N-CSR 1 whitehall_final.htm whitehall_final.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number:   811-07443

 

Name of Registrant:

 Vanguard Whitehall Funds

 

Address of Registrant:

 P.O. Box 2600
  Valley Forge, PA 19482

 

Name and address of agent for service:

 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: October 31

 

Date of reporting period: November 1, 2015 – October 31, 2016

 

Item 1: Reports to Shareholders

 


 
Annual Report | October 31, 2016
Vanguard Selected Value Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Advisors’ Report. 7
Fund Profile. 12
Performance Summary. 13
Financial Statements. 15
Your Fund’s After-Tax Returns. 28
About Your Fund’s Expenses. 29
Glossary. 31

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard Selected Value Fund returned 2.20% for the 12 months ended October 31, 2016, trailing the 7.84% return of its benchmark, the Russell Midcap Value Index, and the 4.65% average return of its mid-capitalization value fund peers.

• Value stocks performed better than their growth counterparts, while large- and small-cap stocks exceeded mid-caps.

• As always, Selected Value’s three advisors depended on extensive research as they hunted for undervalued mid-cap companies.

• The fund’s consumer discretionary, industrial, and energy holdings all lagged their benchmark counterparts. Consumer discretionary lagged the most, finishing well behind the benchmark. Within that sector, cruise lines were the main culprit. Shortfalls in industrials and energy also hurt returns.

• For the ten years ended October 31, 2016, the fund’s average annual return of 6.95% slightly trailed that of its benchmark, which bears no expenses, and surpassed that of its peers.

Total Returns: Fiscal Year Ended October 31, 2016  
  Total
  Returns
Vanguard Selected Value Fund 2.20%
Russell Midcap Value Index 7.84
Mid-Cap Value Funds Average 4.65
Mid-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
 
Total Returns: Ten Years Ended October 31, 2016  
  Average
  Annual Return
Selected Value Fund 6.95%
Russell Midcap Value Index 7.19
Mid-Cap Value Funds Average 6.34
Mid-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  

The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.

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Expense Ratios    
Your Fund Compared With Its Peer Group    
    Peer Group
  Fund Average
Selected Value Fund 0.39% 1.25%

 

The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.35%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.

Peer group: Mid-Cap Value Funds.

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.

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funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

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for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors

shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

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But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

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Advisors’ Report

For the fiscal year ended October 31, 2016, Vanguard Selected Value Fund returned 2.20%. Your fund is managed by three independent advisors. This provides exposure to distinct yet complementary investment approaches, enhancing the fund’s diversification. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.

The advisors, the percentage and amount of fund assets each manages, and a brief description of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal period and of how portfolio positioning reflects this assessment. (Please note that the Pzena Investment

Management discussion refers to industry sectors as defined by Russell classifications rather than the Global Industry Classification Standard used elsewhere in this report.) These comments were prepared on November 17, 2016.

Barrow, Hanley, Mewhinney &
Strauss, LLC

Portfolio Managers:

James P. Barrow,
Executive Director

Mark Giambrone,
Managing Director

The uncertainty and volatility of the last 12 months have created significant headwinds for our strategy. We began

Vanguard Selected Value Fund Investment Advisors  
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Barrow, Hanley, Mewhinney & 59 5,217 Conducts fundamental research on individual stocks
Strauss, LLC     exhibiting traditional value characteristics:
      price/earnings and price/book ratios below the market
      average and dividend yields above the market average.
Pzena Investment Management, 21 1,849 Uses a fundamental, bottom-up, deep-value-oriented
LLC     investment strategy. Seeks to buy good businesses at
      low prices, focusing exclusively on companies that are
      underperforming their historically demonstrated
      earnings power.
Donald Smith & Co., Inc. 18 1,567 Conducts fundamental research on the lowest
      price-to-tangible book value companies. Research
      focuses on underlying quality of book value and assets,
      and on long-term earnings potential.
Cash Investments 2 169 These short-term reserves are invested by Vanguard in
      equity index products to simulate investment in stocks.
      Each advisor may also maintain a cash position.

 

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2016 anticipating several Federal Reserve rate increases, but global concerns sent the market plummeting early on, and investors began considering the possibility of negative interest rates in the United States. This first-quarter unease was followed by the unexpected Brexit vote toward the end of the second quarter—and all these events occurred during our own election cycle.

This scenario could not have been worse for our expectations and positioning, as we believe rates will rise slowly, economic growth will continue, and there will be some global stability. The already expensive areas of the market that benefit both from their defensive characteristics and lower-rate environments––including utilities and REITs, where we are underweight––did well over the period. Conversely, groups that need interest rates and the economy to improve steadily––including consumer discretionary, consumer finance, and industrials, where we are overweight––did poorly.

We believe we are positioned to take advantage of value in the market and that we are past the point of maximum uncertainty; we expect our performance to slowly recover throughout the year. An election year creates its own uncertainty and usually exerts some pressure on health care names (in which we are overweight); the largest overhang may not disappear until after the election. At that point, however, we expect valuations and cash flows to matter most. The portfolio is well situated to benefit from such an environment.

We continue to benefit from a pickup in merger and acquisition activity, as both St. Jude Medical and Tyco International were taken out during the period. If we are finding good companies with attractive valuations and cash flow, and the market doesn’t recognize this, a financial or strategic buyer certainly validates our process.

We are underweight utilities, technology, energy, and REITs. We believe traditional yield plays like utilities and REITs have had substantial runs thanks to a continued low interest rate environment and have very little room for valuation upside or meaningful yield relative to their own histories. We also see considerable risk to these valuation levels when interest rates rise.

Pzena Investment Management, LLC

Portfolio Managers:

Richard Pzena, Founder,
Chief Executive Officer, and
Co-Chief Investment Officer

John Flynn, Principal

Eli Rabinowich, Principal

Equity market returns were volatile over the 12 months, marked by plummeting energy prices in early 2016 and a surprise Brexit vote in June. Despite these head-winds, markets were solidly positive for the year. Our portfolio performed in line with the Russell Midcap Value Index, the fund’s benchmark, benefiting from positioning in technology and stock selection within energy and hindered

8

 

by the underperformance of some consumer discretionary and producer durables holdings.

Hard drive manufacturer Seagate Technology was the portfolio’s top individual contributor. We added to our position in the second quarter of 2016 as the stock declined on personal computer unit weakness that led to a severe decline in gross margins. The stock rebounded sharply during the most recent quarter as the company increased guidance on its cost-cutting efforts and end-market recovery. Also performing well in technology was Hewlett Packard Enterprise (enterprise information technology) as management continues to disassemble the business in order to unlock value. Within producer durables, Terex Corporation (machinery manufacturing) was a top contributor, helped by its continued initiatives to simplify the business and improve returns.

Staples (office supplies) and News Corp. (media and information services) were the leading detractors in the portfolio. Staples struggled as it announced that it would shut its stores in the United Kingdom, and may do the same in Continental Europe, because of declining sales. The company was hurt most from failing to get regulatory approval for its merger deal with Office Depot. We had long believed such an outcome to be possible and had limited our position size accordingly, and we believe the stock remains attractive. News Corp. shares were weak as the company showed continued deterioration in its newspapers business. The stock remains attractive based on its low valuation of 0.6 times book value and more than $3 per share in cash.

The exploitable pockets of cheapness continue to be in financial services, information technology (“old tech” companies that are more exposed to enterprise spending), and, to a growing extent, industrial cyclicals—areas where we have our largest exposures. We have significantly less exposure to sectors deemed “safe” by investors, such as health care, consumer staples, and utilities, where we believe valuations are at unattractive levels.

Donald Smith & Co., Inc.

Portfolio Managers:

Donald G. Smith, President
and Chief Investment Officer

Richard L. Greenberg, CFA,
Senior Vice President

The portfolio continues to meet our criteria of owning a concentrated selection of low price-to-tangible book value stocks with attractive long-term earnings potential. It currently sells at 106% of tangible book value and 8.2 times our estimate of “normalized earnings.” In contrast, the Standard & Poor’s 500 Index sells at over 7 times tangible book value and 17 times normalized earnings.

The rebound in precious metals and energy mirrored the rise in the underlying commodities and contributed most to returns. Top contributors included Yamana Gold (+62.6%) and Kinross Gold Corporation (+92.0%). WPX Energy (+58.3%) and Nabors (+18.5%) also contributed.

9

 

Continued surplus capacity and declining day rates meant that offshore drillers, such as Noble Corp. (–63.3%), did not do well.

While rebounding oil prices helped the energy sector, they also hindered the performance of previously strong airline/ aircraft leasing stocks, including JetBlue (–29.6%), Air France (–16.8%), and AerCap (–0.94%). Lower interest rates tend to push down financial stocks. Our financial exposure is primarily limited to insurance stocks, which on average lagged the market with single-digit returns. Everest Re was an exception, rising 14.4%. In technology, Ingram Micro (+24.9%) received a takeover offer from a Chinese conglomerate.

We eliminated our positions in a number of holdings, most of which had done well and met our targets. These included American National Insurance Company, Coeur Mining, New Gold, Royal Caribbean Cruises, Valero Energy Corporation, and Validus Holdings. We also trimmed positions in Aspen Insurance, Everest RE, Ingram Micro, JetBlue, Kinross Gold, WPX Energy, and XL Group, and added to our positions in AerCap, Air France-KLM, Celestica, MFA Financial, and Micron. We reduced our holdings in Yamana earlier in the period, and then bought some back later at a lower price. Three new names were added to the portfolio: Axis Capital, IAMGOLD Corporation, and Toll Brothers. Axis Capital is a Bermuda-based insurer/ reinsurer; IAMGOLD is an 800,000-ounce gold producer with mines in Africa and Canada; and Toll Brothers is a national builder of luxury homes.

Our largest position is in AerCap. The stock sells at 89% book value, below fair market value, and about 6 times our 2- to 4-year earnings estimate. AerCap has been aggressively selling planes at premiums to book value and redeploying proceeds to a stock buyback program. Our largest industry weightings are to insurance, technology, airlines/aircraft leasing, and metals.

The portfolio’s six insurance companies sell at an average of 95% of tangible book value. Hurt by low interest rates and the attendant low returns on investment portfolios, returns on equity have generally been in the high single digits. Higher interest rates, coupled with stock buyback programs at all six companies and the potential for takeover, should buoy the stocks. In technology, it appears that a better supply/demand situation has developed in memory, providing underlying support to Micron.

Finally, the precious metals stocks have been an obvious beneficiary of the recent rebound in gold and silver prices. While it may be difficult to predict the future direction of precious metal prices, several factors give us comfort in our position.

On a macro level, these factors include worldwide loose monetary policy, which has led to negative real (and in many cases nominal) interest rates in much of the developed world; strong and persistent central bank purchases of gold; rising wealth in countries with a historical affinity for gold (China and India); and a benign

10

 

outlook for gold supply, with few sizable projects on the horizon to replace depletion from older mines.

Our investment in the miners themselves is not necessarily predicated on rising gold prices. Each of them has company-specific projects or catalysts that have the potential to lead to sharply higher earnings, even assuming flat gold prices. The stocks are cheap on both historical price/book

value and price/revenues metrics, while cost-cutting efforts over the past few years should allow the companies to be at least cash flow breakeven, even if gold prices turn lower. Our preference has been to purchase companies that have the most sales and reserves relative to enterprise value; they also must have the balance-sheet strength to survive an extended period of lower prices.

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Selected Value Fund

Fund Profile
As of October 31, 2016

Portfolio Characteristics    
      DJ
      U.S.
    Russell Total
    Midcap Market
    Value FA
  Fund Index Index
Number of Stocks 123 565 3,833
Median Market Cap $9.2B $11.2B $53.5B
Price/Earnings Ratio 20.3x 23.7x 23.1x
Price/Book Ratio 1.7x 1.8x 2.7x
Return on Equity 11.7% 10.0% 16.6%
Earnings Growth      
Rate 10.9% 7.9% 8.4%
Dividend Yield 2.1% 2.3% 2.1%
Foreign Holdings 10.9% 0.0% 0.0%
Turnover Rate 27% — —
Ticker Symbol VASVX — —
Expense Ratio1 0.39% — —
30-Day SEC Yield 1.78% — —
Short-Term      
Reserves 1.7% — —

 

Sector Diversification (% of equity exposure)
    Russell DJ
    Midcap U.S. Total
    Value Market
  Fund Index FA Index
Consumer      
Discretionary 15.5% 8.7% 12.6%
Consumer Staples 3.4 3.6 8.9
Energy 7.5 9.9 6.6
Financials 26.4 18.3 13.9
Health Care 4.0 4.5 13.4
Industrials 16.3 12.4 10.5
Information      
Technology 11.2 9.0 21.0
Materials 7.9 5.7 3.2
Real Estate 3.4 14.7 4.2
Telecommunication      
Services 0.1 1.5 2.3
Utilities 4.3 11.7 3.4

 

Volatility Measures    
  Russell DJ
  Midcap U.S. Total
  Value Market
  Index FA Index
R-Squared 0.86 0.86
Beta 1.02 1.03

These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.

 

Ten Largest Holdings (% of total net assets)
AerCap Holdings NV Trading Companies &  
  Distributors 2.1%
Royal Caribbean Cruises Hotels, Resorts &  
Ltd. Cruise Lines 2.0
Willis Towers Watson    
plc Insurance Brokers 2.0
Ingram Micro Inc. Technology  
  Distributors 1.9
Micron Technology Inc. Semiconductors 1.9
Capital One Financial    
Corp. Consumer Finance 1.9
Hanesbrands Inc. Apparel, Accessories  
  & Luxury Goods 1.9
Reynolds American Inc. Tobacco 1.9
Norwegian Cruise Line Hotels, Resorts &  
Holdings Ltd. Cruise Lines 1.9
Stanley Black & Decker    
Inc. Industrial Machinery 1.9
Top Ten   19.4%

The holdings listed exclude any temporary cash investments and equity index products.

Investment Focus


1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratio was 0.35%.

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Selected Value Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: October 31, 2006, Through October 31, 2016
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended October 31, 2016  
        Final Value
  One Five Ten of a $10,000
  Year Years Years Investment
Selected Value Fund 2.20% 12.16% 6.95% $19,585
Russell Midcap Value Index 7.84 14.07 7.19 20,033
Mid-Cap Value Funds Average 4.65 12.27 6.34 18,486
Dow Jones U.S. Total Stock Market        
Float Adjusted Index 4.21 13.29 6.87 19,436

 

See Financial Highlights for dividend and capital gains information.

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Selected Value Fund

Fiscal-Year Total Returns (%): October 31, 2006, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
Selected Value Fund 2/15/1996 10.53% 15.23% 7.39%

 

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Selected Value Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value•
    Shares ($000)
Common Stocks (96.4%)1    
Consumer Discretionary (13.5%)  
  Royal Caribbean Cruises    
  Ltd. 2,344,500 180,222
  Hanesbrands Inc. 6,499,800 167,045
* Norwegian Cruise Line    
  Holdings Ltd. 4,283,100 166,484
  Whirlpool Corp. 989,800 148,292
  L Brands Inc. 1,671,200 120,644
  Meredith Corp. 1,495,544 67,823
^,2 SeaWorld Entertainment    
  Inc. 4,546,700 63,699
  Interpublic Group of Cos.    
  Inc. 2,152,894 48,203
  News Corp. Class A 3,579,375 43,382
  Omnicom Group Inc. 531,150 42,396
  Dana Inc. 2,360,300 36,538
  Hilton Worldwide    
  Holdings Inc. 1,586,544 35,856
* Toll Brothers Inc. 1,022,000 28,044
  Staples Inc. 3,090,600 22,870
* Adient plc 343,886 15,650
      1,187,148
Consumer Staples (3.0%)    
  Reynolds American Inc. 3,028,476 166,808
  Coca-Cola European    
  Partners plc 1,820,000 69,961
  Kellogg Co. 337,425 25,351
      262,120
Energy (7.3%)    
  Devon Energy Corp. 3,382,600 128,167
^ Vermilion Energy Inc. 2,812,100 110,459
  PBF Energy Inc. Class A 4,662,257 101,637
^ Golar LNG Ltd. 4,424,608 96,855
  Murphy Oil Corp. 1,521,653 39,365
* WPX Energy Inc. 3,037,079 32,983
  Cenovus Energy Inc. 2,004,475 28,945

 

      Market
      Value•
    Shares ($000)
  Baker Hughes Inc. 437,251 24,224
  FMC Technologies Inc. 637,475 20,571
  Superior Energy Services    
  Inc. 1,120,132 15,861
  Noble Corp. plc 3,160,316 15,612
  Rowan Cos. plc Class A 996,725 13,226
  Nabors Industries Ltd. 885,000 10,531
^ Tidewater Inc. 556,400 963
*,^ Paragon Offshore plc 870,105 243
      639,642
Financials (25.9%)    
  Willis Towers Watson plc 1,392,045 175,258
  Capital One Financial    
  Corp. 2,265,500 167,738
  Discover Financial    
  Services 2,845,200 160,270
  New York Community    
  Bancorp Inc. 10,701,500 153,673
  Unum Group 4,292,805 151,965
  FNF Group 3,258,500 117,013
  KeyCorp 7,651,825 108,044
  Fifth Third Bancorp 4,809,000 104,644
  Navient Corp. 7,757,647 99,143
  Ameriprise Financial Inc. 1,018,600 90,034
  Voya Financial Inc. 2,829,840 86,452
  Axis Capital Holdings Ltd. 1,509,138 85,976
  CNA Financial Corp. 2,259,996 82,648
  Everest Re Group Ltd. 401,462 81,705
  XL Group Ltd. 1,631,430 56,611
  Comerica Inc. 1,040,025 54,175
^ Element Fleet    
  Management Corp. 5,546,200 54,044
  Valley National Bancorp 5,402,200 53,266
  Regions Financial Corp. 4,105,725 43,972
  Invesco Ltd. 1,501,950 42,190
  Franklin Resources Inc. 1,059,950 35,678
  Webster Financial Corp. 765,100 30,910
* SLM Corp. 4,030,500 28,415

 

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Selected Value Fund    
 
 
 
      Market
      Value•
    Shares ($000)
  Validus Holdings Ltd. 541,925 27,692
  Torchmark Corp. 426,183 27,024
  Endurance Specialty    
  Holdings Ltd. 260,000 23,907
  MFA Financial Inc. 3,014,000 22,032
  Legg Mason Inc. 639,775 18,374
  Allstate Corp. 269,225 18,280
  Progressive Corp. 495,225 15,604
  Synovus Financial Corp. 420,221 13,897
  Hartford Financial Services    
  Group Inc. 313,800 13,842
*,^ ECN Capital Corp. 5,545,900 12,115
  Aspen Insurance Holdings    
  Ltd. 200,475 9,673
  Genworth Financial Inc.    
  Class A 2,224,850 9,211
  Assurant Inc. 80,045 6,445
      2,281,920
Health Care (3.5%)    
  Cigna Corp. 1,327,025 157,690
  Cardinal Health Inc. 1,903,900 130,779
  Aetna Inc. 154,800 16,618
      305,087
Industrials (17.5%)    
* AerCap Holdings NV 4,443,188 182,659
  Stanley Black & Decker    
  Inc. 1,440,975 164,041
  Owens Corning 3,081,732 150,327
* Johnson Controls    
  International plc 3,438,864 138,655
* Spirit AeroSystems    
  Holdings Inc. Class A 2,715,407 136,748
  Eaton Corp. plc 2,018,900 128,745
  KBR Inc. 6,222,500 92,155
* JetBlue Airways Corp. 5,138,340 89,818
  Orbital ATK Inc. 1,048,400 77,959
  Ryder System Inc. 1,008,600 69,987
  CNH Industrial NV 7,519,700 58,503
*,^ Air France-KLM ADR 8,488,085 51,608
  Terex Corp. 2,115,440 50,517
  Parker-Hannifin Corp. 375,225 46,059
  Dover Corp. 664,325 44,437
  AECOM 1,380,510 38,447
  Actuant Corp. Class A 1,038,025 23,148
      1,543,813
Information Technology (10.4%)  
  Ingram Micro Inc. 4,595,009 170,934
* Micron Technology Inc. 9,780,588 167,835
  Microchip Technology Inc. 2,250,200  136,250
  Total System Services    
  Inc. 1,686,036 84,099
  Hewlett Packard    
  Enterprise Co. 2,214,625 49,763

