malpass | 2,499,755,273 | 91,200,989 | 96.5% |
F. William McNabb III | 2,498,986,712 | 91,969,550 | 96.5% |
Deanna Mulligan | 2,503,553,783 | 87,402,478 | 96.6% |
André F. Perold | 2,453,401,594 | 137,554,668 | 94.7% |
Sarah Bloom Raskin | 2,500,665,258 | 90,291,004 | 96.5% |
Peter F. Volanakis | 2,501,344,074 | 89,612,188 | 96.5% |
*Results are for all funds within the same trust. |
Proposal 2—Approve a manager-of-managers arrangement with third-party investment advisors.
This arrangement enables the fund to enter into and materially amend investment advisory arrangements with third-party investment advisors, subject to the approval of the fund’s board of trustees and certain conditions imposed by the Securities and Exchange Commission, while avoiding the costs and delays associated with obtaining future shareholder approval.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Dividend Appreciation | |||||
Index Fund | 249,738,450 | 10,000,523 | 12,016,623 | 56,641,372 | 76.0% |
6
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Dividend Appreciation | |||||
Index Fund | 252,113,265 | 9,625,082 | 10,017,249 | 56,641,372 | 76.8% |
Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Dividend Appreciation | |||||
Index Fund | 48,608,482 | 14,763,261 | 208,383,853 | 56,641,372 | 14.8% |
7
Dividend Appreciation Index Fund
Fund Profile
As of January 31, 2018
Share-Class Characteristics | |||
Investor | ETF | Admiral | |
Shares | Shares | Shares | |
Ticker Symbol | VDAIX | VIG | VDADX |
Expense Ratio1 | 0.17% | 0.08% | 0.08% |
30-Day SEC Yield | 1.72% | 1.77% | 1.78% |
Portfolio Characteristics | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Number of Stocks | 177 | 177 | 3,765 |
Median Market Cap | $66.1B | $66.1B | $73.6B |
Price/Earnings Ratio | 26.4x | 26.4x | 23.8x |
Price/Book Ratio | 4.5x | 4.4x | 3.2x |
Return on Equity | 22.0% | 22.0% | 14.9% |
Earnings Growth Rate | 4.0% | 4.4% | 9.1% |
Dividend Yield | 1.8% | 1.8% | 1.7% |
Foreign Holdings | 0.0% | 0.0% | 0.0% |
Turnover Rate | 14% | — | — |
Short-Term Reserves | 0.0% | — | — |
Volatility Measures | ||
NASDAQ | ||
US Dividend | DJ | |
Achievers | U.S. Total | |
Select | Market | |
Index | FA Index | |
R-Squared | 1.00 | 0.87 |
Beta | 1.00 | 0.83 |
These measures show the degree and timing of the fund’s | ||
fluctuations compared with the indexes over 36 months. |
Sector Diversification (% of equity exposure) | |||
NASDAQ | |||
US | |||
Dividend | DJ | ||
Achievers | U.S. Total | ||
Select | Market | ||
Fund | Index | FA Index | |
Basic Materials | 4.7% | 4.7% | 2.7% |
Consumer Goods | 13.0 | 13.0 | 8.7 |
Consumer Services | 14.7 | 14.7 | 13.2 |
Financials | 9.6 | 9.6 | 20.3 |
Health Care | 12.9 | 12.9 | 12.6 |
Industrials | 33.6 | 33.6 | 13.3 |
Oil & Gas | 0.0 | 0.0 | 5.6 |
Technology | 9.9 | 9.9 | 19.0 |
Telecommunications | 0.1 | 0.1 | 1.8 |
Utilities | 1.5 | 1.5 | 2.8 |
Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable),
which includes securities that have not been provided an ICB
classification as of the effective reporting period.
Ten Largest Holdings (% of total net assets) | ||
Microsoft Corp. | Software | 5.0% |
Johnson & Johnson | Pharmaceuticals | 3.8 |
PepsiCo Inc. | Soft Drinks | 3.7 |
3M Co. | Diversified Industrials | 3.6 |
Medtronic plc | Medical Equipment | 2.9 |
United Technologies | ||
Corp. | Aerospace | 2.7 |
Texas Instruments Inc. | Semiconductors | 2.7 |
Union Pacific Corp. | Railroads | 2.6 |
Abbott Laboratories | Pharmaceuticals | 2.6 |
Accenture plc | Business Support | |
Services | 2.6 | |
Top Ten | 32.2% | |
The holdings listed exclude any temporary cash investments and | ||
equity index products. |
1 The expense ratios shown are from the prospectus dated May 25, 2017, and represent estimated costs for the current fiscal year. For the fiscal
year ended January 31, 2018, the expense ratios were 0.15% for Investor Shares, 0.08% for ETF Shares, and 0.08% for Admiral Shares.
8
Dividend Appreciation Index Fund
Investment Focus
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindx11x1.jpg)
9
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, 2008, Through January 31, 2018
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindx12x1.jpg)
Average Annual Total Returns | ||||
Periods Ended January 31, 2018 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
Dividend Appreciation Index Fund | 26.02% | 13.44% | 9.44% | $24,658 |
NASDAQ US Dividend Achievers | ||||
• • • • • • • • | ||||
Select Index | 26.19 | 13.62 | 9.67 | 25,175 |
– – – – Large-Cap Core Funds Average | 24.78 | 14.01 | 8.32 | 22,242 |
Dow Jones U.S. Total Stock Market | ||||
Float Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 |
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 | 26.10% | 13.54% | 9.56% | $24,922 |
NASDAQ US Dividend Achievers Select | ||||
Index | 26.19 | 13.62 | 9.67 | 25,175 |
Dow Jones U.S. Total Stock Market Float | ||||
Adjusted Index | 25.16 | 15.48 | 9.91 | 25,724 |
See Financial Highlights for dividend and capital gains information.