 

      Market
      Value•
    Shares ($000)
  ON Semiconductor Corp. 4,216,096 49,202
  Avnet Inc. 1,102,016 46,230
  Seagate Technology plc 1,257,575 43,147
  Flex Ltd. 2,982,200 42,317
* Celestica Inc. 2,887,239 34,214
  HP Inc. 2,175,125 31,517
  Genpact Ltd. 1,016,327 23,365
  Arrow Electronics Inc. 304,204 18,593
  Jabil Circuit Inc. 711,890 15,192
  CDW Corp. 145,485 6,534
      919,192
Materials (7.8%)    
* Kinross Gold Corp. 42,300,000 163,278
^ CRH plc ADR 4,798,799 155,001
  FMC Corp. 2,840,000 133,168
  Yamana Gold Inc.    
  (New York Shares) 20,405,340 72,643
* Axalta Coating Systems    
  Ltd. 2,846,500 71,504
  Celanese Corp. Class A 811,000 59,138
* IAMGOLD Corp. 9,238,132 37,045
      691,777
Real Estate (3.3%)    
2 GEO Group Inc. 3,840,700 92,023
  Host Hotels & Resorts    
  Inc. 5,038,900 78,002
  Lamar Advertising Co.    
  Class A 840,850 53,352
  Corporate Office    
  Properties Trust 1,861,110 49,673
  Hospitality Properties    
  Trust 583,800 15,973
      289,023
Utilities (4.2%)    
  Xcel Energy Inc. 2,961,137 123,035
  Pinnacle West Capital    
  Corp. 1,443,700 109,909
  CenterPoint Energy Inc. 2,167,817 49,426
  Edison International 558,150 41,013
  PG&E Corp. 312,425 19,408
  Exelon Corp. 483,693 16,480
  NRG Energy Inc. 796,234 8,464
      367,735
Total Common Stocks    
(Cost $6,952,508)   8,487,457

 

16

 

Selected Value Fund      
 
 
 
        Market
        Value•
      Shares ($000)
Temporary Cash Investments (4.8%)1  
Money Market Fund (4.7%)    
3,4 Vanguard Market Liquidity    
  Fund, 0.718% 4,108,011 410,842
 
      Face  
      Amount  
      ($000)  
U.S. Government and Agency Obligations (0.1%)
5,6 Freddie Mac Discount Notes,    
  0.300%, 11/8/16   600 600
6 United States Treasury Bill,    
  0.296%–0.320%, 11/25/16 5,700 5,699
6 United States Treasury Bill,    
  0.257–0.292%, 12/29/16 1,800 1,799
6 United States Treasury Bill,    
  0.454%, 4/20/17   200 200
        8,298
Total Temporary Cash Investments  
(Cost $419,115)     419,140
Total Investments (101.2%)    
(Cost $7,371,623)     8,906,597
Other Assets and Liabilities (-1.2%)  
Other Assets     20,626
Liabilities 4     (125,557)
        (104,931)
Net Assets (100%)      
Applicable to 323,065,536 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 8,801,666
Net Asset Value Per Share   $27.24

 

  Amount
  ($000)
Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 8,340,033
Affiliated Vanguard Funds 410,842
Other Affiliated Issuers 155,722
Total Investments in Securities 8,906,597
Investment in Vanguard 687
Receivables for Investment Securities  
Sold 9,597
Receivables for Accrued Income 7,197
Receivables for Capital Shares Issued 2,730
Other Assets 415
Total Assets 8,927,223
Liabilities  
Payables for Investment Securities  
Purchased (6,614)
Collateral for Securities on Loan (93,713)
Payables to Investment Advisor (3,716)
Payables for Capital Shares Redeemed (10,483)
Payables to Vanguard (10,716)
Other Liabilities (315)
Total Liabilities (125,557)
Net Assets 8,801,666

 

17

 

Selected Value Fund

At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 6,888,746
Undistributed Net Investment Income 118,432
Accumulated Net Realized Gains 261,298
Unrealized Appreciation (Depreciation)  
Investment Securities 1,534,974
Futures Contracts (1,784)
Net Assets 8,801,666

 

• 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 $87,621,000.
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 98.4% and 2.8%, respectively, of
net assets.
2 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
4 Includes $93,713,000 of collateral received for securities on loan.
5 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the
Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange
for senior preferred stock.
6 Securities with a value of $7,798,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

18

 

Selected Value Fund  
 
 
Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends1 208,155
Interest 2,122
Securities Lending—Net 902
Total Income 211,179
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 19,809
Performance Adjustment (3,390)
The Vanguard Group—Note C  
Management and Administrative 13,235
Marketing and Distribution 1,820
Custodian Fees 97
Auditing Fees 36
Shareholders’ Reports 163
Trustees’ Fees and Expenses 11
Total Expenses 31,781
Expenses Paid Indirectly (439)
Net Expenses 31,342
Net Investment Income 179,837
Realized Net Gain (Loss)  
Investment Securities Sold 279,830
Futures Contracts 14,324
Foreign Currencies (32)
Realized Net Gain (Loss) 294,122
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (271,390)
Futures Contracts (7,939)
Change in Unrealized Appreciation (Depreciation) (279,329)
Net Increase (Decrease) in Net Assets Resulting from Operations 194,630
1 Dividends are net of foreign withholding taxes of $526,000.  

 

See accompanying Notes, which are an integral part of the Financial Statements.

19

 

Selected Value Fund    
 
 
Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 179,837 163,790
Realized Net Gain (Loss) 294,122 379,722
Change in Unrealized Appreciation (Depreciation) (279,329) (444,590)
Net Increase (Decrease) in Net Assets Resulting from Operations 194,630 98,922
Distributions    
Net Investment Income (150,373) (138,609)
Realized Capital Gain1 (347,588) (401,073)
Total Distributions (497,961) (539,682)
Capital Share Transactions    
Issued 1,575,113 1,787,330
Issued in Lieu of Cash Distributions 457,613 496,488
Redeemed (2,591,075) (2,333,003)
Net Increase (Decrease) from Capital Share Transactions (558,349) (49,185)
Total Increase (Decrease) (861,680) (489,945)
Net Assets    
Beginning of Period 9,663,346 10,153,291
End of Period2 8,801,666 9,663,346

1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $29,192,000 and $33,623,000, 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 $118,432,000 and $106,036,000.

See accompanying Notes, which are an integral part of the Financial Statements.

20

 

Selected Value Fund          
 
 
Financial Highlights          
 
 
For a Share Outstanding     Year Ended October 31,
Throughout Each Period 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $28.15 $29.49 $28.07 $21.01 $18.81
Investment Operations          
Net Investment Income . 5271 .478 .415 . 395 .405
Net Realized and Unrealized Gain (Loss)          
on Investments .030 (.245) 2.555 7.105 2.122
Total from Investment Operations .557 .233 2.970 7.500 2.527
Distributions          
Dividends from Net Investment Income (. 443) (. 404) (. 330) (. 440) (. 327)
Distributions from Realized Capital Gains (1.024) (1.169) (1.220) — —
Total Distributions (1.467) (1.573) (1.550) (.440) (.327)
Net Asset Value, End of Period $27.24 $28.15 $29.49 $28.07 $21.01
 
Total Return2 2.20% 0.88% 11.02% 36.43% 13.64%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $8,802 $9,663 $10,153 $7,019 $4,337
Ratio of Total Expenses to Average Net Assets3 0.35% 0.39% 0.41% 0.43% 0.38%
Ratio of Net Investment Income to          
Average Net Assets 2.00% 1.62% 1.53% 1.70% 2.00%
Portfolio Turnover Rate 27% 24% 18% 27% 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 (0.04%), (0.02%), 0.01%, 0.02%, and (0.03%).

See accompanying Notes, which are an integral part of the Financial Statements.

21

 

Selected Value Fund

Notes to Financial Statements

Vanguard Selected Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

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).

During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2013–2016), 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.

22

 

Selected Value Fund

5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of 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 October 31, 2016, or at any time during the period then ended.

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

B. The investment advisory firms Barrow, Hanley, Mewhinney & Strauss, LLC, Donald Smith & Co., Inc., and Pzena Investment Management, LLC, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Barrow, Hanley, Mewhinney & Strauss, LLC, is subject to quarterly adjustments based on performance relative to the Russell Midcap Value Index for the preceding three years. The basic fee of Donald Smith & Co., Inc., is subject to quarterly adjustments based on performance relative to the MSCI Investable Market 2500 Index for the preceding five years. The basic fee of Pzena Investment Management, LLC, is subject to quarterly adjustments based on performance relative to the Russell Midcap Value Index since April 30, 2014.

23

 

Selected Value Fund

Vanguard manages the cash reserves of the fund as described below.

For the year ended October 31, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.22% of the fund’s average net assets, before a decrease of $3,390,000 (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, distribution, and cash management 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 October 31, 2016, the fund had contributed to Vanguard capital in the amount of $687,000, representing 0.01% of the fund’s net assets and 0.27% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the year ended October 31, 2016, these arrangements reduced the fund’s expenses by $439,000 (an annual rate of 0.00% of average net assets).

E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 8,487,457 — —
Temporary Cash Investments 410,842 8,298 —
Futures Contracts—Assets1 6 — —
Futures Contracts—Liabilities1 (314) — —
Total 8,897,991 8,298 —
1 Represents variation margin on the last day of the reporting period.      

 

24

 

Selected Value Fund

F. At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index December 2016 1,642 174,060 (1,784)

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

During the year ended October 31, 2016, the fund realized net foreign currency losses of $32,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to undistributed net investment income.

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 $17,036,000 from undistributed net investment income, and $27,138,000 from accumulated net realized gains, to paid-in capital.

For tax purposes, at October 31, 2016, the fund had $129,021,000 of ordinary income and $259,750,000 of long-term capital gains available for distribution.

At October 31, 2016, the cost of investment securities for tax purposes was $7,372,296,000. Net unrealized appreciation of investment securities for tax purposes was $1,534,301,000, consisting of unrealized gains of $2,243,602,000 on securities that had risen in value since their purchase and $709,301,000 in unrealized losses on securities that had fallen in value since their purchase.

H. During the year ended October 31, 2016, the fund purchased $2,352,037,000 of investment securities and sold $2,886,715,000 of investment securities, other than temporary cash investments.

25

 

Selected Value Fund    
 
 
 
 
I. Capital shares issued and redeemed were:    
  Year Ended October 31,
  2016 2015
  Shares Shares
  (000) (000)
Issued 63,300 62,441
Issued in Lieu of Cash Distributions 17,506 17,943
Redeemed (100,972) (81,402)
Net Increase (Decrease) in Shares Outstanding (20,166) (1,018)

 

J. 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  
  Oct. 31,   Proceeds     Oct. 31,
  2015   from   Capital Gain 2016
  Market Purchases Securities   Distributions Market
  Value at Cost Sold1 Income Received Value
  ($000) ($000) ($000) ($000) ($000) ($000)
GEO Group Inc. — 88,638 — 2,497 — 92,023
SeaWorld Entertainment Inc. 102,468 — 10,832 3,612 — 63,699
SPX FLOW Inc. 84,631 — 52,087 — — —
Vanguard Market Liquidity Fund 708,715 NA2 NA 2 2,076 — 410,842
Vanguard Mid-Cap Value ETF 29,626 — 29,453 283 — —
Total 925,440     8,468 — 566,564
1 Includes net realized gain (loss) on affiliated investment securities sold of ($58,795,000).
2 Not applicable—purchases and sales are for temporary cash investment purposes.

 

K. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

26

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Selected Value Fund:

In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Selected Value Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

 

Special 2016 tax information (unaudited) for Vanguard Selected Value Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $345,803,000 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 $167,214,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 77.1% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

27

 

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 2016. (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: Selected Value Fund      
Periods Ended October 31, 2016      
  One Five Ten
  Year Years Years
Returns Before Taxes 2.20% 12.16% 6.95%
Returns After Taxes on Distributions 0.88 11.16 6.08
Returns After Taxes on Distributions and Sale of Fund Shares 2.21 9.67 5.53

 

28

 

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.

29

 

Six Months Ended October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Selected Value Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return $1,000.00 $1,010.01 $1.57
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.58 1.58

 

The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.31%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

30

 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

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

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

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

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

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Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com
Fund Information > 800-662-7447 CFA® is a registered trademark owned by CFA Institute.
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q9340 122016

 



Annual Report | October 31, 2016
Vanguard Mid-Cap Growth Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Advisors’ Report. 7
Fund Profile. 11
Performance Summary. 12
Financial Statements. 14
Your Fund’s After-Tax Returns. 25
About Your Fund’s Expenses. 26
Glossary. 28

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard Mid-Cap Growth Fund returned –5.49% for the 12 months ended October 31, 2016. The fund trailed the 0.40% return of its benchmark, the Russell Midcap Growth Index, and the –1.06% average return of its mid-cap growth fund peers.

• Value stocks outperformed their growth counterparts in the U.S. stock market, while large- and small-capitalization stocks exceeded mid-caps.

• Two advisors separately manage fund assets. Their selections among financials—notably real estate investment trusts and related firms—performed especially poorly and finished well behind their benchmark counterparts. (Effective September 1, real estate was designated as its own new sector, the 11th in the benchmark.)

• Strong holdings in the materials sector couldn’t offset additional shortfalls in consumer discretionary, health care, and consumer staples.

• Over the past ten years, the fund’s average annual return of 7.48% slightly trailed that of its benchmark index, which bears no expenses, and surpassed that of its peers.

Total Returns: Fiscal Year Ended October 31, 2016  
  Total
  Returns
Vanguard Mid-Cap Growth Fund -5.49%
Russell Midcap Growth Index 0.40
Mid-Cap Growth Funds Average -1.06
Mid-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
 
Total Returns: Ten Years Ended October 31, 2016  
  Average
  Annual Return
Mid-Cap Growth Fund 7.48%
Russell Midcap Growth Index 7.65
Mid-Cap Growth Funds Average 6.26
Mid-Cap Growth 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
Mid-Cap Growth Fund 0.43% 1.31%

The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.36%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.

Peer group: Mid-Cap Growth Funds.

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute,

3

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

4

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

5

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

6

 

Advisors’ Report

During the 12 months ended October 31, 2016, Vanguard Mid-Cap Growth Fund returned –5.49%. Your fund is managed by two independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches.

Please note that William Blair Investment Management, LLC, marked its tenth anniversary of managing a portion of the fund’s assets in June. Also, after the end of the period, on December 5, Vanguard announced that Chartwell Investment Partners, LLC, would no longer serve as an advisor to the fund. Assets managed by Chartwell have been allocated to RS Investments, a Victory Capital Management investment franchise.

The fund’s advisors during the fiscal year, the percentage of fund assets each managed, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal year and of how their portfolio positioning reflects this assessment. It’s not uncommon for different advisors to have different views about individual securities or the broader investment environment. These comments were prepared on November 15, 2016.

Vanguard Mid-Cap Growth Fund Investment Advisors
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Chartwell Investment Partners, 49 1,940 Uses a bottom-up, fundamental, research-driven
LLC     stock-selection strategy focusing on companies with
      sustainable growth, strong management teams,
      competitive positions, and outstanding product and
      service offerings. These companies should continually
      demonstrate growth in earnings per share.
William Blair Investment 49 1,938 Uses a fundamental investment approach in pursuit of
Management, LLC     superior long-term investment results from
      growth-oriented companies with leadership positions
      and strong market presence.
Cash Investments 2 102 These short-term reserves are invested by Vanguard in
      equity index products to simulate investment in stocks.
      Each advisor may also maintain a modest cash
      position.

 

7

 

Chartwell Investment Partners, LLC

Portfolio Manager:

John A. Heffern, Managing Partner and Senior Portfolio Manager

Equity markets delivered modestly positive performance for the past 12 months. Concerns during the period included the state of the global economy, heightened terrorist activity, geopolitical events, the U.K. Brexit referendum, Federal Reserve rate decisions, and the presidential election campaign. However, gradual easing of some of these issues, accommodative monetary policy, and a rebound in oil prices improved market sentiment in the last six months and drove returns into positive territory.

Against this backdrop, our portfolio decisions steadfastly reflected our bias toward quality, leadership, defensible margins, and a pattern of successful execution around growth-oriented business models.

In consumer services, MGM Resorts International and Burlington Stores boosted the portfolio’s overall performance. MGM, a casino operator with properties in the United States and Asia, benefited from share gains in both its business and leisure segments along with a strong development pipeline. Burlington Stores, an off-price retailer, increased its revenues and profit margin as it executed its business model.

Financial services stocks also did well. Popular, a bank holding company with operations in Puerto Rico and the United States, held steady and maintained ample capital while weathering Puerto Rico’s debt crisis. Market share gains, consolidation opportunities, excess capital, and undemanding valuation drove solid stock performance for Assured Guaranty, the largest and highest-rated U.S. financial guarantor.

In technology, our holdings in Cavium made a solid contribution. The semiconductor provider experienced an uptick in demand for several of its product classes as well as synergies from a recent acquisition. Another success was ServiceNow, a cloud software company with a focus on service management. It appears on track to become a multi-product company with expertise in information technology, service, and human resource management.

Selection among cyclical consumer stocks detracted the most from our performance. Several terrorist attacks, zika virus worries, macroeconomic issues in China, and higher fuel prices weighed on earnings and sentiment for both Norwegian Cruise Line and Royal Caribbean Cruises. Brunswick Corporation, a manufacturer of marine and fitness recreational products, was affected by international market and general macroeconomic concerns.

In business services, our positions in ManpowerGroup and SEI Investments dampened results. Slightly weaker

8

 

operating trends in some markets hurt ManpowerGroup, a provider of blue-collar temporary staffing services. Expenses related to a new processing platform pressured SEI Investments, which develops processing and investment programs for the asset management industry.

The health care sector also underperformed, particularly in the pharmaceuticals industry as competition increased for the generic drug businesses of Endo International and Perrigo.

William Blair Investment Management, LLC

Portfolio Managers: Robert C. Lanphier, Partner David Ricci, CFA, Partner

The relatively flat return of the U.S. equity market over the 12-month period masked some significant moves. The market declined precipitously in the first six weeks of 2016 amid concerns that weakness in manufacturing, falling oil prices, and persistent challenges to global growth could trigger a U.S. recession.

A mid-February reversal was spurred by further easing from foreign central banks and improving global data. From there, positive U.S. economic indicators carried the market higher until June, when the results of the Brexit vote increased investor uncertainty. After a brief pause, the market advanced again, driven by strength among more cyclical segments of the economy, before softening somewhat in October.

Our portfolio’s underperformance was primarily the result of investors’ style preferences. These were most pronounced early in 2016 when the perceived safety of high-dividend-yielding stocks dominated the market.

Our portfolio tends to be significantly underweighted in high-dividend yielders, as we prefer growth companies with substantial reinvestment opportunities that enable superior, durable long-term growth. Although the dividend-yield trade did slow in the months that followed, it remained an obstacle to relative performance.

More recently, investors favored more cyclically oriented areas of the market. Some of our typical industry biases, which in aggregate lead to a portfolio with less cyclicality than the benchmark index, dampened relative returns. For example, in information technology we tend to be underweighted in semiconductors because their commodity-like nature limits their pricing power and cyclicality. Conversely, we generally are overweighted in software and IT services, which tend to have more differentiated products and services, higher value propositions, and more durable growth. This typical positioning worked against us during the period as semiconductors significantly outperformed.

On a stock-specific basis, selection within financials detracted from returns, in part because of our positions in Affiliated Managers Group and Signature Bank. Other laggards included health care companies Perrigo and MEDNAX and consumer discretionary firm Polaris Industries.

9

 

Our holdings in industrials, including a position in Old Dominion Freight Line, performed well. Other top contributors included Airgas (materials), Akamai Technologies (information technology), Dollar General (consumer discretionary), and IDEXX Laboratories (health care).

Looking forward, U.S. investors’ minds are focused on the trajectory of interest rates and the aftermath of the U.S. presidential election. While we evaluate the investment risks and implications of such events, we do not position the portfolio based on possible outcomes. We believe that we can add the most value by investing in quality companies that can grow their earnings faster than the market over the long term.

We are now probably past the midpoint in the recovery from the global financial crisis. Therefore, we believe the risks of an economic slowdown are higher than they have been in the recent past. Slow U.S. and global growth, potential adverse effects from Brexit, rising wages, and unfavorable currency rates are all likely to challenge corporate profit growth.

In this environment, it is our view that earnings growth, rather than valuation expansion, is likely to drive stock performance. We believe our time is best spent focusing on companies with durable, consistent business models that are less dependent on the macroeconomic or political environment to grow earnings over time.

10

 

Mid-Cap Growth Fund

Fund Profile
As of October 31, 2016

Portfolio Characteristics    
      DJ
      U.S.
    Russell Total
    Midcap Market
    Growth FA
  Fund Index Index
Number of Stocks 123 467 3,833
Median Market Cap $9.7B $11.1B $53.5B
Price/Earnings Ratio 26.1x 27.0x 23.1x
Price/Book Ratio 3.0x 5.1x 2.7x
Return on Equity 15.1% 19.7% 16.6%
Earnings Growth      
Rate 17.0% 11.8% 8.4%
Dividend Yield 0.8% 1.2% 2.1%
Foreign Holdings 1.1% 0.0% 0.0%
Turnover Rate 91% — —
Ticker Symbol VMGRX — —
Expense Ratio1 0.43% — —
30-Day SEC Yield 0.44% — —
Short-Term      
Reserves 2.6% — —

 

Sector Diversification (% of equity exposure)
    Russell DJ
    Midcap U.S. Total
    Growth Market
  Fund Index FA Index
Consumer      
Discretionary 20.2% 23.5% 12.6%
Consumer Staples 3.1 7.6 8.9
Energy 2.2 1.3 6.6
Financials 14.5 5.0 13.9
Health Care 16.4 15.1 13.4
Industrials 10.1 14.3 10.5
Information      
Technology 27.3 22.8 21.0
Materials 3.1 5.1 3.2
Real Estate 1.5 4.8 4.2
Telecommunication      
Services 1.5 0.5 2.3
Utilities 0.1 0.0 3.4

 

Volatility Measures    
  Russell DJ
  Midcap U.S. Total
  Growth Market
  Index FA Index
R-Squared 0.94 0.87
Beta 1.01 1.09

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)
MGM Resorts    
International Casinos & Gaming 2.6%
Vantiv Inc. Data Processing &  
  Outsourced Services 2.2
Popular Inc. Regional Banks 2.2
SEI Investments Co. Asset Management  
  & Custody Banks 2.0
BioMarin Pharmaceutical    
Inc. Biotechnology 1.9
Brunswick Corp. Leisure Products 1.8
Assured Guaranty Ltd. Property & Casualty  
  Insurance 1.7
Agilent Technologies Inc. Life Sciences Tools &  
  Services 1.7
Centene Corp. Managed Health  
  Care 1.6
Delta Air Lines Inc. Airlines 1.6
Top Ten   19.3%

The holdings listed exclude any temporary cash investments and equity index products.

Investment Focus


1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratio was 0.36%.

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Mid-Cap Growth Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: October 31, 2006, Through October 31, 2016
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended October 31, 2016  
        Final Value
  One Five Ten of a $10,000
  Year Years Years Investment
Mid-Cap Growth Fund -5.49% 10.44% 7.48% $20,564
Russell Midcap Growth Index 0.40 12.02 7.65 20,907
Mid-Cap Growth Funds Average -1.06 9.73 6.26 18,347
Dow Jones U.S. Total Stock Market        
Float Adjusted Index 4.21 13.29 6.87 19,436

 

Mid-Cap Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

See Financial Highlights for dividend and capital gains information.

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Mid-Cap Growth Fund

Fiscal-Year Total Returns (%): October 31, 2006, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
Mid-Cap Growth Fund 12/31/1997 2.22% 13.60% 8.11%

 

13

 

Mid-Cap Growth Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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 (93.8%)1    
Consumer Discretionary (19.1%)  
* MGM Resorts    
  International 3,880,345 101,549
  Brunswick Corp. 1,621,011 70,514
  Newell Brands Inc. 1,206,100 57,917
  Ross Stores Inc. 862,800 53,960
  Hanesbrands Inc. 1,994,100 51,248
  Six Flags Entertainment    
  Corp. 885,797 49,295
  Royal Caribbean Cruises    
  Ltd. 567,670 43,637
  Tractor Supply Co. 655,040 41,025
* Toll Brothers Inc. 1,389,075 38,116
* Norwegian Cruise Line    
  Holdings Ltd. 969,667 37,691
  PulteGroup Inc. 1,813,510 33,731
  BorgWarner Inc. 863,904 30,962
  Dollar General Corp. 432,626 29,890
* O’Reilly Automotive Inc. 110,821 29,305
* Sally Beauty Holdings Inc. 750,548 19,469
* Ulta Salon Cosmetics &    
  Fragrance Inc. 62,072 15,105
  Dick’s Sporting Goods Inc. 261,710 14,564
  PVH Corp. 127,500 13,640
* Panera Bread Co. Class A 57,040 10,881
* Burlington Stores Inc. 144,274 10,812
* JC Penney Co. Inc. 837,135 7,191
      760,502
Consumer Staples (2.7%)    
  Tyson Foods Inc. Class A 722,900 51,217
  Mead Johnson Nutrition Co.  554,100 41,430
* Herbalife Ltd. 256,900 15,589
      108,236
Energy (2.0%)    
  Superior Energy Services    
  Inc. 2,419,135 34,255
* Concho Resources Inc. 227,015 28,817
* Diamondback Energy Inc. 177,826 16,234
      79,306

 

Financials (13.6%)    
  Popular Inc. 2,373,861 86,171
  SEI Investments Co. 1,840,355 81,583
  Assured Guaranty Ltd. 2,276,535 68,046
  Intercontinental    
  Exchange Inc. 189,995 51,373
  Willis Towers Watson plc 389,200 49,000
* Signature Bank 384,184 46,317
  Lazard Ltd. Class A 1,103,878 40,247
  Radian Group Inc. 2,221,173 30,186
  Nasdaq Inc. 370,100 23,675
* Affiliated Managers    
  Group Inc. 129,590 17,192
  Evercore Partners Inc.    
  Class A 313,716 16,862
  CME Group Inc. 93,945 9,404
  MarketAxess Holdings Inc. 58,715 8,852
  XL Group Ltd. 229,835 7,975
* Western Alliance Bancorp 110,783 4,139
      541,022
Health Care (15.4%)    
* BioMarin Pharmaceutical    
  Inc. 939,277 75,631
  Agilent Technologies Inc. 1,541,735 67,173
* Centene Corp. 1,032,013 64,480
* MEDNAX Inc. 966,400 59,192
* Cerner Corp. 889,700 52,119
  Zoetis Inc. 845,600 40,420
* Mettler-Toledo    
  International Inc. 85,100 34,387
* Mallinckrodt plc 407,665 24,158
  Cigna Corp. 187,895 22,327
  Dentsply Sirona Inc. 370,507 21,330
  HealthSouth Corp. 492,800 19,786
* IDEXX Laboratories Inc. 177,858 19,056
* Align Technology Inc. 212,800 18,284
  Perrigo Co. plc 210,900 17,545
* Alexion Pharmaceuticals    
  Inc. 92,270 12,041
* Veeva Systems Inc.    
  Class A 255,000 9,907

 

14

 

Mid-Cap Growth Fund

      Market
      Value•
    Shares ($000)
* VCA Inc. 126,245 7,759
* ABIOMED Inc. 69,492 7,296
* Incyte Corp. 77,170 6,711
*,^ Intercept Pharmaceuticals    
  Inc. 53,685 6,643
  Danaher Corp. 77,170 6,062
* Edwards Lifesciences Corp. 58,715  5,591
* Charles River Laboratories    
  International Inc. 70,460 5,346
* Neurocrine Biosciences Inc. 107,370  4,700
* Vertex Pharmaceuticals Inc. 61,375  4,656
      612,600
Industrials (9.4%)    
  Delta Air Lines Inc. 1,538,380 64,258
* Old Dominion Freight    
  Line Inc. 807,110 60,275
* Verisk Analytics Inc.    
  Class A 671,100 54,728
* Copart Inc. 728,600 38,230
  TransDigm Group Inc. 133,600 36,401
  KAR Auction Services Inc. 734,800 31,288
* Middleby Corp. 253,100 28,375
  Wabtec Corp. 304,900 23,572
  Dun & Bradstreet Corp. 157,200 19,626
  Equifax Inc. 150,465 18,653
      375,406
Information Technology (25.7%)  
* Vantiv Inc. Class A 1,490,164 86,966
* Akamai Technologies Inc. 923,272 64,140
* Red Hat Inc. 738,200 57,174
* CoStar Group Inc. 253,479 47,431
  SS&C Technologies    
  Holdings Inc. 1,236,407 39,478
* Check Point Software    
  Technologies Ltd. 433,300 36,640
* Euronet Worldwide Inc. 452,960 36,033
* Guidewire Software Inc. 623,200 35,803
* ServiceNow Inc. 399,273 35,100
  Booz Allen Hamilton    
  Holding Corp. Class A 1,115,900 34,001
* PTC Inc. 716,345 33,983
  Global Payments Inc. 464,700 33,700
* Genpact Ltd. 1,448,922 33,311
* Adobe Systems Inc. 303,650 32,645
  CSRA Inc. 1,277,000 32,040
  MAXIMUS Inc. 612,605 31,892
* Cavium Inc. 548,585 30,968
* Tyler Technologies Inc. 182,860 29,331
* Ultimate Software    
  Group Inc. 125,824 26,548
  Fidelity National    
  Information Services Inc. 323,780 23,934
  Monolithic Power Systems    
  Inc. 301,970 23,798

 

* Manhattan Associates Inc. 444,570 22,513
* Electronics For Imaging    
  Inc. 496,577 21,119
* Palo Alto Networks Inc. 135,890 20,904
* First Data Corp. Class A 1,256,540 17,579
* IPG Photonics Corp. 176,400 17,113
* Trimble Inc. 530,130 14,653
  Belden Inc. 221,445 14,352
* salesforce.com Inc. 156,020 11,726
  LogMeIn Inc. 122,467 11,634
  Applied Materials Inc. 374,110 10,879
  Broadcom Ltd. 58,745 10,003
  Avnet Inc. 196,280 8,234
* Nice Ltd. ADR 122,468 8,140
  Lam Research Corp. 77,173 7,475
* Qorvo Inc. 107,370 5,975
* Fortinet Inc. 172,795 5,540
* Tableau Software Inc.    
  Class A 100,659 4,837
* Mobileye NV 122,465 4,553
      1,022,145
Materials (2.9%)    
  Ball Corp. 684,500 52,754
  Vulcan Materials Co. 364,300 41,239
* Axalta Coating Systems    
  Ltd. 862,800 21,674
      115,667
Other (0.2%)    
2 Vanguard Mid-Cap Growth    
  ETF 100,223 10,269
 
Real Estate (1.4%)    
^ MGM Growth Properties    
  LLC Class A 1,155,885 30,423
  Equinix Inc. 41,939 14,984
* CBRE Group Inc. Class A 360,691 9,291
      54,698
Telecommunication Services (1.4%)  
* SBA Communications Corp.  
  Class A 492,800 55,824
Total Common Stocks    
(Cost $3,360,038)   3,735,675
Temporary Cash Investments (5.0%)1  
Money Market Fund (4.8%)    
3,4 Vanguard Market    
  Liquidity Fund, 0.718% 1,921,722 192,192

 

15

 

Mid-Cap Growth Fund

    Face Market
    Amount Value•
    ($000) ($000)
U.S. Government and Agency Obligations (0.2%)
5 United States Treasury Bill,    
  0.321%, 12/1/16 3,900 3,899
5 United States Treasury Bill,    
  0.270%, 12/29/16 200 200
5 United States Treasury Bill,    
  0.287%, 1/5/17 2,000 1,999
      6,098
Total Temporary Cash Investments  
(Cost $198,277)   198,290
Total Investments (98.8%)    
(Cost $3,558,315)   3,933,965
Other Assets and Liabilities (1.2%)  
Other Assets   100,043
Liabilities 4   (53,957)
      46,086
Net Assets (100%)    
Applicable to 182,978,885 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 3,980,051
Net Asset Value Per Share   $21.75

 

  Amount
  ($000)
Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 3,731,504
Affiliated Vanguard Funds 202,461
Total Investments in Securities 3,933,965
Investment in Vanguard 317
Receivables for Investment Securities Sold  94,517 
Receivables for Accrued Income 3,412
Receivables for Capital Shares Issued 1,439
Other Assets 358
Total Assets 4,034,008
Liabilities  
Payables for Investment Securities  
Purchased (27,083)
Collateral for Securities on Loan (4,929)
Payables for Capital Shares Redeemed (15,371)
Payables to Vanguard (6,448)
Other Liabilities (126)
Total Liabilities (53,957)
Net Assets 3,980,051
 
 
At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 3,783,083
Undistributed Net Investment Income 18,779
Accumulated Net Realized Losses (196,515)
Unrealized Appreciation (Depreciation)  
Investment Securities 375,650
Futures Contracts (946)
Net Assets 3,980,051

 

• 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 $4,804,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 96.1% and 2.7%, respectively, of
net assets.
2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
4 Includes $4,929,000 of collateral received for securities on loan.
5 Securities with a value of $4,599,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

16

 

Mid-Cap Growth Fund  
 
 
Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends1 40,354
Interest1 978
Securities Lending—Net 92
Total Income 41,424
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 8,125
Performance Adjustment (1,863)
The Vanguard Group—Note C  
Management and Administrative 7,756
Marketing and Distribution 901
Custodian Fees 42
Auditing Fees 37
Shareholders’ Reports 73
Trustees’ Fees and Expenses 6
Total Expenses 15,077
Expenses Paid Indirectly (224)
Net Expenses 14,853
Net Investment Income 26,571
Realized Net Gain (Loss)  
Investment Securities Sold1 (194,336)
Futures Contracts 10,960
Realized Net Gain (Loss) (183,376)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (70,032)
Futures Contracts (5,006)
Change in Unrealized Appreciation (Depreciation) (75,038)
Net Increase (Decrease) in Net Assets Resulting from Operations (231,843)

1 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $89,000, $947,000, and $10,000, respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

17

 

Mid-Cap Growth Fund    
 
 
Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 26,571 9,595
Realized Net Gain (Loss) (183,376) 343,380
Change in Unrealized Appreciation (Depreciation) (75,038) (137,353)
Net Increase (Decrease) in Net Assets Resulting from Operations (231,843) 215,622
Distributions    
Net Investment Income (12,324) (4,856)
Realized Capital Gain1 (311,613) (405,208)
Total Distributions (323,937) (410,064)
Capital Share Transactions    
Issued 943,333 1,505,655
Issued in Lieu of Cash Distributions 314,619 398,819
Redeemed (1,039,524) (711,728)
Net Increase (Decrease) from Capital Share Transactions 218,428 1,192,746
Total Increase (Decrease) (337,352) 998,304
Net Assets    
Beginning of Period 4,317,403 3,319,099
End of Period2 3,980,051 4,317,403

1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $15,141,000 and $80,760,000, 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 $18,779,000 and $4,532,000.

See accompanying Notes, which are an integral part of the Financial Statements.

18

 

Mid-Cap Growth Fund          
 
 
Financial Highlights          
 
 
For a Share Outstanding     Year Ended October 31,
Throughout Each Period 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $24.88 $26.40 $25.72 $20.95 $19.40
Investment Operations          
Net Investment Income .147 2 .0641 .045 .048 .041
Net Realized and Unrealized Gain (Loss)          
on Investments (1.437) 1.625 3.134 5.965 1.892
Total from Investment Operations (1.290) 1.689 3.179 6.013 1.933
Distributions          
Dividends from Net Investment Income (.070) (.038) (.007) (.075) (.030)
Distributions from Realized Capital Gains (1.770) (3.171) (2.492) (1.168) (.353)
Total Distributions (1.840) (3.209) (2.499) (1.243) (.383)
Net Asset Value, End of Period $21.75 $24.88 $26.40 $25.72 $20.95
 
Total Return 3 -5.49% 6.68% 13.42% 30.32% 10.24%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $3,980 $4,317 $3,319 $2,837 $2,129
Ratio of Total Expenses to Average Net Assets4 0.36% 0.43% 0.46% 0.51% 0.54%
Ratio of Net Investment Income to          
Average Net Assets 0.64%2 0.25%1 0.16% 0.19% 0.19%
Portfolio Turnover Rate 91% 93% 82% 83% 97%

1 Net investment income per share and the ratio of net investment income to average net assets include $.006 and 0.03%, respectively,
resulting from a special dividend from Lazard Ltd. in February 2015.
2 Net investment income per share and the ratio of net investment income to average net assets include $.018 and 0.08%, respectively,
resulting from a special dividend from TransDigm Group in October 2016.
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 (0.04%), (0.01%), (0.02%), 0.02%, and 0.04%.

See accompanying Notes, which are an integral part of the Financial Statements.

19

 

Mid-Cap Growth Fund

Notes to Financial Statements

Vanguard Mid-Cap Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of 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).

During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented less than 3% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

20

 

Mid-Cap Growth Fund

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of 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 October 31, 2016, or at any time during the period then ended.

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

B. The investment advisory firms Chartwell Investment Partners, LLC, and William Blair Investment Management, LLC, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Chartwell Investment Partners, LLC, is subject to quarterly adjustments based on performance

21

 

Mid-Cap Growth Fund

relative to the Russell Midcap Growth Index for the preceding three years. The basic fee of William Blair Investment Management, LLC, is subject to quarterly adjustments based on performance relative to the Russell Midcap Growth Index for the preceding five years .

Vanguard manages the cash reserves of the fund as described below.

For the year ended October 31, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.20% of the fund’s average net assets, before a decrease of $1,863,000 (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, distribution, and cash management 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 October 31, 2016, the fund had contributed to Vanguard capital in the amount of $317,000 representing 0.01% of the fund’s net assets and 0.13% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the year ended October 31, 2016, these arrangements reduced the fund’s expenses by $224,000 (an annual rate of 0.01% of average net assets).

E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 3,735,675 — —
Temporary Cash Investments 192,192 6,098 —
Futures Contracts—Assets1 358    
Futures Contracts—Liabilities1 (126) — —
Total 3,928,099 6,098 —
1 Represents variation margin on the last day of the reporting period.      

 

22

 

Mid-Cap Growth Fund

F. At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P Mid-Cap 400 Index December 2016 307 46,259 (783)
E-mini S&P 500 Index December 2016 426 45,158 (163)
        (946)

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

For tax purposes, at October 31, 2016, the fund had $23,293,000 of ordinary income available for distribution. The fund had capital losses totaling $187,803,000 that may be carried forward indefinitely to offset future net capital gains.

At October 31, 2016, the cost of investment securities for tax purposes was $3,567,851,000. Net unrealized appreciation of investment securities for tax purposes was $366,114,000, consisting of unrealized gains of $498,385,000 on securities that had risen in value since their purchase and $132,271,000 in unrealized losses on securities that had fallen in value since their purchase.

H. During the year ended October 31, 2016, the fund purchased $3,620,514,000 of investment securities and sold $3,718,001,000 of investment securities, other than temporary cash investments.

I. Capital shares issued and redeemed were:    
  Year Ended October 31,
  2016 2015
  Shares Shares
  (000) (000)
Issued 43,119 59,434
Issued in Lieu of Cash Distributions 13,866 16,399
Redeemed (47,557) (28,005)
Net Increase (Decrease) in Shares Outstanding 9,428 47,828

 

J. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

23

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Mid-Cap Growth Fund:

In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Mid-Cap Growth Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

 

Special 2016 tax information (unaudited) for Vanguard Mid-Cap Growth Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $296,472,000 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 $25,643,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 100% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

24

 

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 2016. (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: Mid-Cap Growth Fund      
Periods Ended October 31, 2016      
  One Five Ten
  Year Years Years
Returns Before Taxes -5.49% 10.44% 7.48%
Returns After Taxes on Distributions -7.19 8.42 6.09
Returns After Taxes on Distributions and Sale of Fund Shares -1.63 8.07 5.87

 

25

 

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.