10
Dividend Appreciation Index Fund
Average Annual Total Returns | |||
Periods Ended January 31, 2018 | |||
Since | Final Value | ||
One | Inception | of a $10,000 | |
Year | (12/19/2013) | Investment | |
Dividend Appreciation Index Fund Admiral | |||
Shares | 26.11% | 11.80% | $15,832 |
NASDAQ US Dividend Achievers Select Index | 26.19 | 11.88 | 15,874 |
Dow Jones U.S. Total Stock Market Float | |||
Adjusted Index | 25.16 | 13.13 | 16,621 |
"Since Inception" performance is calculated from the Institutional Plus Shares’ inception date for both the fund and its comparative | |||
standards. |
Cumulative Returns of ETF Shares: January 31, 2008, Through January 31, 2018 | |||
One | Five | Ten | |
Year | Years | Years | |
Dividend Appreciation Index Fund ETF Shares | |||
Market Price | 26.15% | 88.73% | 150.52% |
Dividend Appreciation Index Fund ETF Shares Net | |||
Asset Value | 26.10 | 88.69 | 149.22 |
NASDAQ US Dividend Achievers Select Index | 26.19 | 89.36 | 151.75 |
Fiscal-Year Total Returns (%): January 31, 2008, Through January 31, 2018
![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindx13x1.jpg)
11
Dividend Appreciation Index Fund
Average Annual Total Returns: Periods Ended December 31, 2017
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.
Ten Years | ||||||
Inception Date | One Year | Five Years | Income | Capital | Total | |
Investor Shares | 4/27/2006 | 22.12% | 13.62% | 2.23% | 6.19% | 8.42% |
ETF Shares | 4/21/2006 | |||||
Market Price | 22.21 | 13.74 | 8.55 | |||
Net Asset Value | 22.22 | 13.73 | 8.54 | |||
Admiral Shares | 12/19/2013 | 22.22 | — | 2.321 | 8.371 | 10.691 |
1 Return since inception. |
12
Dividend Appreciation Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2018
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 (4.7%) | ||
Ecolab Inc. | 2,537,805 | 349,405 |
Air Products & | ||
Chemicals Inc. | 1,892,920 | 318,711 |
PPG Industries Inc. | 2,236,592 | 265,551 |
Nucor Corp. | 2,773,852 | 185,737 |
Westlake Chemical | ||
Corp. | 1,121,593 | 126,291 |
Albemarle Corp. | 979,281 | 109,278 |
International Flavors | ||
& Fragrances Inc. | 687,600 | 103,346 |
RPM International Inc. | 1,161,837 | 60,648 |
Royal Gold Inc. | 568,270 | 50,576 |
NewMarket Corp. | 103,087 | 40,986 |
Sensient Technologies | ||
Corp. | 385,845 | 27,723 |
HB Fuller Co. | 437,859 | 22,703 |
Stepan Co. | 195,012 | 15,293 |
Hawkins Inc. | 92,238 | 3,256 |
1,679,504 | ||
Consumer Goods (13.0%) | ||
PepsiCo Inc. | 10,963,874 | 1,318,954 |
NIKE Inc. Class B | 11,528,517 | 786,475 |
Colgate-Palmolive Co. | 7,680,167 | 570,176 |
Stanley Black & Decker | ||
Inc. | 1,327,393 | 220,653 |
Archer-Daniels-Midland | ||
Co. | 4,968,038 | 213,377 |
Kellogg Co. | 3,054,678 | 208,054 |
Clorox Co. | 1,115,809 | 158,099 |
Hormel Foods Corp. | 4,600,225 | 157,926 |
Genuine Parts Co. | 1,290,804 | 134,334 |
Brown-Forman Corp. | ||
Class B | 1,876,634 | 130,051 |
JM Smucker Co. | 1,012,976 | 128,536 |
Church & Dwight Co. | ||
Inc. | 2,215,167 | 108,211 |
McCormick & Co. Inc. | 988,750 | 107,546 | |
Hasbro Inc. | 1,081,352 | 102,263 | |
Bunge Ltd. | 1,213,696 | 96,404 | |
Polaris Industries Inc. | 547,603 | 61,885 | |
Leggett & Platt Inc. | 1,163,289 | 54,105 | |
Columbia Sportswear | |||
Co. | 604,387 | 45,130 | |
Lancaster Colony Corp. | 238,595 | 30,636 | |
J&J Snack Foods Corp. | 162,803 | 22,538 | |
^ | Tootsie Roll Industries | ||
Inc. | 327,858 | 11,737 | |
Andersons Inc. | 245,249 | 8,363 | |
4,675,453 | |||
Consumer Services (14.7%) | |||
Lowe’s Cos. Inc. | 7,567,031 | 792,495 | |
Costco Wholesale Corp. | 3,821,076 | 744,613 | |
Walgreens Boots | |||
Alliance Inc. | 9,390,110 | 706,700 | |
CVS Health Corp. | 8,922,868 | 702,141 | |
TJX Cos. Inc. | 5,671,050 | 455,499 | |
Sysco Corp. | 4,699,456 | 295,455 | |
Ross Stores Inc. | 3,428,545 | 282,478 | |
Kroger Co. | 8,161,074 | 247,770 | |
Best Buy Co. Inc. | 2,730,056 | 199,458 | |
Cardinal Health Inc. | 2,744,270 | 197,011 | |
AmerisourceBergen | |||
Corp. Class A | 1,890,199 | 188,396 | |
Tiffany & Co. | 1,082,751 | 115,475 | |
Rollins Inc. | 1,896,802 | 93,588 | |
FactSet Research | |||
Systems Inc. | 392,470 | 78,765 | |
Casey’s General | |||
Stores Inc. | 340,898 | 41,286 | |
^ | Cracker Barrel Old | ||
Country Store Inc. | 209,099 | 36,902 | |
John Wiley & Sons | |||