26

 

Six Months Ended October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Mid-Cap Growth Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return $1,000.00 $999.54 $1.71
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.43 1.73

The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.34%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

27

 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

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

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

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

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

28

 

Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior Management Team

Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com
Fund Information > 800-662-7447 CFA® is a registered trademark owned by CFA Institute.
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Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q3010 122016

 



Annual Report | October 31, 2016
Vanguard International Explorer™ Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Advisors’ Report. 7
Fund Profile. 11
Performance Summary. 13
Financial Statements. 15
Your Fund’s After-Tax Returns. 33
About Your Fund’s Expenses. 34
Trustees Approve Advisory Arrangements. 36
Glossary. 38

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• For the 12 months ended October 31, 2016, Vanguard International Explorer Fund returned –0.06%. Its benchmark returned 1.88%; the average return of its peers was 1.39%.

• The fund’s two advisors analyze small-capitalization companies to identify those they believe will grow faster than the overall market.

• Their bottom-up approach produced above-benchmark returns in some markets, including China, South Korea, France, and Sweden, but lagged overall in the Pacific and Europe. In particular, stock selection in Japan, Australia, Italy, and the United Kingdom dampened relative performance.

• By sector, the fund outperformed in information technology, consumer discretionary, and utilities, but underperformed in others, notably financials and materials.

• For the ten years ended October 31, 2016, the fund produced an average annual return of 3.56%. Its composite index returned 3.61% and the average return of its peers was 3.68%.

Total Returns: Fiscal Year Ended October 31, 2016  
  Total
  Returns
Vanguard International Explorer Fund -0.06%
S&P EPAC SmallCap Index 1.88
International Small-Cap Funds Average 1.39
International Small-Cap Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  

 

Total Returns: Ten Years Ended October 31, 2016  
  Average
  Annual Return
International Explorer Fund 3.56%
S&P EPAC SmallCap Index 3.61
International Small-Cap Funds Average 3.68
International Small-Cap 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
International Explorer Fund 0.42% 1.59%

The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.41%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.

 

Peer group: International Small-Cap Funds.

 

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.

3

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

4

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors

shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


5

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

6

 

Advisors’ Report

For the fiscal year ended October 31, 2016, Vanguard International Explorer Fund returned –0.06%. Your fund is managed by two independent advisors, a strategy that enhances its diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.

The advisors, the amount and percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the year and of how their portfolio positioning reflected that assessment. These comments were prepared on November 10, 2016.

November 4, 2016, marked the fund’s 20th anniversary. We would like to thank Schroder Investment Management for being an advisor to the fund since its launch.

Schroder Investment Management
North America Inc.

Portfolio Manager:

Matthew F. Dobbs,
Head of Global Small Companies

International small-capitalization equities made limited progress over the year, with the S&P EPAC SmallCap Index returning 1.9% in U.S. dollars. Overall returns may have been modest for the year, but international small caps have again

Vanguard International Explorer Fund Investment Advisors
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Schroder Investment 69 1,961 The advisor employs a fundamental investment
Management North America Inc.     approach that considers macroeconomic factors while
      focusing primarily on company-specific factors,
      including a company’s potential for long-term growth,
      financial condition, quality of management, and
      sensitivity to cyclical factors. The advisor also
      considers the relative value of a company’s securities
      compared with those of other companies and the
      market as a whole.
Wellington Management 28 801 The advisor employs a traditional, bottom-up approach
Company LLP     that is opportunistic in nature, relying on global and
      regional research resources to identify both
      growth-oriented and neglected or misunderstood
      companies.
Cash Investments 3 67 These short-term reserves are invested by Vanguard in
      equity index products to simulate investment in stocks.
      Each advisor also may maintain a modest cash
      position.

 

7

 

outperformed their larger peers, which returned –2.7% as measured by the S&P EPAC Large/Midcap Index.

The small-cap “effect” has been most prominent in continental Europe, where smaller-company outperformance in the financial and health care sectors has been particularly influential; and in Japan, where the more domestic focus of smaller companies has benefited them relative to large caps during a period of strength in the Japanese yen.

Among the worst returns were in the United Kingdom, where the vote to leave the European Union on June 23 hit more domestically focused smaller companies particularly hard. The rout was led by key small-cap sectors such as house builders, real estate, retail, and consumer services. This reflected acute investor concerns over the outlook for revenues, the impact on input costs (costs for items used to produce goods and services) from a dramatically weaker pound sterling, and the potential for restrictive immigration policies.

It has been a mixed period regarding relative performance. Stock selection in Japan has been the main challenge. It was not helped by our underweighting of the market, which has been the strongest major-market performer over the year. We have struggled to find attractive value among domestic defensives and the high-yielding real estate investment trust sector, but given a strong currency and a hunt for yield amid the negative interest rate policy pursued by the Bank of Japan,

these areas have outperformed strongly. Meanwhile, stock selection in consumer discretionary (auto parts companies such as Unipres and Eagle Industries), information technology (OBIC, Kakaku. com), and materials (Kumiai Chemical) lagged. The impact was only partly offset by strong showings among some of our domestically oriented industrial holdings such as Aica Kogyo, Trusco Nakayama, and Fukushima Industries.

Our continental European holdings also disappointed, almost entirely because of our financials in Italy, most notably Anima Holding, BPER, and Banca Sistema. This more than counteracted good selection among information technology stocks, most notably Logitech, Ubisoft, and Lectra.

Selection in Asian markets outside Japan (in both developed and emerging markets) has generally been strong. A number of consumer names in Hong Kong and China have been notably strong, including New Oriental Education and Shenzhou International, along with South Korean auto parts stocks Mando and Hanon Systems. Selection in information technology also added value because of strong returns from SINA.com, the Chinese internet stock, and Chroma ATE in Taiwan.

The year has closed with perhaps more than the usual litany of uncertainties, including political developments in Europe, continued fragility in a number of emerging markets, and signs that the efficacy of monetary policy tools is fading. The constraints of high debt levels and poor demographics (and not just in developed

8

 

economies) suggest that overall global growth will continue to be as muted as it has been over the last seven years. Long-term investors will have to work harder to identify areas of superior growth, and in that context we remain confident that selective exposure to smaller companies is strategically important. We will continue to work hard to identify companies offering sustainable growth and superior returns.

Wellington Management Company LLP

Portfolio Manager:

Simon H. Thomas,
Senior Managing Director and Equity Portfolio Manager

Global equities rose over the 12-month period. The year had a volatile start as Chinese stocks plunged in early January, sparking a global risk-off trade that caused central banks to increase monetary easing efforts around the world. Toward the end of the second quarter, after a lengthy and, at times, acrimonious campaign, the British electorate voted to leave the European Union. Risk appetite has fluctuated considerably over the period as governments have had to grapple with a slow-growth, low-inflation environment. The U.S. Federal Reserve’s signaling of a second rate hike at its December meeting, coupled with a “hard” Brexit scenario, U.S. election uncertainty, and potential monetary shifts by the European Central Bank, caused global equities to pull back toward the end of the period.

Stock selection within the financial, materials, and industrial sectors weighed on the performance of our portfolio. (Effective September 1, a real estate sector was added, composed of holdings that previously were classified as financials. The index returns and attribution analysis of the real estate sector are for the period starting September 1 and ending October 31.) This weight on performance was partially offset by strong stock selection within consumer staples, energy, and information technology. Allocation among sectors, which is largely a result of our bottom-up stock selection process, weighed on performance as well, largely driven by our overweight allocation to the consumer discretionary sector. At the regional level, selection within Europe, specifically the United Kingdom, and Japan detracted most from relative results. From an allocation perspective, our overweight to Japan aided relative performance.

The largest detractors from relative performance during the period included Anima, B&M European Value Retail, and N Brown Group. Anima, an Italian asset manager, performed poorly as the environment for financials in Italy became more challenging because of low interest rates and the overall health of the Italian banking sector. Despite this short-term volatility, we have maintained our position in the company as we believe it will be a long-term beneficiary of the increasing Italian savings rate, and the continued shift of retirement assets to asset managers.

9

 

B&M European Value Retail, one of the leading value retailers of general merchandise in the United Kingdom, traded down after the Brexit vote in June. This is a company that we are really excited about and believe was oversold post-Brexit, given the company’s underlying fundamentals. It has a first-class management team that will likely benefit from a slower U.K. economy, as consumers have tightened their belts. We still held the stock as of the end of the period. N Brown Group, a U.K.-based internet and catalogue home shopping company offering clothes and accessories, faced a much more challenging business environment after the Brexit vote. Many of its input goods are U.S.-dollar-based, which became a challenge given the depreciating pound sterling. We exited our position following the Brexit vote.

Top contributors to relative performance included Kyudenko, Nippon Shinyaku, and Gategroup. Kyudenko is a Japanese electrical engineering company that owns a sizable solar asset portfolio. The company continues to benefit from a healthy construction cycle in Japan, as well as the appreciation of value in its solar assets. Shares remain inexpensive, and the company has a net cash position on its balance sheet. We continue to hold the position based

on our positive outlook for the company. Nippon Shinyaku is a Japan-based pharmaceutical company. We continue to be optimistic about the company’s new pulmonary hypertension drug, Selexipag, which has been approved in the United States, and is expected to be approved in Europe in the near future. We maintained our position as the company continues to execute and maintains a strong drug pipeline. Switzerland-based Gategroup is a leading provider of catering, hospitality, and logistics services to the travel industry. In July, the company was acquired by HNA Group, a Chinese travel and logistics conglomerate. We supported the acquisition given that shares were at an all-time high and sold our position into strength.

Relative to the benchmark, at the end of the period we were most overweight the consumer discretionary and health care sectors. We were most underweight the new real estate sector and information technology. On a regional basis, Japan was our greatest overweight position relative to the benchmark. We were most underweight Asia excluding Japan, though we continue to look for high-quality companies that have been neglected by the market and thus offer attractive investment opportunities.

10

 

International Explorer Fund

Fund Profile
As of October 31, 2016

Portfolio Characteristics    
      MSCI
    S&P AC
    EPAC World
    SmallCap Index ex
  Fund Index USA
Number of Stocks 298 3,907 1,844
Median Market Cap $1.7B $1.6B $29.6B
Price/Earnings Ratio 20.9x 19.9x 20.9x
Price/Book Ratio 1.9x 1.5x 1.6x
Return on Equity 12.0% 10.5% 14.9%
Earnings Growth      
Rate 15.0% 10.1% 6.9%
Dividend Yield 2.2% 2.3% 3.0%
Turnover Rate 37% — —
Ticker Symbol VINEX — —
Expense Ratio1 0.42% — —
Short-Term Reserves 2.3% — —

 

Sector Diversification (% of equity exposure)
      MSCI
    S&P AC
    EPAC World
    SmallCap Index
  Fund Index ex USA
Consumer      
Discretionary 20.2% 16.0% 11.5%
Consumer Staples 5.0 6.2 10.4
Energy 1.1 2.2 6.8
Financials 11.0 12.4 22.5
Health Care 8.1 8.5 8.2
Industrials 26.2 22.2 11.7
Information      
Technology 11.7 11.0 9.5
Materials 9.6 9.5 7.7
Real Estate 4.6 9.4 3.4
Telecommunication      
Services 0.7 0.9 4.9
Utilities 1.8 1.7 3.4

 

Volatility Measures    
    MSCI
  S&P AC
  EPAC World
  SmallCap Index ex
  Index USA
R-Squared 0.94 0.76
Beta 0.94 0.80

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)
Anima Holding SPA Asset Management  
  & Custody Banks 1.3%
Rubis SCA Gas Utilities 1.2
BRAAS Monier Building Construction  
Group SA Materials 1.2
Nippon Shinyaku Co.    
Ltd. Pharmaceuticals 1.1
Cerved Information    
Solutions SPA Specialized Finance 1.1
Logitech International SA Technology  
  Hardware, Storage &  
  Peripherals 1.1
Smurfit Kappa Group plc Paper Packaging 1.0
SPIE SA Construction &  
  Engineering 1.0
Ubisoft Entertainment Home Entertainment  
SA Software 1.0
OC Oerlikon Corp. AG Industrial Machinery 1.0
Top Ten   11.0%

The holdings listed exclude any temporary cash investments and equity index products.

Allocation by Region (% of equity exposure)


1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratio was 0.41%.

11

 

International Explorer Fund

Market Diversification (% of equity exposure)
    S&P MSCI
    EPAC AC World
    SmallCap Index ex
  Fund Index USA
Europe      
United Kingdom 14.8% 14.6% 12.4%
Italy 8.0 2.0 1.4
France 7.9 8.6 6.9
Germany 5.5 7.8 6.3
Switzerland 4.8 7.9 6.0
Sweden 3.8 3.1 1.9
Ireland 4.6 0.3 0.3
Netherlands 3.0 1.8 2.3
Denmark 1.4 1.4 1.2
Austria 1.2 0.2 0.1
Other 2.7 5.9 4.5
Subtotal 57.7% 53.6% 43.3%
Pacific      
Japan 26.7% 25.7% 17.2%
Australia 4.4 6.6 5.1
South Korea 1.8 3.8 3.4
Hong Kong 1.1 2.5 2.5
Other 0.5 1.4 1.0
Subtotal 34.5% 40.0% 29.2%
Emerging Markets      
India 2.5% 0.0% 2.0%
China 2.5 0.8 6.2
Taiwan 1.7 0.0 2.9
Other 0.8 0.0 8.9
Subtotal 7.5% 0.8% 20.0%
North America      
Other 0.3% 0.3% 6.8%
Middle East 0.0% 0.8% 0.5%
Other 0.0% 4.5% 0.2%

 

"Other" represents securities that are not classified by the fund's benchmark index.

12

 

International Explorer Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: October 31, 2006, Through October 31, 2016
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended October 31, 2016  
        Final Value
  One Five Ten of a $10,000
  Year Years Years Investment
International Explorer Fund -0.06% 8.34% 3.56% $14,186
S&P EPAC SmallCap Index 1.88 8.64 3.61 14,262
International Small-Cap Funds Average 1.39 8.07 3.68 14,348
MSCI All Country World Index ex USA 0.72 4.11 2.07 12,277

International Small-Cap Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

See Financial Highlights for dividend and capital gains information.

13

 

International Explorer Fund

Fiscal-Year Total Returns (%): October 31, 2006, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Ten
  Date Year Years Years
International Explorer Fund 11/4/1996 7.95% 10.77% 4.27%

 

14

 

International Explorer Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value•
    Shares ($000)
Common Stocks (96.0%)1    
Australia (4.0%)    
  Computershare Ltd. 1,553,679 12,446
  Mirvac Group 6,146,824 9,751
  oOh!media Ltd. 2,861,954 9,295
  Iluka Resources Ltd. 2,094,685 9,183
  Ansell Ltd. 547,555 9,021
  Tox Free Solutions Ltd. 4,248,114 7,588
  Domino’s Pizza    
  Enterprises Ltd. 151,696 7,390
  Fairfax Media Ltd. 11,707,454 7,333
  Spotless Group Holdings    
  Ltd. 8,552,373 6,488
  Incitec Pivot Ltd. 2,439,068 5,455
^ Japara Healthcare Ltd. 3,284,183 4,689
  Mantra Group Ltd. 1,784,551 4,456
  SEEK Ltd. 386,119 4,288
  Asaleo Care Ltd. 3,589,221 3,977
  Amcor Ltd. 303,234 3,385
^ Regis Healthcare Ltd. 1,099,902 3,289
^,* Karoon Gas Australia Ltd. 1,374,635 2,388
^ Estia Health Ltd. 1,003,698 2,045
  Link Administration    
  Holdings Ltd. 262,865 1,438
      113,905
Austria (1.2%)    
  Lenzing AG 98,802 12,877
  ANDRITZ AG 144,985 7,581
  BUWOG AG 185,240 4,477
  Wienerberger AG 264,678 4,230
  Schoeller-Bleckmann    
  Oilfield Equipment AG 59,483 4,214
      33,379
Belgium (0.7%)    
  Cie d’Entreprises CFE 52,608 5,799
  D’ieteren SA 117,856 5,195
  Ontex Group NV 150,617 4,556
* Galapagos NV 49,600 3,018
      18,568

 

China (2.4%)    
  Shenzhou International    
  Group Holdings Ltd. 2,482,000 16,440
* SINA Corp. 208,099 15,012
* New Oriental Education    
  & Technology Group Inc.    
  ADR 285,056 14,290
  ANTA Sports Products    
  Ltd. 2,437,000 7,028
  Belle International    
  Holdings Ltd. 8,858,000 5,349
  CSPC Pharmaceutical    
  Group Ltd. 4,756,000 4,924
  Haitian International    
  Holdings Ltd. 1,807,000 3,725
      66,768
Denmark (1.3%)    
  Matas A/S 1,375,000 26,685
* H Lundbeck A/S 301,184 9,707
  Ambu A/S Class B 28,887 1,497
* OW Bunker A/S 1,000,000 —
      37,889
Finland (0.2%)    
  Tikkurila Oyj 250,000 4,813
 
France (7.4%)    
  Rubis SCA 375,361 34,230
  SPIE SA 1,500,000 28,347
* Ubisoft Entertainment SA 825,000 28,071
  Elis SA 1,561,961 25,950
* Marie Brizard Wine &    
  Spirits SA 1,000,000 16,989
  Imerys SA 167,514 11,663
*,2 Maisons du Monde SA 390,663 10,997
  Lectra 580,000 10,484
* ID Logistics Group 69,999 9,874
  Eurazeo SA 108,699 6,259
  Orpea 61,653 5,131
* Virbac SA 31,697 5,044
  BioMerieux 32,381 4,718

 

15

 

International Explorer Fund

      Market
      Value•
    Shares ($000)
  Albioma SA 250,000 4,130
  Wendel SA 33,264 3,827
  Coface SA 512,886 3,321
      209,035
Germany (5.1%)    
  BRAAS Monier Building    
  Group SA 1,133,916 32,679
  Duerr AG 300,000 22,371
  XING AG 87,891 17,926
  RIB Software AG 900,000 12,209
  Zeal Network SE 318,921 10,839
^ Wacker Chemie AG 100,000 8,921
  Grand City Properties SA 425,000 7,476
  STRATEC Biomedical AG 123,627 7,068
* Senvion SA 290,000 5,101
  Sartorius AG Preference    
  Shares 58,461 4,602
  SAF-Holland SA 339,483 4,559
*,2 windeln.de SE 850,000 3,824
  Deutsche Beteiligungs AG 110,136 3,723
^ ElringKlinger AG 173,940 2,694
      143,992
Hong Kong (1.1%)    
  Techtronic Industries Co.    
  Ltd. 3,898,500 14,647
  Hysan Development Co.    
  Ltd. 1,373,000 6,337
  Johnson Electric Holdings    
  Ltd. 2,052,125 4,960
  Value Partners Group Ltd. 4,491,000 4,284
      30,228
India (2.4%)    
  Gujarat Pipavav Port Ltd. 7,640,999 18,628
  Apollo Hospitals    
  Enterprise Ltd. 909,567 18,261
  Container Corp. Of India    
  Ltd. 616,702 12,712
  Phoenix Mills Ltd. 1,438,800 8,131
  Idea Cellular Ltd. 5,969,556 6,819
  Multi Commodity    
  Exchange of India Ltd. 205,558 3,966
      68,517
Indonesia (0.2%)    
  Matahari Department    
  Store Tbk PT 3,465,800 4,780
  Ciputra Property Tbk PT 34,752,201  2,026
      6,806
Ireland (4.5%)    
  Smurfit Kappa Group plc    
  (London Shares) 1,150,000 25,249
* Dalata Hotel Group plc 5,000,000 22,374
  Glanbia plc 900,000 14,661
  Origin Enterprises plc 2,000,000 12,401

 