Inc. Class A | 420,368 | 26,651 | |
Aaron’s Inc. | 622,000 | 25,434 |
13
Dividend Appreciation Index Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Monro Inc. | 283,457 | 16,015 | |
Matthews International | |||
Corp. Class A | 280,686 | 15,718 | |
International Speedway | |||
Corp. Class A | 220,499 | 10,231 | |
5,272,081 | |||
Financials (9.6%) | |||
Chubb Ltd. | 4,051,954 | 632,713 | |
S&P Global Inc. | 2,247,873 | 407,090 | |
Travelers Cos. Inc. | 2,433,059 | 364,764 | |
Aflac Inc. | 3,492,098 | 308,003 | |
Ameriprise Financial Inc. | 1,340,175 | 226,088 | |
Franklin Resources Inc. | 4,917,962 | 208,571 | |
Cincinnati Financial | |||
Corp. | 1,432,970 | 110,195 | |
SEI Investments Co. | 1,384,771 | 104,066 | |
Torchmark Corp. | 1,024,497 | 93,076 | |
American Financial | |||
Group Inc. | 757,030 | 85,802 | |
WR Berkley Corp. | 1,054,615 | 76,966 | |
Brown & Brown Inc. | 1,217,598 | 63,900 | |
Cullen/Frost Bankers Inc. | 554,590 | 59,014 | |
Eaton Vance Corp. | 987,654 | 57,086 | |
BOK Financial Corp. | 569,826 | 55,096 | |
Commerce Bancshares | |||
Inc. | 928,175 | 54,307 | |
Bank of the Ozarks | 1,054,041 | 52,649 | |
Erie Indemnity Co. | |||
Class A | 401,905 | 47,730 | |
Prosperity Bancshares | |||
Inc. | 604,565 | 45,826 | |
RenaissanceRe | |||
Holdings Ltd. | 356,122 | 45,277 | |
Assurant Inc. | 483,948 | 44,272 | |
Hanover Insurance | |||
Group Inc. | 369,669 | 41,828 | |
Axis Capital Holdings | |||
Ltd. | 749,099 | 37,852 | |
UMB Financial Corp. | 433,169 | 32,999 | |
American Equity | |||
Investment Life | |||
Holding Co. | 768,264 | 25,353 | |
RLI Corp. | 382,478 | 24,578 | |
Community Bank | |||
System Inc. | 439,724 | 23,437 | |
^ | AmTrust Financial | ||
Services Inc. | 1,702,462 | 22,847 | |
BancFirst Corp. | 275,233 | 15,344 | |
Westamerica | |||
Bancorporation | 228,328 | 13,556 | |
1st Source Corp. | 225,296 | 11,781 | |
Tompkins Financial Corp. | 131,730 | 10,851 | |
Infinity Property & | |||
Casualty Corp. | 96,082 | 9,728 |
Southside Bancshares | ||
Inc. | 254,769 | 8,746 |
Community Trust | ||
Bancorp Inc. | 153,220 | 7,247 |
3,428,638 | ||
Health Care (12.9%) | ||
Johnson & Johnson | 9,902,606 | 1,368,441 |
Medtronic plc | 11,944,548 | 1,025,917 |
Abbott Laboratories | 15,032,346 | 934,411 |
Stryker Corp. | 3,243,786 | 533,214 |
Becton Dickinson and | ||
Co. | 2,169,562 | 527,073 |
Perrigo Co. plc | 1,247,369 | 113,037 |
West Pharmaceutical | ||
Services Inc. | 637,193 | 63,847 |
Healthcare Services | ||
Group Inc. | 633,318 | 34,946 |
Atrion Corp. | 15,854 | 9,122 |
National HealthCare | ||
Corp. | 131,885 | 8,226 |
4,618,234 | ||
Industrials (33.5%) | ||
3M Co. | 5,186,511 | 1,299,221 |
United Technologies | ||
Corp. | 7,010,424 | 967,509 |
Union Pacific Corp. | 7,079,408 | 945,101 |
Accenture plc Class A | 5,733,730 | 921,410 |
Lockheed Martin Corp. | 2,525,530 | 896,184 |
FedEx Corp. | 2,318,423 | 608,540 |
General Dynamics Corp. | 2,633,648 | 585,934 |
Raytheon Co. | 2,547,839 | 532,346 |
Illinois Tool Works Inc. | 3,014,768 | 523,575 |
Northrop Grumman | ||
Corp. | 1,518,888 | 517,227 |
Automatic Data | ||
Processing Inc. | 3,905,129 | 482,791 |
CSX Corp. | 8,059,413 | 457,533 |
Sherwin-Williams Co. | 811,716 | 338,575 |
Waste Management | ||
Inc. | 3,825,117 | 338,255 |
Roper Technologies Inc. | 886,255 | 248,674 |
Republic Services Inc. | ||
Class A | 2,950,264 | 202,978 |
Cintas Corp. | 913,779 | 153,926 |
L3 Technologies Inc. | 676,807 | 143,794 |
Dover Corp. | 1,352,803 | 143,681 |
Fastenal Co. | 2,516,449 | 138,304 |
WW Grainger Inc. | 511,852 | 138,026 |
JB Hunt Transport | ||
Services Inc. | 968,422 | 117,014 |
CH Robinson Worldwide | ||
Inc. | 1,232,014 | 112,680 |
Expeditors International | ||
of Washington Inc. | 1,566,932 | 101,772 |
14
Dividend Appreciation Index Fund
Market | ||
Value• | ||
Shares | ($000) | |
AO Smith Corp. | 1,279,432 | 85,441 |
Jack Henry & | ||
Associates Inc. | 675,371 | 84,192 |
Nordson Corp. | 499,769 | 71,827 |
Graco Inc. | 1,461,800 | 68,412 |
Robert Half | ||
International Inc. | 1,111,575 | 64,338 |
Carlisle Cos. Inc. | 561,601 | 64,141 |
Toro Co. | 941,188 | 61,789 |
Donaldson Co. Inc. | 1,148,642 | 58,190 |
Lincoln Electric Holdings | ||
Inc. | 571,471 | 55,758 |
AptarGroup Inc. | 542,149 | 47,395 |
Sonoco Products Co. | 864,416 | 46,946 |
MDU Resources Group | ||
Inc. | 1,698,796 | 44,984 |
ITT Inc. | 768,921 | 43,060 |
Ryder System Inc. | 465,036 | 40,472 |
Bemis Co. Inc. | 804,160 | 37,587 |
MSC Industrial Direct | ||
Co. Inc. Class A | 390,088 | 36,622 |
Silgan Holdings Inc. | 1,050,320 | 31,394 |
Regal Beloit Corp. | 389,364 | 30,332 |
MSA Safety Inc. | 328,405 | 25,717 |
ABM Industries Inc. | 566,560 | 21,546 |
Franklin Electric Co. Inc. | 402,587 | 18,237 |
Brady Corp. Class A | 414,359 | 15,849 |
Badger Meter Inc. | 253,390 | 12,213 |
Tennant Co. | 153,471 | 10,344 |
McGrath RentCorp | 208,473 | 9,965 |
Lindsay Corp. | 92,604 | 8,261 |
Gorman-Rupp Co. | 227,117 | 6,421 |
Cass Information | ||
Systems Inc. | 106,919 | 6,196 |
NACCO Industries | ||
Inc. Class A | 45,020 | 1,893 |
12,024,572 | ||
Technology (9.9%) | ||
Microsoft Corp. | 18,915,190 | 1,797,132 |
Texas Instruments Inc. | 8,696,125 | 953,704 |
Analog Devices Inc. | 3,175,186 | 291,736 |
Microchip Technology | ||
Inc. | 1,882,810 | 179,281 |
Harris Corp. | 1,082,734 | 172,566 |
Xilinx Inc. | 2,165,566 | 158,130 |
3,552,549 | ||
Telecommunications (0.1%) | ||
Telephone & Data | ||
Systems Inc. | 895,339 | 24,559 |
Utilities (1.5%) | ||
Edison International | 2,834,371 | 177,233 |
Atmos Energy Corp. | 915,101 | 75,862 |
UGI Corp. | 1,504,202 | 68,847 |
Aqua America Inc. | 1,543,283 | 55,882 |
Market | |||
Value• | |||
Shares | ($000) | ||
Southwest Gas Holdings | |||
Inc. | 413,015 | 30,390 | |
New Jersey Resources | |||
Corp. | 750,808 | 29,131 | |
Black Hills Corp. | 464,327 | 25,793 | |
MGE Energy Inc. | 301,832 | 18,050 | |
American States Water | |||
Co. | 318,463 | 17,586 | |
California Water Service | |||
Group | 417,156 | 16,978 | |
SJW Group | 178,219 | 10,665 | |
Chesapeake Utilities Corp. | 141,732 | 10,417 | |
Middlesex Water Co. | 141,787 | 5,340 | |
Connecticut Water | |||
Service Inc. | 95,858 | 5,085 | |
York Water Co. | 111,930 | 3,543 | |
550,802 | |||
Total Common Stocks | |||
(Cost $25,277,050) | 35,826,392 | ||
Temporary Cash Investments (0.1%)1 | |||
Money Market Fund (0.1%) | |||
2,3 | Vanguard Market | ||
Liquidity Fund, | |||
1.545% | 436,237 | 43,624 | |
Face | |||
Amount | |||
($000) | |||
U. S. Government and Agency Obligations (0.0%) | |||
4 | United States Treasury | ||
Bill, 1.432%, 4/26/18 | 200 | 199 | |
4 | United States Treasury | ||
Bill, 1.398%, 5/3/18 | 100 | 100 | |
4 | United States Treasury | ||
Bill, 1.446%, 5/31/18 | 1,350 | 1,343 | |
United States Treasury | |||
Bill, 1.482%, 6/7/18 | 100 | 100 | |
4 | United States Treasury | ||
Bill, 1.509%, 6/21/18 | 100 | 99 | |
1,841 | |||
Total Temporary Cash Investments | |||
(Cost $45,465) | 45,465 | ||
Total Investments (100.0%) | |||
(Cost $25,322,515) | 35,871,857 |
15
Dividend Appreciation Index Fund
Amount | |
($000) | |
Other Assets and Liabilities (0.0%) | |
Other Assets | |
Investment in Vanguard | 1,862 |
Receivables for Accrued Income | 32,504 |
Receivables for Capital Shares Issued | 11,752 |
Variation Margin Receivable— | |
Futures Contracts | 22 |
Other Assets | 200 |
Total Other Assets | 46,340 |
Liabilities | |
Payables for Investment Securities | |
Purchased | (12,418) |
Collateral for Securities on Loan | (13,626) |
Payables for Capital Shares | |
Redeemed | (6,186) |
Payables to Vanguard | (11,457) |
Total Liabilities | (43,687) |
Net Assets (100%) | 35,874,510 |
At January 31, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 25,648,644 |
Undistributed Net Investment Income | 24,002 |
Accumulated Net Realized Losses | (348,860) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 10,549,342 |
Futures Contracts | 1,382 |
Net Assets | 35,874,510 |
Investor Shares—Net Assets | |
Applicable to 26,688,648 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 1,143,698 |
Net Asset Value Per Share— | |
Investor Shares | $42.85 |
Amount | |
($000) | |
ETF Shares—Net Assets | |
Applicable to 268,121,071 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 28,716,993 |
Net Asset Value Per Share— | |
ETF Shares | $107.10 |
Admiral Shares—Net Assets | |
Applicable to 206,897,660 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 6,013,819 |
Net Asset Value Per Share— | |
Admiral Shares | $29.07 |
• 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 $13,117,000.