  Irish Continental Group    
  plc 2,500,000 11,659
  Irish Residential    
  Properties REIT plc 8,400,000 10,832
  Kingspan Group plc 425,000 10,407
* Cairn Homes plc 5,854,846 7,575
* FBD Holdings plc 650,000 4,351
  Smurfit Kappa Group plc 175,000 3,840
  IFG Group plc 1,675,000 3,315
      126,664
Italy (7.7%)    
2 Anima Holding SPA 7,437,016 36,232
  Cerved Information    
  Solutions SPA 3,947,405 31,773
* Yoox Net-A-Porter    
  Group SPA 850,000 24,451
  Maire Tecnimont SPA 6,500,000 15,672
^ Salvatore Ferragamo SPA 606,146 14,817
  Moncler SPA 761,170 12,672
  Credito Emiliano SPA 2,125,000 11,979
  Cairo Communication    
  SPA 2,372,242 10,177
  DiaSorin SPA 160,424 9,859
  FinecoBank Banca Fineco    
  SPA 1,500,000 8,766
  Brunello Cucinelli SPA 431,223 8,542
2 Infrastrutture Wireless    
  Italiane SPA 1,802,466 8,521
2 OVS SPA 1,419,252 7,775
  Autogrill SPA 913,656 7,615
2 Banca Sistema SPA 2,371,523 6,225
*,2 Technogym SPA 750,000 3,386
      218,462
Japan (25.5%)    
  Nippon Shinyaku Co. Ltd. 637,800 32,376
  Aica Kogyo Co. Ltd. 742,700 21,194
  Hitachi Transport System    
  Ltd. 978,800 20,177
  Digital Garage Inc. 1,067,300 20,167
  Tsuruha Holdings Inc. 167,000 19,269
  Tokai Tokyo Financial    
  Holdings Inc. 3,670,500 18,622
  Arcs Co. Ltd. 709,300 17,798
  Zenkoku Hosho Co. Ltd. 388,555 16,706
  Ai Holdings Corp. 668,400 16,424
  Trusco Nakayama Corp. 315,700 16,322
  Kuroda Electric Co. Ltd. 811,400 15,787
  Nihon Parkerizing Co. Ltd. 1,140,000 15,708
  Glory Ltd. 465,700 15,395
  Nippon Densetsu Kogyo    
  Co. Ltd. 807,600 14,714
  Koito Manufacturing Co.    
  Ltd. 276,100 14,496

 

16

 

International Explorer Fund

      Market
      Value•
    Shares ($000)
  TPR Co. Ltd. 493,100 14,259
  Nitta Corp. 548,700 14,201
  Kureha Corp. 369,400 14,127
  Kakaku.com Inc. 769,500 12,928
  JSP Corp. 512,500 12,245
  Obara Group Inc. 279,700 12,054
  Kissei Pharmaceutical    
  Co. Ltd. 445,800 11,651
  Daikyonishikawa Corp. 890,400 11,529
  SCSK Corp. 307,400 11,467
  OBIC Business    
  Consultants Co. Ltd. 243,800 11,416
  Kyudenko Corp. 346,400 11,160
  Temp Holdings Co. Ltd. 626,500 10,625
  Alps Electric Co. Ltd. 440,090 10,557
  Sumitomo Real Estate    
  Sales Co. Ltd. 465,300 10,517
  Daibiru Corp. 1,195,400 10,384
  Shinmaywa Industries Ltd.  1,321,000  10,225
  Nippon Shokubai Co. Ltd. 144,361 9,962
  Fukushima Industries    
  Corp. 285,500 9,747
* IHI Corp. 3,703,245 9,742
  Musashi Seimitsu    
  Industry Co. Ltd. 384,900 9,427
  Unipres Corp. 469,200 9,055
  NEC Networks & System    
  Integration Corp. 488,600 8,683
  Sanwa Holdings Corp. 867,665 8,641
  Asahi Intecc Co. Ltd. 182,870 7,920
  Taiheiyo Cement Corp. 2,736,000 7,836
  Kenedix Inc. 1,823,900 7,669
  Takara Leben Co. Ltd. 1,088,600 7,384
  Lintec Corp. 329,700 7,181
  Iida Group Holdings Co.    
  Ltd. 369,785 7,148
  Tokyo TY Financial Group    
  Inc. 219,643 7,028
  Nabtesco Corp. 225,300 6,729
  Teijin Ltd. 341,800 6,604
  Ferrotec Corp. 530,400 6,451
  Disco Corp. 51,900 6,273
* Itoham Yonekyu Holdings    
  Inc. 651,000 6,208
  Miura Co. Ltd. 352,400 6,081
  Ezaki Glico Co. Ltd. 105,300 5,986
  Toyo Tire & Rubber Co.    
  Ltd. 375,200 5,819
  Tokyo Ohka Kogyo Co.    
  Ltd. 155,480 5,521
  Ain Holdings Inc. 81,600 5,508
  Shinsei Bank Ltd. 3,390,235 5,481
  EPS Holdings Inc. 396,100 5,198
  Eagle Industry Co. Ltd. 349,600 4,988

 

  Tokyo Steel    
  Manufacturing Co. Ltd. 718,100 4,981
^ Kumiai Chemical Industry    
  Co. Ltd. 876,100 4,960
  Tenma Corp. 265,300 4,595
  Leopalace21 Corp. 650,000 4,226
^ Yushin Precision    
  Equipment Co. Ltd. 175,200 4,081
^ Jamco Corp. 197,300 4,068
* Kobe Steel Ltd. 488,500 4,031
  Hitachi Metals Ltd. 321,700 4,021
  Ichigo Inc. 909,600 3,944
  Takasago International    
  Corp. 144,600 3,876
  DMG Mori Co. Ltd. 348,400 3,695
  H2O Retailing Corp. 246,900 3,667
^,* W-Scope Corp. 184,800 3,306
  Mitsui Sugar Co. Ltd. 146,500 3,301
  Casio Computer Co. Ltd. 228,100 3,177
  Tsutsumi Jewelry Co. Ltd. 187,900 2,973
      721,672
Luxembourg (0.7%)    
  L’Occitane International    
  SA 6,365,500 13,141
  Reinet Investments SCA 339,753 6,694
      19,835
Malaysia (0.1%)    
  Bursa Malaysia Bhd. 1,977,900 4,077
 
Netherlands (2.9%)    
* Van Lanschot NV Class A 950,000 19,477
  Kendrion NV 350,000 10,094
* SIF Holding NV    
  (Berlin Shares) 581,260 10,084
  IMCD Group NV 230,511 9,969
2 Refresco Group NV 658,323 9,617
*,2 Intertrust NV 399,996 8,432
  Beter Bed Holding NV 400,000 7,243
* SIF Holding NV 343,740 5,961
  Delta Lloyd NV 4 —
      80,877
New Zealand (0.3%)    
  Fletcher Building Ltd. 1,197,176 8,869
 
Norway (0.3%)    
  Kongsberg Gruppen ASA 518,433 7,401
 
Other (0.8%)    
^,3 Vanguard FTSE All World    
  ex-US Small-Cap ETF 249,010 24,052
 
Singapore (0.2%)    
  First Resources Ltd. 4,816,500 6,301

 

17

 

International Explorer Fund

      Market
      Value•
    Shares ($000)
South Korea (1.8%)    
  Medy-Tox Inc. 32,771 11,627
  NCSoft Corp. 36,154 8,352
  Mando Corp. 32,377 7,570
^ Nexen Tire Corp. 645,802 7,408
  S-1 Corp. 83,659 6,755
^ Hotel Shilla Co. Ltd. 99,951 5,000
  Hanon Systems 302,600 2,829
      49,541
Spain (0.7%)    
  Applus Services SA 900,000 8,636
  Melia Hotels International    
  SA 626,180 7,731
  Naturhouse Health SAU 600,000 3,194
      19,561
Sweden (3.7%)    
2 Bravida Holding AB 3,250,000 19,974
2 Nordax Group AB 3,125,000 19,615
  Modern Times Group    
  MTG AB Class B 600,000 16,148
2 Coor Service    
  Management Holding    
  AB 2,750,000 15,984
  Bufab AB 1,724,046 14,343
  Loomis AB Class B 450,000 12,791
  Concentric AB 469,805 5,587
      104,442
Switzerland (4.6%)    
  Logitech International SA 1,250,000 30,233
  OC Oerlikon Corp. AG 2,859,137 26,879
  Helvetia Holding AG 37,500 19,510
  Ascom Holding AG 900,000 15,411
  Interroll Holding AG 14,000 15,281
  u-blox Holding AG 51,532 9,741
  Comet Holding AG 6,000 5,202
  ams AG 183,362 5,134
  Tecan Group AG 21,312 3,512
      130,903
Taiwan (1.6%)    
  Giant Manufacturing Co.    
  Ltd. 1,767,000 12,498
  Chroma ATE Inc. 3,824,000 9,693
  CTCI Corp. 4,336,000 6,363
  Gourmet Master Co. Ltd. 657,300 5,899
  Catcher Technology Co.    
  Ltd. 492,000 3,851
  Eclat Textile Co. Ltd. 326,000 3,694
  Globalwafers Co. Ltd. 1,283,000 3,162
      45,160
Thailand (0.2%)    
  LPN Development PCL 14,565,300 4,747
 
United Arab Emirates (0.1%)  
* Lamprell plc 3,650,000 3,280

 

United Kingdom (14.1%)    
  Dechra Pharmaceuticals    
  plc 850,000 13,988
  Grainger plc 4,660,000 12,615
  Restaurant Group plc 2,501,386 11,475
  DCC plc 140,000 11,390
  Kennedy Wilson Europe    
  Real Estate plc 879,949 10,923
  HomeServe plc 1,420,000 10,602
  Micro Focus International    
  plc 392,057 10,266
  Elementis plc 3,500,640 10,210
  Abcam plc 936,899 9,977
  IG Group Holdings plc 975,000 9,846
  SuperGroup plc 574,000 9,446
  SSP Group plc 2,209,000 9,180
  Ricardo plc 800,000 9,074
  Dunelm Group plc 972,500 9,007
  AA plc 2,845,363 8,899
  Northgate plc 1,700,208 8,731
^ Telecom Plus plc 600,000 8,688
  Eco Animal Health Group    
  plc 1,448,166 8,676
  Tyman plc 2,910,245 8,663
  Grafton Group plc 1,425,000 8,655
  B&M European Value    
  Retail SA 2,873,534 8,250
  Hikma Pharmaceuticals    
  plc 380,581 8,163
  Halma plc 630,000 8,065
  Keller Group plc 877,904 7,308
  Redrow plc 1,563,146 7,261
^ Kier Group plc 420,311 6,990
  Photo-Me International    
  plc 3,600,000 6,671
  Bodycote plc 913,000 6,617
  Hunting plc 1,023,975 6,293
  Pets at Home Group plc 2,356,073 6,157
  Mears Group plc 1,096,560 6,050
  Investec plc 931,000 5,778
^ Victrex plc 268,040 5,740
  WS Atkins plc 310,000 5,729
  Saga plc 2,289,340 5,553
2 Auto Trader Group plc 1,203,759 5,515
  Polypipe Group plc 1,744,012 5,377
  Consort Medical plc 382,925 5,354
  Hays plc 3,072,148 5,131
  Inchcape plc 600,000 4,770
  Volution Group plc 2,317,253 4,739
  Genus plc 205,292 4,715
  Berendsen plc 365,000 4,307
  JRP Group plc 2,909,347 4,303
  James Fisher & Sons plc 202,693 4,011
  Soco International plc 2,311,526 3,901

 

18

 

International Explorer Fund

      Market
      Value•
    Shares ($000)
  Ultra Electronics Holdings    
  plc 168,554 3,830
  LondonMetric Property    
  plc 2,000,000 3,649
  Electra Private Equity plc 67,300 3,545
  Cranswick plc 134,329 3,482
  UNITE Group plc 513,676 3,480
  Cineworld Group plc 524,152 3,461
  Brewin Dolphin Holdings    
  plc 984,495 3,132
* Findel plc 1,104,252 2,863
  A.G. Barr plc 496,000 2,859
  QinetiQ Group plc 1,000,000 2,816
  Senior plc 1,263,500 2,693
  SIG plc 1,975,000 2,672
  Hill & Smith Holdings plc 215,326 2,649
*,2 ConvaTec Group plc 824,284 2,522
^,* LMS Capital plc 1,906,855 1,314
* Ophir Energy plc 1,408,565 1,189
  Laird plc 588,080 1,042
      400,257
United States (0.2%)    
  Samsonite International    
  SA 1,969,500 6,192
Total Common Stocks    
(Cost $2,451,654)   2,716,193
Temporary Cash Investments (5.7%)1  
Money Market Fund (5.1%)    
4,5 Vanguard Market    
  Liquidity Fund,    
  0.718% 1,447,562 144,771
 
    Face  
    Amount  
    ($000)  
Repurchase Agreement (0.3%)  
  Goldman Sachs & Co.    
  0.320%, 11/1/16    
  (Dated 10/31/16,    
  Repurchase Value    
  $8,900,000 collateralized    
  by Federal National    
  Mortgage Assn.    
  3.500%, 8/1/46, with    
  a value of $9,078,000) 8,900 8,900

 

U.S. Government and Agency Obligations (0.3%)
6 United States Treasury    
  Bill, 0.327%, 1/19/17 3,000 2,998
7 United States Treasury    
  Bill, 0.320%, 1/26/17 3,000 2,998
7 United States Treasury    
  Bill, 0.381%, 3/9/17 1,000 998
      6,994
Total Temporary Cash Investments  
(Cost $160,658)   160,665
Total Investments (101.7%)    
(Cost $2,612,312)   2,876,858
Other Assets and Liabilities (-1.7%)  
Other Assets 6   16,560
Liabilities 4   (64,715)
      (48,155)
Net Assets (100%)    
Applicable to 168,160,576 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization)   2,828,703
Net Asset Value Per Share   $16.82
 
 
Statement of Assets and Liabilities  
Assets    
Investments in Securities, at Value    
  Unaffiliated Issuers   2,708,035
  Affiliated Vanguard Funds   168,823
Total Investments in Securities   2,876,858
Investment in Vanguard   224
Receivables for Investment Securities  
  Sold   4,551
Receivables for Accrued Income   7,916
Receivables for Capital Shares Issued 703
Other Assets 6   3,166
Total Assets   2,893,418
Liabilities    
Payables for Investment Securities    
  Purchased   2,498
Collateral for Securities on Loan   49,669
Payables to Investment Advisor   1,462
Payables for Capital Shares Redeemed 2,638
Payables to Vanguard   4,482
Other Liabilities   3,966
Total Liabilities   64,715
Net Assets   2,828,703

 

19

 

International Explorer Fund

At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 2,570,759
Undistributed Net Investment Income 16,139
Accumulated Net Realized Losses (22,767)
Unrealized Appreciation (Depreciation)  
Investment Securities 264,546
Futures Contracts 1,174
Forward Currency Contracts (716)
Foreign Currencies (432)
Net Assets 2,828,703

 

• 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 $47,125,000.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 97.6% and 4.1%, respectively,
of net assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31, 2016, the aggregate value of these securities was $158,619,000,
representing 5.6% of net assets.
3 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
4 Includes $49,669,000 of collateral received for securities on loan.
5 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is
the 7-day yield.
6 Securities with a value of $1,098,000 and cash of $525,000 have been segregated as collateral for open forward currency contracts.
7 Securities with a value of $3,097,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.

20

 

International Explorer Fund

Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends1 62,096
Interest 571
Securities Lending—Net 2,123
Total Income 64,790
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 6,288
Performance Adjustment (23)
The Vanguard Group—Note C  
Management and Administrative 4,387
Marketing and Distribution 529
Custodian Fees 481
Auditing Fees 40
Shareholders’ Reports 45
Trustees’ Fees and Expenses 4
Total Expenses 11,751
Net Investment Income 53,039
Realized Net Gain (Loss)  
Investment Securities Sold (17,731)
Futures Contracts (2,056)
Foreign Currencies and Forward Currency Contracts 1,507
Realized Net Gain (Loss) (18,280)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (31,650)
Futures Contracts (1,998)
Foreign Currencies and Forward Currency Contracts (433)
Change in Unrealized Appreciation (Depreciation) (34,081)
Net Increase (Decrease) in Net Assets Resulting from Operations 678
1 Dividends are net of foreign withholding taxes of $4,692,000.  

 

See accompanying Notes, which are an integral part of the Financial Statements.

 

21

 

International Explorer Fund

Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 53,039 41,153
Realized Net Gain (Loss) (18,280) 121,585
Change in Unrealized Appreciation (Depreciation) (34,081) (29,075)
Net Increase (Decrease) in Net Assets Resulting from Operations 678 133,663
Distributions    
Net Investment Income (43,678) (45,599)
Realized Capital Gain1 (109,775) (153,304)
Total Distributions (153,453) (198,903)
Capital Share Transactions    
Issued 533,743 712,308
Issued in Lieu of Cash Distributions 139,822 183,328
Redeemed (578,815) (541,440)
Net Increase (Decrease) from Capital Share Transactions 94,750 354,196
Total Increase (Decrease) (58,025) 288,956
Net Assets    
Beginning of Period 2,886,728 2,597,772
End of Period2 2,828,703 2,886,728

1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $0 and $26,297,000 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 $16,139,000 and $4,878,000.

See accompanying Notes, which are an integral part of the Financial Statements.

22

 

International Explorer Fund

Financial Highlights          
 
 
For a Share Outstanding     Year Ended October 31,
Throughout Each Period 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $17.76 $18.26 $18.50 $14.50 $14.41
Investment Operations          
Net Investment Income .318 .287 .335 .327 .362
Net Realized and Unrealized Gain (Loss)          
on Investments (.334) .635 .133 4.078 .287
Total from Investment Operations (.016) .922 .468 4.405 .649
Distributions          
Dividends from Net Investment Income (. 263) (. 326) (. 420) (. 405) (. 346)
Distributions from Realized Capital Gains (.661) (1.096) (.288) — (.213)
Total Distributions (. 924) (1.422) (.708) (. 405) (. 559)
Net Asset Value, End of Period $16.82 $17.76 $18.26 $18.50 $14.50
 
Total Return1 -0.06% 5.65% 2.66% 31.13% 5.02%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $2,829 $2,887 $2,598 $2,281 $1,819
Ratio of Total Expenses to Average Net Assets2 0.41% 0.42% 0.40% 0.36% 0.43%
Ratio of Net Investment Income to          
Average Net Assets 1.83% 1.53% 1.69% 2.03% 2.35%
Portfolio Turnover Rate 37% 42% 39% 36% 28%

1 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
2 Includes performance-based investment advisory fee increases (decreases) of 0.00%, 0.00%, 0.00%, (0.05%), and 0.02%.

See accompanying Notes, which are an integral part of the Financial Statements.

23

 

International Explorer Fund

Notes to Financial Statements

Vanguard International Explorer Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of 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. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. 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 clearing-house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

24

 

International Explorer Fund

The fund enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts or to protect the value of securities and related receivables and payables against changes in foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counter-party risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and notional amounts 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 gains (losses) on futures or forward currency contracts.

During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund’s average investment in forward currency contracts represented 5% of net assets, based on the average of notional amounts at each quarter-end during the period.

4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, 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.

25

 

International Explorer Fund

5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

7. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of 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.

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 October 31, 2016, 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.

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International Explorer Fund

Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the fund’s understanding of the applicable countries’ tax rules and rates. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received during the year, if any, are included in dividend income. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.

B. The investment advisory firms Schroder Investment Management North America Inc. and Wellington Management Company LLP each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Schroder Investment Management North America Inc. and Wellington Management Company LLP is subject to quarterly adjustments based on performance relative to the S&P EPAC SmallCap Index for the preceding three years.

Vanguard manages the cash reserves of the fund as described below.

For the year ended October 31, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.22% of the fund’s average net assets, before a decrease of $23,000 (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, distribution, and cash management 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 October 31, 2016, the fund had contributed to Vanguard capital in the amount of $224,000, representing 0.01% of the fund’s net assets and 0.09% 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).

27

 

International Explorer Fund

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 53,354 2,662,839 —
Temporary Cash Investments 144,771 15,894 —
Futures Contracts—Assets1 58 — —
Futures Contracts—Liabilities1 (154) — —
Forward Currency Contracts—Assets — 923 —
Forward Currency Contracts—Liabilities — (1,639) —
Total 198,029 2,678,017 —
1 Represents variation margin on the last day of the reporting period.      

 

E. At October 31, 2016, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Statement of Assets and Liabilities Caption ($000) ($000) ($000)
Other Assets 58 923 981
Other Liabilities (154) (1,639) (1,793)

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the year ended October 31, 2016, were:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts (2,056) — (2,056)
Forward Currency Contracts — 861 861
Realized Net Gain (Loss) on Derivatives (2,056) 861 (1,195)
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts (1,998) — (1,998)
Forward Currency Contracts — (288) (288)
Change in Unrealized Appreciation (Depreciation) on Derivatives (1,998) (288) (2,286)

 

28

 

International Explorer Fund

At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
Dow Jones EURO STOXX 50 Index December 2016 628 21,017 306
Topix Index December 2016 100 13,275 775
S&P ASX 200 Index December 2016 56 5,635 (50)
FTSE 100 Index December 2016 63 5,330 143
        1,174

 

Unrealized appreciation (depreciation) on open Dow Jones EURO STOXX 50 and FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.

At October 31, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.

            Unrealized
  Contract         Appreciation
  Settlement     Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Toronto-Dominion Securities 12/21/16 EUR 19,023 USD 21,470 (537)
BNP Paribas 12/13/16 JPY 1,551,213 USD 15,214 (396)
Citibank, N.A. 12/21/16 EUR 13,628 USD 14,996 —
Citibank, N.A. 12/13/16 JPY 1,001,960 USD 9,668 (97)
Bank of America N.A. 12/21/16 GBP 4,149 USD 5,552 (468)
Goldman Sachs International 12/20/16 AUD 6,481 USD 4,819 105
JPMorgan Chase Bank N.A. 12/20/16 AUD 5,121 USD 3,923 (32)
Citibank, N.A. 12/21/16 GBP 3,139 USD 3,865 (18)
BNP Paribas 12/21/16 EUR 616 USD 695 (17)
JPMorgan Chase Bank N.A 12/21/16 GBP 366 USD 489 (40)
Barclays Bank plc 12/21/16 USD 6,905 EUR 6,153 136
Citibank, N.A. 12/13/16 USD 5,781 JPY 587,565 169
JPMorgan Chase Bank N.A 12/21/16 USD 5,337 EUR 4,758 102
Goldman Sachs International 12/21/16 USD 2,189 GBP 1,680 131
BNP Paribas 12/13/16 USD 1,865 JPY 186,830 80
BNP Paribas 12/21/16 USD 1,483 EUR 1,352 (5)
JPMorgan Chase Bank N.A 12/21/16 USD 1,416 GBP 1,084 88
BNP Paribas 12/21/16 USD 1,279 EUR 1,138 27
Bank of America N.A. 12/13/16 USD 1,194 JPY 125,325 (3)
Barclays Bank plc 12/13/16 USD 1,192 JPY 119,205 53

 

29

 

International Explorer Fund

            Unrealized
  Contract         Appreciation
  Settlement     Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Barclays Bank plc 12/20/16 USD 1,089 AUD 1,449 (12)
Citibank, N.A. 12/21/16 USD 1,033 EUR 932 7
JPMorgan Chase Bank N.A 12/13/16 USD 909 JPY 93,930 12
JPMorgan Chase Bank N.A 12/20/16 USD 793 AUD 1,058 (11)
Bank of America N.A. 12/13/16 USD 786 JPY 81,210 10
JPMorgan Chase Bank N.A. 12/20/16 USD 623 AUD 819 —
Citibank, N.A. 12/20/16 USD 414 AUD 541 3
JPMorgan Chase Bank N.A. 12/21/16 USD 344 GBP 281 —
Bank of America N.A. 12/20/16 USD 253 GBP 208 (2)
UBS AG 12/21/16 USD 206 AUD 273 (1)
Barclays Bank plc 12/21/16 USD 172 GBP 140 —
Bank of America N.A 12/20/16 USD 100 AUD 131 —
            (716)
AUD—Australian dollar.            
EUR—Euro.            
GBP—British pound.            
JPY—Japanese yen.            
USD—U.S. dollar.            

 

F. 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 October 31, 2016, the fund realized net foreign currency gains of $647,000, which increased distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Certain of the fund’s investments are in securities considered to be passive foreign investment companies, for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended October 31, 2016, the fund realized gains on the sale of passive foreign investment companies of $1,287,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Passive foreign investment companies held at October 31, 2016, had unrealized appreciation of $28,891,000, all of which has been distributed and is reflected in the balance of undistributed net investment income.

The fund realized gains on the sale of securities that were subject to capital gains tax in certain foreign countries. Capital gains taxes reduce realized gains for financial statement purposes but are treated as an expense for tax purposes. Accordingly, $34,000 of capital gains tax has been reclassified from accumulated net realized losses to undistributed net investment income.

30

 

International Explorer Fund

For tax purposes, at October 31, 2016, the fund had $49,262,000 of ordinary income available for distribution. The fund had available capital losses totaling $21,093,000 that may be carried forward indefinitely to offset future net capital gains.

At October 31, 2016, the cost of investment securities for tax purposes was $2,643,118,000. Net unrealized appreciation of investment securities for tax purposes was $233,740,000, consisting of unrealized gains of $479,023,000 on securities that had risen in value since their purchase and $245,283,000 in unrealized losses on securities that had fallen in value since their purchase.

G. During the year ended October 31, 2016, the fund purchased $1,056,398,000 of investment securities and sold $1,040,777,000 of investment securities, other than temporary cash investments.

H. Capital shares issued and redeemed were:

  Year Ended October 31,
  2016 2015
  Shares Shares
  (000) (000)
Issued 32,185 39,930
Issued in Lieu of Cash Distributions 8,363 11,118
Redeemed (34,938) (30,786)
Net Increase (Decrease) in Shares Outstanding 5,610 20,262

 

I. 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  
  Oct. 31,   Proceeds     Oct. 31,
  2015   from   Capital Gain 2016
  Market Purchases Securities   Distributions Market
  Value at Cost Sold Income Received Value
  ($000) ($000) ($000)1 ($000) ($000) ($000)
Bufab AB 12,344 469 5,448 412 — NA2
Vanguard FTSE All World ex-US            
Small-Cap ETF 23,646 — — 632 — 24,052
Vanguard Market Liquidity Fund 208,878 NA3 NA 3 477 — 144,771
Total 244,868     1,521 — 168,823
1 Includes net realized gain (loss) on affiliated investment securities sold of $298,000.
2 Not applicable—at October 31, 2016, the security was still held, but the issuer was no longer an affiliated company of the fund.
3 Not applicable—purchases and sales are for temporary cash investment purposes.

 

J. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, 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 Whitehall Funds and the Shareholders of Vanguard International Explorer Fund:

In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard International Explorer Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

Special 2016 tax information (unaudited) for Vanguard International Explorer Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $109,775,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.

The fund distributed $37,392,000 of qualified dividend income to shareholders during the fiscal year.

The fund designates to shareholders foreign source income of $62,810,000 and foreign taxes paid of $4,609,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.

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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 2016. (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: International Explorer Fund      
Periods Ended October 31, 2016      
  One Five Ten
  Year Years Years
Returns Before Taxes -0.06% 8.34% 3.56%
Returns After Taxes on Distributions -1.28 7.14 2.45
Returns After Taxes on Distributions and Sale of Fund Shares 1.01 6.47 2.85

 

33

 

About Your Fund’s Expenses

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

The accompanying table illustrates your fund’s costs in two ways:

• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“

• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

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Six Months Ended October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
International Explorer Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return $1,000.00 $1,005.98 $1.97
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.18 1.98

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 0.39%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

35

 

Trustees Approve Advisory Arrangements

The board of trustees of Vanguard International Explorer Fund has renewed the fund’s investment advisory arrangements with Schroder Investment Management North America Inc. (Schroder Inc.) and Wellington Management Company LLP (Wellington Management), as well as a sub-advisory arrangement with Schroder Investment Management North America Limited (Schroder Ltd.). The board determined that renewing the fund’s advisory arrangements was in the best interests of the fund and its shareholders.

The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. 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 advisors and made monthly presentations to the board during the fiscal year directing the board’s focus to relevant information and topics.

The board, or an investment committee made up of board members, also received information through 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 arrangements. 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 each advisor. The board considered the following:

Schroder. Schroders plc, the parent company of Schroder Inc. and Schroder Ltd. (collectively, Schroder), founded in 1804, specializes in global equity and fixed income management. Schroder employs a bottom-up, fundamental research-driven process to select stocks. Schroder’s International Small-Cap Committee is responsible for the management of its portion of the fund, and leverages Schroder’s extensive network of local analysts across the globe, as it believes that country factors are more important for smaller companies relative to larger companies. Schroder focuses on identifying companies with sustainable competitive advantages, attractive earnings growth, and compelling valuations. Schroder Inc. has advised the fund since its inception in 1996, and its affiliate Schroder Ltd. has advised a portion of the fund since 2003.

Wellington Management. Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. Wellington Management’s international small-cap team uses a traditional, bottom-up investment process that attempts to discover a company’s intrinsic value. In valuing a company, it believes that the same valuation metric should be applied on an industry-by-industry basis. Although the team’s valuation discipline is essential to the process, its philosophy is not biased toward growth or value as it invests in both extended growth opportunities and neglected or misunderstood companies. The firm has advised a portion of the fund since 2010.

36

 

The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangements.

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 arrangements should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also 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 fund’s advisory fee rate.

The board did not consider profitability of the fund’s advisors in determining whether to approve the advisory fees, because the firms are independent of Vanguard, and the advisory fees are the result of arm’s-length negotiations.

The benefit of economies of scale

The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each firm increase.

The board will consider whether to renew the advisory arrangements again after a one-year period.

37

 

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.

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.

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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.

39

 

The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

InterestedTrustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

IndependentTrustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the
Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

 P.O. Box 2600
Valley Forge, PA 19482-2600

 

Connect with Vanguard® > vanguard.com

Fund Information > 800-662-7447  
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing > 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q1260 122016

 



Annual Report | October 31, 2016

Vanguard High Dividend Yield Index Fund

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Fund Profile. 7
Performance Summary. 9
Financial Statements. 11
Your Fund’s After-Tax Returns. 28
About Your Fund’s Expenses. 29
Glossary. 31

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard High Dividend Yield Index Fund returned a bit more than 8% for the 12 months ended October 31, 2016, closely tracking its target, the FTSE High Dividend Yield Index. It outdistanced both the broad market and the average return of its peers.

• The fund’s focus on U.S. companies that are committed to paying larger-than-average dividends helped boost its results for the fiscal year.

• The fund posted gains in each of its ten market sectors. Technology (+15%) was the top contributor, followed by consumer goods (+10%), utilities (+18%), and industrials (+10%).

• Since its inception in November of 2006, the fund has produced an average annual return of almost 7%.

Total Returns: Fiscal Year Ended October 31, 2016  
  Total
  Returns
Vanguard High Dividend Yield Index Fund  
Investor Shares 8.11%
ETF Shares  
Market Price 8.13
Net Asset Value 8.18
FTSE High Dividend Yield Index 8.25
Equity Income Funds Average 4.59

 

Equity Income 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: Inception Through October 31, 2016  
  Average
  Annual Return
High Dividend Yield Index Fund Investor Shares (Returns since inception: 11/16/2006) 6.60%
FTSE High Dividend Yield Index 6.82
Equity Income Funds Average 5.11
Equity Income 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 Peer Group
  Shares Shares Average
High Dividend Yield Index Fund 0.16% 0.09% 1.20%

 

The fund expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratios were 0.15% for Investor Shares and 0.08% for ETF Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.

Peer group: Equity Income Funds.

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

 

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.

3

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

4

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors

shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

5

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

6

 

High Dividend Yield Index Fund

Fund Profile
As of October 31, 2016

Share-Class Characteristics  
 
 
  Investor ETF
  Shares Shares
Ticker Symbol VHDYX VYM
Expense Ratio1 0.16% 0.09%
30-Day SEC    
Yield 3.17% 3.24%

 

Portfolio Characteristics    
      DJ
      U.S.
    FTSE High Total
    Dividend Market
    Yield FA
  Fund Index Index
Number of Stocks 419 415 3,833
Median Market Cap $108.2B $108.2B $53.5B
Price/Earnings Ratio 20.2x 20.2x 23.1x
Price/Book Ratio 2.6x 2.6x 2.7x
Return on Equity 17.4% 17.4% 16.6%
Earnings Growth      
Rate 1.1% 1.1% 8.4%
Dividend Yield 3.3% 3.3% 2.1%
Foreign Holdings 0.0% 0.0% 0.0%
Turnover Rate 7% — —
Short-Term      
Reserves -0.1% — —

 

Volatility Measures    
  FTSE High DJ
  Dividend U.S. Total
  Yield Market
  Index FA Index
R-Squared 1.00 0.89
Beta 1.00 0.86

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

 

Ten Largest Holdings (% of total net assets)
Microsoft Corp. Software 5.3%
Exxon Mobil Corp. Integrated Oil & Gas 4.0
Johnson & Johnson Pharmaceuticals 3.7
General Electric Co. Diversified Industrials 3.0
JPMorgan Chase & Co. Banks 2.9
Wells Fargo & Co. Banks 2.7
AT&T Inc. Fixed Line  
  Telecommunications 2.6
Procter & Gamble Co. Nondurable  
  Household Products 2.6
Chevron Corp. Integrated Oil & Gas 2.3
Verizon Communications Fixed Line  
Inc. Telecommunications 2.3
Top Ten   31.4%

The holdings listed exclude any temporary cash investments and equity index products.

Investment Focus

1 The expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratios were 0.15% for Investor Shares and 0.08% for ETF Shares.

7

 

High Dividend Yield Index Fund

Sector Diversification (% of equity exposure)
    FTSE High DJ
    Dividend U.S. Total
    Yield Market
  Fund Index FA Index
Basic Materials 3.2% 3.2% 2.5%
Consumer Goods 15.2 15.2 10.2
Consumer Services 5.7 5.6 13.2
Financials 13.8 13.8 19.4
Health Care 11.0 11.0 12.6
Industrials 12.4 12.4 12.7
Oil & Gas 10.4 10.5 6.6
Technology 14.8 14.8 17.2
Telecommunications 5.2 5.2 2.3
Utilities 8.3 8.3 3.3

 

8

 

High Dividend Yield Index Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: November 16, 2006, Through October 31, 2016
Initial Investment of $10,000


 

  Average Annual Total Returns  
  Periods Ended October 31, 2016  
      Since Final Value
  One Five Inception of a $10,000
  Year Years (11/16/2006) Investment
High Dividend Yield Index Fund        
Investor Shares 8.11% 13.63% 6.60% $18,903
FTSE High Dividend Yield Index 8.25 13.79 6.82 19,287
Equity Income Funds Average 4.59 10.40 5.11 16,432
Dow Jones U.S. Total Stock Market        
Float Adjusted Index 4.21 13.29 6.69 19,062

Equity Income Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

 

 

      Since Final Value
  One Five Inception of a $10,000
  Year Years (11/10/2006) Investment
High Dividend Yield Index Fund        
ETF Shares Net Asset Value 8.18% 13.71% 6.80% $19,267
FTSE High Dividend Yield Index 8.25 13.79 6.90 19,449
Dow Jones U.S. Total Stock Market Float        
Adjusted Index 4.21 13.29 6.85 19,358
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

 

See Financial Highlights for dividend and capital gains information.

9

 

High Dividend Yield Index Fund

Cumulative Returns of ETF Shares: November 10, 2006, Through October 31, 2016

      Since
  One Five Inception
  Year Years (11/10/2006)
High Dividend Yield Index Fund ETF Shares Market      
Price 8.13% 90.01% 92.68%
High Dividend Yield Index Fund ETF Shares Net      
Asset Value 8.18 90.09 92.67
FTSE High Dividend Yield Index 8.25 90.79 94.49
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

 

Fiscal-Year Total Returns (%): November 16, 2006, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Five Since
  Date Year Years Inception
Investor Shares 11/16/2006 18.75% 15.74% 6.81%
ETF Shares 11/10/2006      
Market Price   18.79 15.82 7.00
Net Asset Value   18.79 15.84 7.00

 

10

 

High Dividend Yield Index Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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 (99.6%)1    
Basic Materials (3.2%)    
  EI du Pont de Nemours    
  & Co. 2,173,172 149,492
  Dow Chemical Co. 2,765,415 148,807
  Air Products &    
  Chemicals Inc. 538,044 71,786
  LyondellBasell Industries    
  NV Class A 869,176 69,143
  International Paper Co. 1,023,383 46,083
  Nucor Corp. 782,274 38,214
  Mosaic Co. 873,979 20,565
  RPM International Inc. 333,927 15,875
  Steel Dynamics Inc. 565,803 15,537
  Avery Dennison Corp. 222,243 15,510
  CF Industries Holdings Inc. 562,040  13,495
  Reliance Steel &    
  Aluminum Co. 165,192 11,362
  Olin Corp. 393,994 8,640
  Scotts Miracle-Gro Co.    
  Class A 89,723 7,904
  Huntsman Corp. 406,196 6,885
  Compass Minerals    
  International Inc. 86,367 6,205
* Versum Materials Inc. 268,981 6,106
  Domtar Corp. 146,301 5,260
* Ingevity Corp. 106,012 4,389
  Commercial Metals Co. 276,105 4,338
  KapStone Paper and    
  Packaging Corp. 206,500 3,746
  Innophos Holdings Inc. 54,893 2,516
  A Schulman Inc. 86,695 2,492
  Ferroglobe plc 165,318 1,529
  Rayonier Advanced    
  Materials Inc. 114,338 1,478
      677,357
Consumer Goods (15.1%)    
  Procter & Gamble Co. 6,361,328 552,163
  Coca-Cola Co. 10,251,522 434,664
  PepsiCo Inc. 3,574,839 383,223

 

  Philip Morris    
  International Inc. 3,878,328 374,026
  Altria Group Inc. 4,926,173 325,719
  Kraft Heinz Co. 1,477,234 131,400
  Reynolds American Inc. 2,066,337 113,814
  Ford Motor Co. 9,589,553 112,581
  General Motors Co. 3,561,716 112,550
  Kimberly-Clark Corp. 897,496 102,682
  General Mills Inc. 1,473,082 91,302
  Archer-Daniels-Midland    
  Co. 1,452,931 63,304
  ConAgra Foods Inc. 1,078,201 51,948
  Kellogg Co. 584,623 43,923
  Stanley Black & Decker    
  Inc. 368,453 41,945
  Clorox Co. 320,992 38,525
  Genuine Parts Co. 374,466 33,923
  Mattel Inc. 832,346 26,244
  Harley-Davidson Inc. 445,398 25,397
  Coach Inc. 679,581 24,390
  Hasbro Inc. 279,084 23,278
  Coca-Cola European    
  Partners plc 564,965 21,717
  Bunge Ltd. 342,890 21,263
  Leggett & Platt Inc. 325,466 14,932
  Pinnacle Foods Inc. 282,196 14,510
  Nu Skin Enterprises Inc.    
  Class A 118,358 7,297
  B&G Foods Inc. 165,519 7,018
^ Flowers Foods Inc. 435,293 6,756
  Tupperware Brands Corp. 110,270 6,563
  Vector Group Ltd. 232,939 4,878
  HNI Corp. 102,315 4,160
  Steelcase Inc. Class A 236,376 3,156
  Universal Corp. 55,795 3,024
  Schweitzer-Mauduit    
  International Inc. 71,956 2,656
  MDC Holdings Inc. 108,807 2,580
^ Cal-Maine Foods Inc. 65,606 2,536
  Knoll Inc. 105,141 2,275

 

11

 