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 0.0%, 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 $13,626,000 of collateral received for securities
on loan.
4 Securities with a value of $1,742,000 been segregated as
initial margin for open futures contracts.
16
Dividend Appreciation Index Fund
Derivative Financial Instruments Outstanding as of Period End | ||||
Futures Contracts | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Long Futures Contracts | ||||
E-mini S&P 500 Index | March 2018 | 339 | 47,897 | 1,382 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized
gain (loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
17
Dividend Appreciation Index Fund
Statement of Operations
Year Ended | |
January 31, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends | 665,159 |
Interest1 | 267 |
Securities Lending—Net | 583 |
Total Income | 666,009 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 3,298 |
Management and Administrative—Investor Shares | 1,152 |
Management and Administrative—ETF Shares | 14,364 |
Management and Administrative—Admiral Shares | 2,858 |
Marketing and Distribution—Investor Shares | 193 |
Marketing and Distribution—ETF Shares | 933 |
Marketing and Distribution—Admiral Shares | 359 |
Custodian Fees | 279 |
Auditing Fees | 38 |
Shareholders’ Reports and Proxy—Investor Shares | 110 |
Shareholders’ Reports and Proxy—ETF Shares | 1,847 |
Shareholders’ Reports and Proxy—Admiral Shares | 160 |
Trustees’ Fees and Expenses | 21 |
Total Expenses | 25,612 |
Net Investment Income | 640,397 |
Realized Net Gain (Loss) | |
Investment Securities Sold1 | 1,358,559 |
Futures Contracts | 7,136 |
Realized Net Gain (Loss) | 1,365,695 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities1 | 5,379,121 |
Futures Contracts | 1,148 |
Change in Unrealized Appreciation (Depreciation) | 5,380,269 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 7,386,361 |
1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund | |
were $245,000, ($50,000), and $1,000, respectively. |
See accompanying Notes, which are an integral part of the Financial Statements.
18
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 640,397 | 572,766 |
Realized Net Gain (Loss) | 1,365,695 | 31,660 |
Change in Unrealized Appreciation (Depreciation) | 5,380,269 | 3,293,065 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 7,386,361 | 3,897,491 |
Distributions | ||
Net Investment Income | ||
Investor Shares | (20,628) | (18,763) |
ETF Shares | (510,111) | (474,719) |
Admiral Shares | (100,830) | (82,693) |
Realized Capital Gain | ||
Investor Shares | — | — |
ETF Shares | — | — |
Admiral Shares | — | — |
Total Distributions | (631,569) | (576,175) |
Capital Share Transactions | ||
Investor Shares | (75,461) | 2,117 |
ETF Shares | 579,800 | 1,201,844 |
Admiral Shares | 629,958 | 599,134 |
Net Increase (Decrease) from Capital Share Transactions | 1,134,297 | 1,803,095 |
Total Increase (Decrease) | 7,889,089 | 5,124,411 |
Net Assets | ||
Beginning of Period | 27,985,421 | 22,861,010 |
End of Period1 | 35,874,510 | 27,985,421 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $24,002,000 and $15,174,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
19
Dividend Appreciation Index Fund
Financial Highlights
Investor Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $34.67 | $30.40 | $31.37 | $28.59 | $25.23 |
Investment Operations | |||||
Net Investment Income | .7561 | .694 | .670 | .627 | . 540 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 8.165 | 4.275 | (.947) | 2.756 | 3.350 |
Total from Investment Operations | 8.921 | 4.969 | (.277) | 3.383 | 3.890 |
Distributions | |||||
Dividends from Net Investment Income | (.741) | (. 699) | (. 693) | (. 603) | (. 530) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (.741) | (. 699) | (. 693) | (. 603) | (. 530) |
Net Asset Value, End of Period | $42.85 | $34.67 | $30.40 | $31.37 | $28.59 |
Total Return2 | 26.02% | 16.46% | -0.93% | 11.86% | 15.51% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $1,144 | $994 | $875 | $1,450 | $2,966 |
Ratio of Total Expenses to Average Net Assets | 0.15% | 0.17% | 0.19% | 0.20% | 0.20% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.99% | 2.11% | 2.11% | 2.04% | 1.98% |
Portfolio Turnover Rate 3 | 14% | 19% | 22% | 20% | 3% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital
shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Dividend Appreciation Index Fund
Financial Highlights
ETF Shares | |||||
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $86.66 | $75.98 | $78.42 | $71.47 | $63.08 |
Investment Operations | |||||
Net Investment Income | 1.9511 | 1.810 | 1.759 | 1.645 | 1.421 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 20.408 | 10.696 | (2.380) | 6.890 | 8.357 |
Total from Investment Operations | 22.359 | 12.506 | (.621) | 8.535 | 9.778 |
Distributions | |||||
Dividends from Net Investment Income | (1.919) | (1.826) | (1.819) | (1.585) | (1.388) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (1.919) | (1.826) | (1.819) | (1.585) | (1.388) |
Net Asset Value, End of Period | $107.10 | $86.66 | $75.98 | $78.42 | $71.47 |
Total Return | 26.10% | 16.59% | -0.84% | 11.97% | 15.60% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $28,717 | $22,698 | $18,771 | $20,610 | $18,511 |
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.09% | 0.10% | 0.10% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.06% | 2.20% | 2.21% | 2.14% | 2.08% |