High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  Cosan Ltd. 251,354 2,237
  Briggs & Stratton Corp. 95,647 1,781
  National Presto Industries    
  Inc. 15,145 1,321
  Superior Industries    
  International Inc. 53,376 1,308
      3,238,969
Consumer Services (5.6%)    
  Wal-Mart Stores Inc. 3,878,435 271,568
  McDonald’s Corp. 2,123,966 239,095
  Target Corp. 1,423,591 97,843
  Sysco Corp. 1,284,200 61,796
  Las Vegas Sands Corp. 994,162 57,542
  Carnival Corp. 953,661 46,825
  Omnicom Group Inc. 585,581 46,741
  L Brands Inc. 533,089 38,484
  Viacom Inc. Class B 855,499 32,133
  Macy’s Inc. 764,430 27,894
  Best Buy Co. Inc. 642,342 24,993
  Darden Restaurants Inc. 313,880 20,336
  Wynn Resorts Ltd. 202,982 19,192
  Kohl’s Corp. 426,575 18,663
^ Nordstrom Inc. 348,560 18,125
  Gap Inc. 561,160 15,482
  KAR Auction Services Inc. 333,257 14,190
  Six Flags Entertainment    
  Corp. 230,192 12,810
  H&R Block Inc. 556,706 12,788
  Staples Inc. 1,610,841 11,920
  TEGNA Inc. 544,727 10,688
  Cinemark Holdings Inc. 262,289 10,439
^ Cracker Barrel Old    
  Country Store Inc. 53,772 7,420
  American Eagle Outfitters    
  Inc. 425,696 7,254
  International Game    
  Technology plc 249,884 7,177
  GameStop Corp. Class A 260,745 6,271
  John Wiley & Sons Inc.    
  Class A 103,387 5,335
  Hillenbrand Inc. 150,118 4,556
^ Regal Entertainment    
  Group Class A 203,319 4,373
  ILG Inc. 258,177 4,229
  Meredith Corp. 92,988 4,217
  DineEquity Inc. 44,398 3,512
  Time Inc. 255,897 3,327
  Extended Stay America Inc. 215,764 3,085
  Abercrombie & Fitch Co. 174,422 2,548
  SeaWorld Entertainment    
  Inc. 175,035 2,452
  Bob Evans Farms Inc. 56,260 2,319
  Guess? Inc. 170,709 2,305
  Gannett Co. Inc. 287,381 2,233
  National CineMedia Inc. 148,555 2,060

 

  ClubCorp Holdings Inc. 170,361 1,968
  Tailored Brands Inc.   119,497 1,888
^ Copa Holdings SA Class A 19,407 1,790
  Weis Markets Inc.   31,174 1,734
  New Media Investment    
  Group Inc.   109,542 1,577
  Cato Corp. Class A   48,589 1,442
^ Buckle Inc.   65,168 1,359
  Rent-A-Center Inc.   130,755 1,319
  Pier 1 Imports Inc.   220,797 952
  Speedway Motorsports Inc. 37,581 707
        1,198,956
Financials (13.7%)      
  JPMorgan Chase & Co. 8,991,456 622,748
  Wells Fargo & Co. 12,570,101 578,350
  Chubb Ltd.   1,155,177 146,707
  PNC Financial Services    
  Group Inc.   1,222,092 116,832
  BlackRock Inc.   306,297 104,521
  MetLife Inc.   2,198,138 103,225
  Prudential Financial Inc. 1,087,833 92,237
  CME Group Inc.   796,849 79,765
  BB&T Corp.   2,009,255 78,763
  Travelers Cos. Inc.   716,280 77,487
  Aflac Inc.   985,821 67,893
  SunTrust Banks Inc.   1,227,242 55,508
  M&T Bank Corp.   367,411 45,092
  Fifth Third Bancorp   1,908,891 41,537
  Principal Financial Group    
  Inc.   713,128 38,937
  KeyCorp   2,701,876 38,150
  T. Rowe Price Group Inc. 586,766 37,559
  Ameriprise Financial Inc. 403,956 35,706
  Regions Financial Corp. 3,147,877 33,714
  Huntington Bancshares    
  Inc.   2,713,418 28,762
  Invesco Ltd.   1,022,187 28,713
  Cincinnati Financial Corp. 364,763 25,818
  FNF Group   676,620 24,297
  Western Union Co.   1,200,867 24,101
  Arthur J Gallagher & Co. 430,902 20,782
  New York Community    
  Bancorp Inc.   1,168,558 16,780
  People’s United Financial    
  Inc.   792,489 12,870
  PacWest Bancorp   287,475 12,474
  Axis Capital Holdings Ltd. 208,657 11,887
  First American Financial    
  Corp.   268,635 10,493
  Navient Corp.   802,237 10,253
  Cullen/Frost Bankers Inc. 132,035 10,033
  Eaton Vance Corp.   276,947 9,710
  Lazard Ltd. Class A   265,963 9,697
  Old Republic International    
  Corp.   573,323 9,666

 

12

 

High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  Allied World Assurance Co.    
  Holdings AG 222,510 9,563
  Umpqua Holdings Corp. 544,485 8,320
  Validus Holdings Ltd. 160,212 8,187
  Bank of Hawaii Corp. 98,753 7,421
  Chemical Financial Corp. 169,871 7,296
  BankUnited Inc. 242,102 7,055
  ProAssurance Corp. 129,752 6,916
  United Bankshares Inc. 181,104 6,828
  Hancock Holding Co. 199,473 6,692
  FNB Corp. 511,679 6,688
  IBERIABANK Corp. 101,202 6,644
  Fulton Financial Corp. 444,809 6,628
  NorthStar Asset    
  Management Group Inc. 482,226 6,607
  Valley National Bancorp 663,719 6,544
  Janus Capital Group Inc. 471,963 6,051
  Federated Investors Inc.    
  Class B 219,367 5,923
^ LPL Financial Holdings Inc. 190,884 5,910
  Washington Federal Inc. 216,635 5,903
  RLI Corp. 90,828 5,063
  Old National Bancorp 342,443 5,034
  Glacier Bancorp Inc. 177,526 5,017
  Capitol Federal Financial    
  Inc. 340,220 4,991
  Hope Bancorp Inc. 307,206 4,958
  Columbia Banking System    
  Inc. 140,581 4,642
  Community Bank System    
  Inc. 96,063 4,526
  BGC Partners Inc. Class A 487,412 4,187
  Trustmark Corp. 144,817 4,009
  TFS Financial Corp. 222,764 3,970
  LegacyTexas Financial    
  Group Inc. 114,689 3,924
  Northwest Bancshares Inc. 246,102 3,874
  Mercury General Corp. 70,750 3,854
  CVB Financial Corp. 221,691 3,720
  Horace Mann Educators    
  Corp. 99,140 3,564
  Provident Financial    
  Services Inc. 155,528 3,529
^ BOK Financial Corp. 49,330 3,503
  NBT Bancorp Inc. 101,735 3,429
  Waddell & Reed Financial    
  Inc. Class A 211,265 3,321
  Kemper Corp. 86,212 3,237
  WesBanco Inc. 97,839 3,220
  Independent Bank Corp. 55,880 3,082
  First Financial Bancorp 141,879 3,050
  Artisan Partners Asset    
  Management Inc. Class A 111,401 2,896
  Simmons First National    
  Corp. Class A 57,901 2,857
  NRG Yield Inc. Class A 193,468 2,850

 

Park National Corp.   29,100 2,821
Westamerica      
Bancorporation   55,960 2,773
CNA Financial Corp.   72,248 2,642
Boston Private Financial    
Holdings Inc.   199,406 2,622
HFF Inc. Class A   98,058 2,611
Tompkins Financial Corp. 31,963 2,534
Safety Insurance Group Inc. 37,099 2,512
American National      
Insurance Co.   20,356 2,385
S&T Bancorp Inc.   75,879 2,382
Brookline Bancorp Inc. 163,424 2,092
First Commonwealth    
Financial Corp.   185,243 1,882
City Holding Co.   35,821 1,872
Oritani Financial Corp. 117,384 1,837
Maiden Holdings Ltd. 133,081 1,817
Cohen & Steers Inc.   47,293 1,758
FBL Financial Group Inc.    
Class A   27,315 1,729
Washington Trust Bancorp    
Inc.   36,048 1,655
Stock Yards Bancorp Inc. 46,333 1,580
TrustCo Bank Corp. NY 207,081 1,450
Flushing Financial Corp. 67,578 1,448
BancFirst Corp.   19,900 1,427
Sandy Spring Bancorp Inc. 43,261 1,371
Community Trust Bancorp    
Inc.   37,223 1,361
1st Source Corp.   35,861 1,239
Greenhill & Co. Inc.   50,681 1,188
Dime Community      
Bancshares Inc.   71,018 1,150
NRG Yield Inc.   68,351 1,053
First Financial Corp.   24,254 973
Republic Bancorp Inc.    
Class A   18,762 594
Willis Towers Watson plc 8 1
      2,939,309
Health Care (10.9%)      
Johnson & Johnson   6,831,686 792,407
Pfizer Inc. 15,076,778 478,085
Merck & Co. Inc.   6,898,512 405,081
AbbVie Inc.   4,022,673 224,385
Bristol-Myers Squibb Co. 4,136,700 210,599
Eli Lilly & Co.   2,445,586 180,582
Quest Diagnostics Inc. 343,916 28,009
Owens & Minor Inc.   149,356 4,847
Abaxis Inc.   58,721 2,803
* Innoviva Inc.   233,860 2,409
Kindred Healthcare Inc. 218,212 2,149
Meridian Bioscience Inc. 109,059 1,794
PDL BioPharma Inc.   397,897 1,281
      2,334,431

 

13

 

High Dividend Yield Index Fund

    Market
    Value•
  Shares ($000)
Industrials (12.4%)    
General Electric Co. 22,252,630 647,551
3M Co. 1,503,713 248,564
Boeing Co. 1,407,385 200,454
United Parcel Service Inc.    
Class B 1,725,859 185,979
Lockheed Martin Corp. 742,718 182,991
Caterpillar Inc. 1,436,924 119,926
Raytheon Co. 735,605 100,491
Automatic Data    
Processing Inc. 1,135,339 98,843
Emerson Electric Co. 1,585,268 80,341
Waste Management Inc. 1,112,462 73,044
Eaton Corp. plc 1,126,774 71,854
CSX Corp. 2,339,449 71,377
Norfolk Southern Corp. 727,436 67,651
Deere & Co. 735,799 64,971
Cummins Inc. 415,911 53,162
PACCAR Inc. 875,605 48,088
Paychex Inc. 817,704 45,137
Republic Services Inc.    
Class A 695,882 36,624
WestRock Co. 627,392 28,979
Fastenal Co. 654,487 25,512
Xerox Corp. 2,505,845 24,482
CH Robinson Worldwide    
Inc. 354,994 24,182
Packaging Corp. of    
America 233,690 19,279
MDU Resources Group    
Inc. 469,588 12,308
Sonoco Products Co. 234,636 11,800
Ryder System Inc. 135,494 9,402
MSC Industrial Direct Co.    
Inc. Class A 118,404 8,620
National Instruments Corp. 248,624  6,984
Kennametal Inc. 199,752 5,655
Timken Co. 166,396 5,499
MSA Safety Inc. 81,118 4,729
Covanta Holding Corp. 276,852 4,153
CEB Inc. 79,709 3,878
Applied Industrial    
Technologies Inc. 75,114 3,816
GATX Corp. 86,723 3,796
Aircastle Ltd. 169,245 3,478
Brady Corp. Class A 100,885 3,339
RR Donnelley & Sons Co. 170,746 3,031
Otter Tail Corp. 83,171 2,990
Greif Inc. Class A 63,223 2,963
^ Ship Finance International    
Ltd. 192,688 2,437
ManTech International    
Corp. Class A 59,834 2,323
Greenbrier Cos. Inc. 70,298 2,214

 

^ Nordic American Tankers    
  Ltd. 268,921 2,197
^ GasLog Ltd. 133,590 2,051
  Raven Industries Inc. 94,239 2,021
  General Cable Corp. 139,299 1,950
^ Seaspan Corp. Class A 157,065 1,943
  AVX Corp. 121,511 1,704
* LSC Communications Inc. 63,830 1,547
  McGrath RentCorp 49,971 1,504
  Schnitzer Steel Industries    
  Inc. 58,208 1,406
* Donnelley Financial    
  Solutions Inc. 63,830 1,369
  Triton International    
  Ltd./Bermuda 112,833 1,362
  Scorpio Tankers Inc. 295,523 1,132
  H&E Equipment Services    
  Inc. 79,262 1,106
  American Railcar Industries  
  Inc. 27,295 1,004
^ Teekay Corp. 145,350 949
  Myers Industries Inc. 54,838 661
  Textainer Group Holdings    
  Ltd. 50,219 382
  Daktronics Inc. 1,161 10
      2,647,195
Oil & Gas (10.4%)    
  Exxon Mobil Corp. 10,360,211 863,213
  Chevron Corp. 4,678,093 490,030
  Occidental Petroleum    
  Corp. 1,919,538 139,954
  ConocoPhillips 3,066,582 133,243
  Phillips 66 1,317,627 106,925
  Kinder Morgan Inc. 4,663,030 95,266
  Spectra Energy Corp. 1,732,123 72,420
  Valero Energy Corp. 1,154,729 68,406
  Marathon Petroleum    
  Corp. 1,316,985 57,407
  Williams Cos. Inc. 1,845,440 53,887
  National Oilwell Varco Inc. 942,682 30,260
^ Helmerich & Payne Inc. 261,870 16,527
  Targa Resources Corp. 370,652 16,272
  OGE Energy Corp. 492,324 15,282
  Murphy Oil Corp. 424,138 10,972
  HollyFrontier Corp. 403,775 10,074
  Patterson-UTI Energy Inc. 369,037 8,296
  Western Refining Inc. 219,245 6,325
  Oceaneering International    
  Inc. 249,835 5,946
  PBF Energy Inc. Class A 265,515 5,788
  SemGroup Corp. Class A 164,006 5,289
  Pattern Energy Group Inc.    
  Class A 183,751 4,107
  Noble Corp. plc 624,509 3,085
  Delek US Holdings Inc. 167,362 2,828
 
14

 

 

High Dividend Yield Index Fund

  Archrock Inc. 161,631 1,875
^ Frank’s International NV 117,847 1,326
  CVR Energy Inc. 84,952 1,127
      2,226,130
Other (0.0%)2    
* Safeway Inc CVR    
  (Casa Ley)    
  Expire 1/30/2018 364 —
* Safeway Inc CVR (PDC)    
  Expire 1/30/2017 364 —
 
Technology (14.8%)    
  Microsoft Corp. 18,793,880 1,126,129
  Intel Corp. 11,776,788 410,657
  Cisco Systems Inc. 12,522,705 384,197
  International Business    
  Machines Corp. 2,387,024 366,862
  QUALCOMM Inc. 3,650,583 250,868
  Texas Instruments Inc. 2,504,350 177,433
  HP Inc. 4,265,355 61,805
  Analog Devices Inc. 763,566 48,944
  Western Digital Corp. 656,806 38,384
  Linear Technology Corp. 598,383 35,939
  Microchip Technology Inc. 534,217 32,347
  Xilinx Inc. 632,227 32,161
  KLA-Tencor Corp. 386,823 29,054
  Maxim Integrated    
  Products Inc. 709,640 28,123
  Harris Corp. 308,233 27,497
  Seagate Technology plc 701,010 24,052
  CA Inc. 774,634 23,812
  Garmin Ltd. 263,236 12,730
  Pitney Bowes Inc. 465,983 8,313
  Cypress Semiconductor    
  Corp. 798,914 7,965
  Science Applications    
  International Corp. 91,494 6,305
  Lexmark International Inc.    
  Class A 156,890 6,227
  Intersil Corp. Class A 277,999 6,138
  Diebold Inc. 187,608 4,090
  Cogent Communications    
  Holdings Inc. 103,875 3,833
  West Corp. 161,906 3,193
  Brooks Automation Inc. 167,756 2,186
  Computer Programs &    
  Systems Inc. 12,023 314
      3,159,558
Telecommunications (5.2%)    
  AT&T Inc. 15,355,165 564,916
  Verizon Communications    
  Inc. 10,138,588 487,666
  CenturyLink Inc. 1,368,364 36,371
  Frontier Communications    
  Corp. 2,968,957 11,935

 

Consolidated    
Communications    
Holdings Inc. 124,516 2,980
^ Windstream Holdings Inc. 244,196 1,917
EarthLink Holdings Corp. 243,821 1,395
    1,107,180
Utilities (8.3%)    
NextEra Energy Inc. 1,153,179 147,607
Duke Energy Corp. 1,722,568 137,840
Southern Co. 2,436,925 125,672
Dominion Resources Inc. 1,563,311 117,561
American Electric Power    
Co. Inc. 1,223,158 79,310
PG&E Corp. 1,253,886 77,891
Exelon Corp. 2,197,210 74,859
Sempra Energy 616,040 65,978
Edison International 812,893 59,731
Consolidated Edison Inc. 762,539 57,610
PPL Corp. 1,668,563 57,298
Public Service Enterprise    
Group Inc. 1,264,433 53,207
Xcel Energy Inc. 1,236,086 51,359
WEC Energy Group Inc. 788,760 47,105
Eversource Energy 776,646 42,762
DTE Energy Co. 444,228 42,650
FirstEnergy Corp. 1,047,162 35,907
Entergy Corp. 438,706 32,324
Ameren Corp. 595,738 29,757
CMS Energy Corp. 691,079 29,129
ONEOK Inc. 527,086 25,527
CenterPoint Energy Inc. 1,058,219 24,127
SCANA Corp. 318,855 23,391
Alliant Energy Corp. 555,098 21,121
Westar Energy Inc.    
Class A 362,437 20,775
Pinnacle West Capital    
Corp. 270,732 20,611
UGI Corp. 429,689 19,890
AES Corp. 1,687,705 19,864
Atmos Energy Corp. 257,516 19,157
NiSource Inc. 791,877 18,419
Great Plains Energy Inc. 488,134 13,883
Aqua America Inc. 374,046 11,483
National Fuel Gas Co. 194,231 10,174
Vectren Corp. 199,051 10,014
Portland General Electric    
Co. 215,488 9,404
IDACORP Inc. 118,539 9,292
Southwest Gas Corp. 120,962 8,765
NRG Energy Inc. 791,987 8,419
WGL Holdings Inc. 130,752 8,247
Black Hills Corp. 129,515 8,010
Hawaiian Electric    
Industries Inc. 264,426 7,801
ONE Gas Inc. 125,628 7,698

 

15

 

High Dividend Yield Index Fund

  New Jersey Resources    
  Corp. 220,205 7,476
  ALLETE Inc. 115,574 7,084
  Spire Inc. 110,424 6,935
  NorthWestern Corp. 117,496 6,762
  PNM Resources Inc. 203,431 6,683
  Avista Corp. 148,325 6,141
  Avangrid Inc. 155,618 6,133
  South Jersey Industries Inc. 193,803 5,746
  MGE Energy Inc. 86,277 5,043
  Empire District Electric Co. 140,303 4,803
  El Paso Electric Co. 94,819 4,381
  Northwest Natural Gas Co. 66,232 3,894
  California Water Service    
  Group 119,053 3,691
  Atlantica Yield plc 89,574 1,611
      1,768,012
Total Common Stocks    
(Cost $18,713,225)   21,297,097
Temporary Cash Investments (0.4%)1  
Money Market Fund (0.4%)    
3,4 Vanguard Market    
  Liquidity Fund, 0.718% 704,088 70,416
 
    Face  
    Amount  
    ($000)  
U.S. Government and Agency Obligations (0.0%)
5 United States Treasury Bill,    
  0.275–0.312%, 12/8/16 2,500 2,499
5 United States Treasury Bill,    
  0.281%, 12/15/16 300 300
5 United States Treasury Bill,    
  0.300%, 12/22/16 200 200
5 United States Treasury Bill,    
  0.360%, 1/12/17 500 500
      3,499
Total Temporary Cash Investments  
(Cost $73,912)   73,915
Total Investments (100.0%)    
(Cost $18,787,137)   21,371,012

 

Other Assets and Liabilities (0.0%)  
Other Assets  
Investment in Vanguard 1,630
Receivables for Accrued Income 31,814
Receivables for Capital Shares Issued 9,960
Other Assets 16
Total Other Assets 43,420
Liabilities  
Payables for Investment Securities  
Purchased (268)
Collateral for Securities on Loan (23,840)
Payables for Capital Shares Redeemed (7,637)
Payables to Vanguard (6,431)
Other Liabilities (136)
Total Liabilities (38,312)
Net Assets (100%) 21,376,120
 
 
At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 18,939,601
Undistributed Net Investment Income 63,970
Accumulated Net Realized Losses (210,773)
Unrealized Appreciation (Depreciation)  
Investment Securities 2,583,875
Futures Contracts (553)
Net Assets 21,376,120

 

16

 

High Dividend Yield Index Fund

  Amount
  ($000)
Investor Shares—Net Assets  
Applicable to 208,506,549 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 5,878,923
Net Asset Value Per Share—  
Investor Shares $28.20
 
 
ETF Shares—Net Assets  
Applicable to 217,684,796 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 15,497,197
Net Asset Value Per Share—  
ETF Shares $71.19

 

• 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 $22,757,000.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 100.0% and 0.0%, respectively,
of net assets.
2 “Other” represents securities that are not classified by the fund’s benchmark index.
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 $23,840,000 of collateral received for securities on loan.
5 Securities with a value of $3,349,000 have been segregated as initial margin for open futures contracts.
CVR—Contingent Value Rights.
See accompanying Notes, which are an integral part of the Financial Statements.