Portfolio Turnover Rate2 | 14% | 19% | 22% | 20% | 3% |
1 Calculated based on average shares outstanding.
2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital
shares, including ETF Creation Units.
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, | |||||
For a Share Outstanding | Jan. 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 |
Net Asset Value, Beginning of Period | $23.52 | $20.62 | $21.28 | $19.40 | $20.00 |
Investment Operations | |||||
Net Investment Income | . 528 2 | .492 | .478 | .445 | . 030 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 5.542 | 2.903 | (.644) | 1.865 | (.630) |
Total from Investment Operations | 6.070 | 3.395 | (.166) | 2.310 | (.600) |
Distributions | |||||
Dividends from Net Investment Income | (. 520) | (. 495) | (. 494) | (. 430) | — |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (. 520) | (. 495) | (. 494) | (. 430) | — |
Net Asset Value, End of Period | $29.07 | $23.52 | $20.62 | $21.28 | $19.40 |
Total Return3 | 26.11% | 16.58% | -0.83% | 11.94% | -3.00% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $6,014 | $4,294 | $3,215 | $2,776 | $760 |
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.09% | 0.10% | 0.10%4 |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.06% | 2.20% | 2.21% | 2.14% | 2.08%4 |
Portfolio Turnover Rate 5 | 14% | 19% | 22% | 20% | 3% |
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital
shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
22
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, 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 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 notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2018, 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 the notional amounts at each quarter-end during the period.
23
Dividend Appreciation Index Fund
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, 2015–2018), 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 event 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, 2018, 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.
24
Dividend Appreciation Index Fund
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses), shareholder reporting, and the proxy. 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, 2018, the fund had contributed to Vanguard capital in the amount of $1,862,000, representing 0.01% of the fund’s net assets and 0.74% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 35,826,392 | — | — |
Temporary Cash Investments | 43,624 | 1,841 | — |
Futures Contracts—Assets1 | 22 | — | — |
Total | 35,870,038 | 1,841 | — |
1 Represents variation margin on the last day of the reporting period. |
25
Dividend Appreciation Index Fund
D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
During the year ended January 31, 2018, the fund realized $1,049,955,000 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, 2018, the fund had $33,964,000 of ordinary income available for distribution. The fund used capital losses of $316,888,000 to offset taxable capital gains realized during the year ended January 31, 2018. At January 31, 2018, the fund had available capital losses totaling $347,478,000 to offset future net capital gains. Of this amount, $11,128,000 is subject to expiration on January 31, 2019. Capital losses of $336,350,000 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, 2018, the cost of investment securities for tax purposes was $25,322,515,000. Net unrealized appreciation of investment securities for tax purposes was $10,549,342,000, consisting of unrealized gains of $10,731,267,000 on securities that had risen in value since their purchase and $181,925,000 in unrealized losses on securities that had fallen in value since their purchase.
E. During the year ended January 31, 2018, the fund purchased $9,396,655,000 of investment securities and sold $8,268,097,000 of investment securities, other than temporary cash investments. Purchases and sales include $3,906,683,000 and $3,807,618,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
The fund purchased securities from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the year ended January 31, 2018, such purchases and sales were $969,125,000 and $214,244,000, respectively; these amounts are included in the purchases and sales of investment securities noted above.
26
Dividend Appreciation Index Fund
F. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||
2018 | 2017 | |||
Amount | Shares | Amount | Shares | |
($000) | (000) | ($000) | (000) | |
Investor Shares | ||||
Issued | 289,695 | 7,648 | 306,256 | 9,147 |
Issued in Lieu of Cash Distributions | 18,908 | 498 | 17,178 | 515 |
Redeemed | (384,064) | (10,128) | (321,317) | (9,762) |
Net Increase (Decrease)—Investor Shares | (75,461) | (1,982) | 2,117 | (100) |
ETF Shares | ||||
Issued | 4,404,813 | 47,483 | 3,087,183 | 37,802 |
Issued in Lieu of Cash Distributions | — | — | — | — |
Redeemed | (3,825,013) | (41,275) | (1,885,339) | (22,950) |
Net Increase (Decrease)—ETF Shares | 579,800 | 6,208 | 1,201,844 | 14,852 |
Admiral Shares | ||||
Issued | 1,640,606 | 63,331 | 1,490,587 | 65,899 |
Issued in Lieu of Cash Distributions | 89,401 | 3,462 | 74,470 | 3,292 |
Redeemed | (1,100,049) | (42,478) | (965,923) | (42,568) |
Net Increase (Decrease)—Admiral Shares | 629,958 | 24,315 | 599,134 | 26,623 |
G. Management has determined that no material events or transactions occurred subsequent to January 31, 2018, that would require recognition or disclosure in these financial statements.
27
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Dividend Appreciation Index Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Dividend Appreciation Index Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2018, the related statement of operations for the year ended January 31, 2018, the statement of changes in net assets for each of the two years in the period ended January 31, 2018, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2018, 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 ended January 31, 2018 and the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2018 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2018
We have served as the auditor of one or more investment companies in The Vanguard Group of
Funds since 1975.
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![](https://capedge.com/proxy/N-CSR/0000932471-18-005513/gividendappreciationindx31x1.jpg)
Special 2017 tax information (unaudited) for Vanguard Dividend Appreciation Index Fund
This information for the fiscal year ended January 31, 2018, is included pursuant to provisions of
the Internal Revenue Code.
The fund distributed $631,569,000 of qualified dividend income to shareholders during the
fiscal year.
For corporate shareholders, 95.9% 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 2018. (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, 2018
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 26.02% | 13.44% | 9.44% |
Returns After Taxes on Distributions | 25.44 | 12.90 | 9.01 |
Returns After Taxes on Distributions and Sale of Fund Shares | 15.73 | 10.66 | 7.68 |
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, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Dividend Appreciation Index Fund | 7/31/2017 | 1/31/2018 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,158.31 | $0.71 |
ETF Shares | 1,000.00 | 1,158.58 | 0.44 |
Admiral Shares | 1,000.00 | 1,158.58 | 0.44 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,024.55 | $0.66 |
ETF Shares | 1,000.00 | 1,024.80 | 0.41 |
Admiral Shares | 1,000.00 | 1,024.80 | 0.41 |
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 0.13% for Investor Shares, 0.08% for ETF Shares, and 0.08% 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 (184/365).
32
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.
34
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 201 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. 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.
Interested Trustees1
F. William McNabb III
Mr. McNabb has served as chairman of the board of Vanguard and of each of the investment companies served by Vanguard since January 2010; as a trustee of each of the investment companies served by Vanguard since 2009; and as director of Vanguard since 2008. Mr. McNabb served as chief executive officer and president of Vanguard and each of the investment companies served by Vanguard from 2008 to 2017 and as a managing director of Vanguard from 1995 to 2008. Mr. McNabb also serves as a director of Vanguard Marketing Corporation. He was born in 1957.
Mortimer J. Buckley
Mr. Buckley has served as chief executive officer of Vanguard since January 2018; as chief executive officer, president, and trustee of each of the investment companies served by Vanguard since January 2018; and as president and director of Vanguard since 2017. Previous positions held by Mr. Buckley at Vanguard include chief investment officer (2013–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006). Mr. Buckley also served as chairman of the board of the Children’s Hospital of Philadelphia from 2011 to 2017. He was born in 1969.
Independent Trustees
Emerson U. Fullwood
Mr. Fullwood has served as trustee since July 2008. Mr. Fullwood is the former executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Previous positions held at Xerox by Mr. Fullwood include president of the Worldwide Channels Group, president of Latin America, executive chief staff officer of Developing Markets, and president of Worldwide Customer Services. Mr. Fullwood is the executive in residence at the Rochester Institute of Technology, where he was the 2009–2010 Distinguished Minett Professor. Mr. Fullwood serves as lead director of SPX FLOW, Inc. (multi-industry manufacturing); director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College; and a trustee of the University of Rochester. He was born in 1948.
Amy Gutmann
Dr. Gutmann has served as trustee since June 2006. Dr. Gutmann has served as the president of the University of Pennsylvania since 2004. She is the Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they
are officers of the Vanguard funds.
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. Dr. Gutmann also serves as a trustee of the National Constitution Center. She was born in 1949.
JoAnn Heffernan Heisen
Ms. Heisen has served as trustee since July 1998. Ms. Heisen is the former corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and a former member of its executive committee (1997–2008). During her tenure at Johnson & Johnson, Ms. Heisen held multiple roles, including: chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991). Ms. Heisen serves as a director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation and as a member of the advisory board of the Institute for Women’s Leadership at Rutgers University. She was born in 1950.
F. Joseph Loughrey
Mr. Loughrey has served as trustee since October 2009. Mr. Loughrey is the former president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Mr. Loughrey serves as chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; as a director of the V Foundation for Cancer Research; and as a 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. He was born in 1949.
Mark Loughridge
Mr. Loughridge has served as trustee since March 2012. Mr. Loughridge is the former senior vice president and chief financial officer (retired 2013) at IBM (information technology services). Mr. Loughridge also served as a fiduciary member of IBM’s retirement plan committee (2004–2013). Previous positions held by Mr. Loughridge at IBM include senior vice president and general manager of Global Financing (2002–2004), vice president and controller (1998–2002), and a variety of management roles. Mr. Loughridge serves as a member of the Council on Chicago Booth. He was born in 1953.
Scott C. Malpass
Mr. Malpass has served as trustee since March 2012. Mr. Malpass has served as chief investment officer since 1989 and as vice president since 1996 at the University of Notre Dame. Mr. Malpass serves as an assistant professor of finance at the Mendoza College of Business at the University of Notre Dame and is a member of the Notre Dame 403(b) investment committee. Mr. Malpass also serves as chairman of the board of TIFF Advisory Services, Inc.; as a member of the board of Catholic Investment Services, Inc. (investment advisors); as a member of the board of advisors for Spruceview Capital Partners; and as a member of the board of superintendence of the Institute for the Works of Religion. He was born in 1962.
Deanna Mulligan
Ms. Mulligan has served as trustee since January 2018. Ms. Mulligan has served as president since 2010 and chief executive officer since 2011 at The Guardian Life Insurance Company of America. Previous positions held by Ms. Mulligan at The Guardian Life Insurance Company of America include chief operating officer (2010–2011) and executive vice president of Individual Life and Disability (2008–2010). Ms. Mulligan serves as a board member of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. She also serves as a trustee of the Economic Club of New York and the Bruce Museum (arts and science) and as a member of the Advisory Council for the Stanford Graduate School of Business. She was born in 1963.
André F. Perold
Dr. Perold has served as trustee since December 2004. Dr. Perold is the George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Dr. Perold serves as chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Dr. Perold also serves as an overseer of the Museum of Fine Arts Boston. He was born in 1952.
Sarah Bloom Raskin
Ms. Raskin has served as trustee since January 2018. Ms. Raskin served as deputy secretary of the United States Department of the Treasury (2014–2017), as a governor of the Federal Reserve Board (2010–2014), and as commissioner of financial regulation of the State of Maryland (2007–2010). Ms. Raskin also
served as a member of the Neighborhood Reinvestment Corporation’s board of directors (2012–2014). Ms. Raskin serves as a director of i(x) Investments, LLC. She was born in 1961.
Peter F. Volanakis
Mr. Volanakis has served as trustee since July 2009. Mr. Volanakis is the retired president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and a former director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Mr. Volanakis served as a director of SPX Corporation (multi-industry manufacturing) (2012) and as an overseer of the Amos Tuck School of Business Administration at Dartmouth College (2001–2013). Mr. Volanakis serves as chairman of the board of trustees of Colby-Sawyer College and is a member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables). He was born in 1955.
Executive Officers
Glenn Booraem
Mr. Booraem, a principal of Vanguard, has served as investment stewardship officer of each of the investment companies served by Vanguard since February 2017. Mr. Booraem served as treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard. He was born in 1967.
Christine M. Buchanan
Ms. Buchanan, a principal of Vanguard, has served as treasurer of each of the investment companies served by Vanguard since November 2017. She also serves as global head of Fund Administration at Vanguard. Ms. Buchanan served as a partner at KPMG LLP (audit, tax, and advisory services) (2005–2017). She was born in 1970.
Thomas J. Higgins
Mr. Higgins, a principal of Vanguard, has served as chief financial officer of each of the investment companies served by Vanguard since 2008.
Mr. Higgins served as treasurer of each of the investment companies served by Vanguard (1998–2008). He was born in 1957.
Peter Mahoney
Mr. Mahoney, a principal of Vanguard, has served as controller of each of the investment companies served by Vanguard since May 2015. Mr. Mahoney served as head of International Fund Services at Vanguard (2008–2014). He was born in 1974.
Anne E. Robinson
Ms. Robinson has served as general counsel of Vanguard since September 2016; as secretary of Vanguard and of each of the investment companies served by Vanguard since September 2016; as director and senior vice president of Vanguard Marketing Corporation since September 2016; and as a managing director of Vanguard since August 2016. Ms. Robinson served as managing director and general counsel of Global Cards and Consumer Services at Citigroup (2014–2016). She served as counsel at American Express (2003–2014). She was born in 1970.
Michael Rollings
Mr. Rollings, a managing director of Vanguard since June 2016, has served as finance director of each of the investment companies served by Vanguard since November 2017 and as a director of Vanguard Marketing Corporation since June 2016. Mr. Rollings served as treasurer of each of the investment companies served by Vanguard from February 2017 to November 2017. He also served as the executive vice president and chief financial officer of MassMutual Financial Group (2006–2016). He was born in 1963.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollins |
Chris D. McIsaac | |
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 |
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P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
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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: 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, 2018: $240,000
Fiscal Year Ended January 31, 2017: $216,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended January 31, 2018: $8,424,459
Fiscal Year Ended January 31, 2017: $9,629,849
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, 2018: $3,194,093
Fiscal Year Ended January 31, 2017: $2,717,627
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, 2018: $274,313
Fiscal Year Ended January 31, 2017: $254,050
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, 2018: $0
Fiscal Year Ended January 31, 2017: $214,225
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, 2018: $274,313
Fiscal Year Ended January 31, 2017: $468,275
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: JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, Sarah Bloom Raskin, 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: Disclosure of Securities Lending Activities for Closed-End Management
Investment Companies.
Not Applicable.
Item 13: 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/ MORTIMER J. BUCKLEY* |
MORTIMER J. BUCKLEY | |
CHIEF EXECUTIVE OFFICER | |
Date: March 20, 2018 |
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/ MORTIMER J. BUCKLEY * |
MORTIMER J. BUCKLEY | |
CHIEF EXECUTIVE OFFICER | |
Date: March 20, 2018 | |
VANGUARD SPECIALIZED FUNDS | |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER | |
Date: March 20, 2018 |
* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on January 18, 2018 see file
Number 33-32216, Incorporated by Reference.