17

 

High Dividend Yield Index Fund

Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends 611,556
Interest1 185
Securities Lending—Net 2,059
Total Income 613,800
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 2,202
Management and Administrative—Investor Shares 5,586
Management and Administrative—ETF Shares 7,368
Marketing and Distribution—Investor Shares 1,068
Marketing and Distribution—ETF Shares 868
Custodian Fees 603
Auditing Fees 35
Shareholders’ Reports—Investor Shares 49
Shareholders’ Reports—ETF Shares 349
Trustees’ Fees and Expenses 10
Total Expenses 18,138
Net Investment Income 595,662
Realized Net Gain (Loss)  
Investment Securities Sold1 345,824
Futures Contracts 4,312
Realized Net Gain (Loss) 350,136
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 538,186
Futures Contracts (5,027)
Change in Unrealized Appreciation (Depreciation) 533,159
Net Increase (Decrease) in Net Assets Resulting from Operations 1,478,957
1 Interest income and realized net gain (loss) from an affiliated company of the fund were $166,000 and $7,000, respectively.

 

See accompanying Notes, which are an integral part of the Financial Statements.

18

 

High Dividend Yield Index Fund

Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 595,662 471,533
Realized Net Gain (Loss) 350,136 709,023
Change in Unrealized Appreciation (Depreciation) 533,159 (758,580)
Net Increase (Decrease) in Net Assets Resulting from Operations 1,478,957 421,976
Distributions    
Net Investment Income    
Investor Shares (149,810) (131,007)
ETF Shares (416,117) (338,220)
Realized Capital Gain    
Investor Shares — —
ETF Shares — —
Total Distributions (565,927) (469,227)
Capital Share Transactions    
Investor Shares 1,276,227 316,638
ETF Shares 3,605,173 1,464,202
Net Increase (Decrease) from Capital Share Transactions 4,881,400 1,780,840
Total Increase (Decrease) 5,794,430 1,733,589
Net Assets    
Beginning of Period 15,581,690 13,848,101
End of Period1 21,376,120 15,581,690
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $63,970,000 and $34,148,000.

 

See accompanying Notes, which are an integral part of the Financial Statements.

19

 

High Dividend Yield Index Fund

Financial Highlights

Investor Shares          
 
For a Share Outstanding     Year Ended October 31,
Throughout Each Period 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $26.89 $26.98 $23.83 $19.76 $17.30
Investment Operations          
Net Investment Income . 854 . 815 .727 . 667 . 579
Net Realized and Unrealized Gain (Loss)          
on Investments 1.286 (.088) 3.147 4.063 2.446
Total from Investment Operations 2.140 .727 3.874 4.730 3.025
Distributions          
Dividends from Net Investment Income (. 830) (. 817) (.724) (. 660) (. 565)
Distributions from Realized Capital Gains — — — — —
Total Distributions (. 830) (. 817) (.724) (. 660) (. 565)
Net Asset Value, End of Period $28.20 $26.89 $26.98 $23.83 $19.76
 
Total Return1 8.11% 2.78% 16.48% 24.35% 17.69%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $5,879 $4,368 $4,066 $3,019 $1,596
Ratio of Total Expenses to Average Net Assets 0.15% 0.16% 0.18% 0.19% 0.20%
Ratio of Net Investment Income to          
Average Net Assets 3.19% 3.06% 2.92% 3.10% 3.22%
Portfolio Turnover Rate2 7% 11% 12% 13% 11%

 

1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable account service fees.
2 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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High Dividend Yield Index Fund

Financial Highlights

ETF Shares          
 
For a Share Outstanding     Year Ended October 31,
Throughout Each Period 2016 2015 2014 2013 2012
Net Asset Value, Beginning of Period $67.88 $68.11 $60.16 $49.89 $43.68
Investment Operations          
Net Investment Income 2.203 2.104 1.885 1.732 1.506
Net Realized and Unrealized Gain (Loss)          
on Investments 3.245 (.222) 7.943 10.247 6.180
Total from Investment Operations 5.448 1.882 9.828 11.979 7.686
Distributions          
Dividends from Net Investment Income (2.138) (2.112) (1.878) (1.709) (1.476)
Distributions from Realized Capital Gains — — — — —
Total Distributions (2.138) (2.112) (1.878) (1.709) (1.476)
Net Asset Value, End of Period $71.19 $67.88 $68.11 $60.16 $49.89
 
Total Return 8.18% 2.84% 16.56% 24.43% 17.80%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $15,497 $11,214 $9,782 $6,918 $4,203
Ratio of Total Expenses to Average Net Assets 0.08% 0.09% 0.10% 0.10% 0.10%
Ratio of Net Investment Income to          
Average Net Assets 3.26% 3.13% 3.00% 3.19% 3.32%
Portfolio Turnover Rate1 7% 11% 12% 13% 11%

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

See accompanying Notes, which are an integral part of the Financial Statements.

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High Dividend Yield Index Fund

Notes to Financial Statements

Vanguard High Dividend Yield Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

During the year ended October 31, 2016, 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.

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High Dividend Yield 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 (October 31, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

6. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at October 31, 2016, 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.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution

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High Dividend Yield Index Fund

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 October 31, 2016, the fund had contributed to Vanguard capital in the amount of $1,630,000, representing 0.01% of the fund’s net assets and 0.65% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest
rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine
the fair value of investments).

The following table summarizes the market value of the fund’s investments as of October 31, 2016,
based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 21,297,097 — —
Temporary Cash Investments 70,416 3,499 —
Futures Contracts—Liabilities1 (132) — —
Total 21,367,381 3,499 —
1 Represents variation margin on the last day of the reporting period.      

 

D. At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index December 2016 713 75,582 (553)

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

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High Dividend Yield Index Fund

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

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 October 31, 2016, the fund realized gains on the sale of passive foreign investment companies of $87,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Passive foreign investment companies held at October 31, 2016, had unrealized appreciation of $652,000.

During the year ended October 31, 2016, the fund realized $472,041,000 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 October 31, 2016, the fund had $70,013,000 of ordinary income available for distribution. At October 31, 2016, the fund had available capital losses totaling $211,326,000 to offset future net capital gains. Of this amount, $18,315,000 is subject to expiration on October 31, 2018. Capital losses of $193,011,000 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 October 31, 2016, the cost of investment securities for tax purposes was $18,787,789,000. Net unrealized appreciation of investment securities for tax purposes was $2,583,223,000, consisting of unrealized gains of $2,980,769,000 on securities that had risen in value since their purchase and $397,546,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the year ended October 31, 2016, the fund purchased $7,672,681,000 of investment securities and sold $2,765,795,000 of investment securities, other than temporary cash investments. Purchases and sales include $4,544,933,000 and $1,418,566,000, 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 October 31, 2016, such purchases and sales were $285,964,000 and $395,673,000, respectively; these amounts are included in the purchases and sales of investment securities noted above.

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High Dividend Yield Index Fund

G. Capital share transactions for each class of shares were:

      Year Ended October 31,
    2016   2015
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 2,061,346 74,813 1,160,012 43,020
Issued in Lieu of Cash Distributions 124,953 4,577 106,677 4,039
Redeemed (910,072) (33,330) (950,051) (35,330)
Net Increase (Decrease)—Investor Shares 1,276,227 46,060 316,638 11,729
ETF Shares        
Issued 5,032,957 73,213 3,664,582 53,660
Issued in Lieu of Cash Distributions — — — —
Redeemed (1,427,784) (20,725) (2,200,380) (32,075)
Net Increase (Decrease)—ETF Shares 3,605,173 52,488 1,464,202 21,585

 

H. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, 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 Whitehall Funds and the Shareholders of Vanguard High Dividend Yield Index Fund:

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard High Dividend Yield Index Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

 

Special 2016 tax information (unaudited) for Vanguard High Dividend Yield Index Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $565,927,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 99.7% 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 2016. (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: High Dividend Yield Index Fund Investor Shares  
Periods Ended October 31, 2016      
 
      Since
  One Five Inception
  Year Years (11/16/2006)
Returns Before Taxes 8.11% 13.63% 6.60%
Returns After Taxes on Distributions 7.33 12.90 6.03
Returns After Taxes on Distributions and Sale of Fund Shares 5.18 10.89 5.27

 

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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 October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
High Dividend Yield Index Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,039.29 $0.77
ETF Shares 1,000.00 1,039.72 0.41
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,024.38 $0.76
ETF Shares 1,000.00 1,024.73 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 0.15% for Investor Shares and 0.08% for ETF Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

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Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

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

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

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

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

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Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior ManagementTeam
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 


 

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  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q6230 122016

 


 
Annual Report | October 31, 2016
 
Vanguard Emerging Markets
Government Bond Index Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
Fund Profile. 7
Performance Summary. 9
Financial Statements. 12
About Your Fund’s Expenses. 48
Glossary. 50

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard Emerging Markets Government Bond Index Fund returned 10.65% for Investor Shares for the 12 months ended October 31, 2016, tracking the performance of its benchmark and slightly outperforming the average return of its peers.

• Monetary policy among the world’s largest central banks remained supportive of global bonds. The Federal Reserve raised interest rates just once, in December. Central banks in the United Kingdom, Europe, and Japan maintained highly accommodative policies.

• Historically low yields—some even below 0%—among government bonds in developed nations spurred demand for emerging-market bonds with higher yields. As emerging-market bonds gained in price, their yields fell. The fund’s SEC yield for Investor Shares declined from 4.75% to 4.09% during the period.

• Performance was nearly uniformly positive across all nations. Of the top ten countries represented in the fund by assets, the sovereign bonds of Brazil (+23.3%), Argentina (+20.3%), and Indonesia (+14.0%) produced the fund’s strongest returns.

Total Returns: Fiscal Year Ended October 31, 2016        
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Emerging Markets Government Bond Index Fund        
Investor Shares 4.09% 4.97% 5.68% 10.65%
ETF Shares 4.26      
Market Price       10.87
Net Asset Value       10.84
Admiral™ Shares 4.26 5.15 5.74 10.89
Institutional Shares 4.29 5.19 5.70 10.89
Bloomberg Barclays USD Emerging Markets Government        
RIC Capped Index       11.05
Emerging Markets Hard Currency Debt Funds Average       10.56

 

Emerging Markets Hard Currency Debt 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. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq 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: Inception Through October 31, 2016  
  Average
Annual Return
Emerging Markets Government Bond Index Fund Investor Shares (Returns since inception: 5/31/2013) 4.48%
Bloomberg Barclays USD Emerging Markets Government RIC Capped Index 4.72
Emerging Markets Hard Currency Debt Funds Average 2.07
Emerging Markets Hard Currency Debt 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
Emerging Markets Government Bond          
Index Fund 0.49% 0.34% 0.33% 0.29% 1.24%

 

The fund expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratios were 0.49% for Investor Shares, 0.32% for ETF Shares, 0.32% for Admiral Shares, and 0.29% 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 2015.

Peer group:  Emerging Markets Hard Currency Debt Funds.

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.

3

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

4

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors

shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

5

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

6

 

Emerging Markets Government Bond Index Fund

Fund Profile
As of October 31, 2016

Share-Class Characteristics        
 
  Investor   Admiral Institutional
  Shares ETF Shares Shares Shares
Ticker Symbol VGOVX VWOB VGAVX VGIVX
Expense Ratio1 0.49% 0.34% 0.33% 0.29%
30-Day SEC Yield 4.09% 4.26% 4.26% 4.29%

 

Financial Attributes    
 
    Bloomberg
    Barclays USD
    Emerging Mkts
    Government
  Fund RIC Capped Idx
Number of Bonds 937 950
Yield to Maturity    
(before expenses) 4.6% 4.6%
Average Coupon 5.5% 5.6%
Average Duration 6.5 years 6.3 years
Average Effective    
Maturity 10.0 years 10.0 years
Short-Term Reserves 0.9% —

 

Sector Diversification (% of portfolio)  
Foreign Government 100.0%

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

 

 

Volatility Measures  
  Bloomberg
  Barclays USD
  Emerging Mkts
  Government
  RIC Capped Idx
R-Squared 1.00
Beta 1.03

These measures show the degree and timing of the fund’s fluctuations compared with the index over 36 months.

 

 

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 0.7%
1 - 3 Years 15.4
3 - 5 Years 22.0
5 - 10 Years 36.9
10 - 20 Years 8.8
20 - 30 Years 14.7
Over 30 Years 1.5

 

Distribution by Credit Quality (% of portfolio)
Aa 6.8
A 17.3
Baa 36.2
Less Than Baa 39.7

 

Credit-quality ratings are obtained from Barclays and are from Moody's, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. For more information about these ratings, see the Glossary entry for Credit Quality.

1 The expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratios were 0.49% for Investor Shares, 0.32% for ETF Shares, 0.32% for Admiral Shares, and 0.29% for Institutional Shares.

7

 

Emerging Markets Government Bond Index Fund

Market Diversification (% of portfolio )  
  Fund
Emerging Markets  
China 14.4%
Mexico 8.3
Brazil 7.6
Indonesia 5.8
Russia 5.8
Turkey 5.0
United Arab Emirates 4.6
Argentina 3.8
Qatar 3.5
Colombia 2.9
Philippines 2.7
Venezuela 2.4
Saudi Arabia 2.1
India 1.9
Lebanon 1.8
Malaysia 1.8
South Africa 1.7
Chile 1.7
Hungary 1.5
Kazakhstan 1.5
Poland 1.4
Ukraine 1.4
Peru 1.2
Uruguay 1.0
Other 13.0
Subtotal 98.8%
Other  
Panama 1.2%

 

8

 

Emerging Markets Government Bond 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: May 31, 2013, Through October 31, 2016
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended October 31, 2016  
    Since Final Value
  One Inception of a $10,000
  Year (5/31/2013) Investment
Emerging Markets Government Bond      
Index Fund Investor Shares 9.82% 4.25% $11,529
Bloomberg Barclays USD Emerging      
Markets Government RIC Capped      
Index 11.05 4.72 11,709
Emerging Markets Hard Currency      
Debt Funds Average 10.56 2.07 10,727
Bloomberg Barclays Global      
Aggregate Index ex USD 6.47 0.36 10,124

Emerging Markets Hard Currency Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

 

 

    Since Final Value
  One Inception of a $10,000
  Year (5/31/2013) Investment
Emerging Markets Government Bond Index Fund      
ETF Shares Net Asset Value 10.84% 4.62% $11,672
Emerging Markets Government Bond Index Fund      
ETF Shares Market Price 10.87 4.74 11,714
Bloomberg Barclays USD Emerging Markets      
Government RIC Capped Index 11.05 4.72 11,709
Bloomberg Barclays Global Aggregate Index ex USD 6.47 0.36 10,124
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

Vanguard fund returns are adjusted to reflect the 0.75% fee on purchases of fund shares. The fee does not apply to the ETF Shares. The Fiscal-Year Total Returns table is not adjusted for fees.

See Financial Highlights for dividend and capital gains information.

9

 

Emerging Markets Government Bond Index Fund      
 
 
 
 
  Average Annual Total Returns  
  Periods Ended October 31, 2016  
    Since Final Value
  One Inception of a $10,000
  Year (5/31/2013) Investment
Emerging Markets Government Bond Index      
Fund Admiral Shares 10.06% 4.41% $11,591
Bloomberg Barclays USD Emerging Markets      
Government RIC Capped Index 11.05 4.72 11,709
Bloomberg Barclays Global Aggregate Index      
ex USD 6.47 0.36 10,124

"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

 

 

    Since Final Value
  One Inception of a $5,000,000
  Year (2/11/2015)1 Investment
Emerging Markets Government Bond Index      
Fund Institutional Shares 10.06% 7.46% $5,658,329
Bloomberg Barclays USD Emerging Markets      
Government RIC Capped Index 11.05 8.01 5,708,092
Bloomberg Barclays Global Aggregate Index      
ex USD 6.47 3.37 5,293,296

"Since Inception" performance is calculated from the Institutional Shares’ inception date for both the fund and its comparative standards.

1 Institutional Shares were first issued on November 25, 2014, and were redeemed shortly thereafter. Institutional Shares were next issued on February 11, 2015. The total return shown is based on the period beginning February 11, 2015.

Cumulative Returns of ETF Shares: May 31, 2013, Through October 31, 2016  
    Since
  One Inception
  Year (5/31/2013)
Emerging Markets Government Bond Index Fund    
ETF Shares Market Price 10.87% 17.14%
Emerging Markets Government Bond Index Fund    
ETF Shares Net Asset Value 10.84 16.72
Bloomberg Barclays USD Emerging Markets    
Government RIC Capped Index 11.05 17.09

"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standard.

Vanguard fund returns are adjusted to reflect the 0.75% fee on purchases of fund shares. The fee does not apply to the ETF Shares. The Fiscal-Year Total Returns table is not adjusted for fees.

10

 

Emerging Markets Government Bond Index Fund

Fiscal-Year Total Returns (%): May 31, 2013, Through October 31, 2016  
        Bloomberg
        Barclays USD
        Emerging Mkts
        Government
      Investor Shares RIC Capped Idx
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2013 1.51% -2.89% -1.38% -1.39%
2014 4.46 2.16 6.62 7.00
2015 4.36 -4.52 -0.16 -0.08
2016 4.97 5.68 10.65 11.05

 

Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

          Since Inception
  Inception Date One Year Income Capital Total
Investor Shares 5/31/2013 15.25% 4.47% 0.45% 4.92%
Fee-Adjusted Returns   14.39     4.68
ETF Shares 5/31/2013        
Market Price   15.21     5.27
Net Asset Value   15.38     5.05
Admiral Shares 5/31/2013 15.37 4.64 0.43 5.07
Fee-Adjusted Returns   14.50     4.83
Institutional Shares 2/11/20151 15.41 5.16 3.84 9.00
Fee-Adjusted Returns   14.54     8.50

 

1 Institutional Shares were first issued on November 25, 2014, and were redeemed shortly thereafter. Institutional Shares were next issued on February 11, 2015. The total return shown is based on the period beginning February 11, 2015.

Vanguard fund returns are adjusted to reflect the 0.75% fee on purchases of fund shares. The fee does not apply to the ETF Shares. The Fiscal-Year Total Returns table is not adjusted for fees.

11

 

Emerging Markets Government Bond Index Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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).

        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
Angola (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
  Republic of Angola 9.500% 11/12/25 1,400 1,374
1 Republic of Angola Via Northern Lights III BV 7.000% 8/16/19 750 750
Total Angola (Cost $2,140)       2,124
Argentina (3.7%)        
Sovereign Bonds (U.S. Dollar-Denominated) (3.7%)        
  Argentine Republic 8.750% 6/2/17 1,050 1,087
  Argentine Republic 6.250% 4/22/19 3,000 3,174
  Argentine Republic 6.875% 4/22/21 3,700 3,994
2 Argentine Republic 6.875% 4/22/21 150 162
  Argentine Republic 7.500% 4/22/26 5,600 6,112
  Argentine Republic 8.280% 12/31/33 1,012 1,092
  Argentine Republic 8.280% 12/31/33 2,452 2,750
  Argentine Republic 7.125% 7/6/36 3,480 3,578
1 Argentine Republic 2.500% 12/31/38 5,994 4,088
  Argentine Republic 7.625% 4/22/46 2,350 2,560
1 City of Buenos Aires Argentina 8.950% 2/19/21 200 225
1 City of Buenos Aires Argentina 7.500% 6/1/27 250 268
1,2 City of Buenos Aires Argentina 7.500% 6/1/27 1,000 1,067
  Petrobras Argentina SA 7.375% 7/21/23 500 514
1 Provincia de Buenos Aires 10.875% 1/26/21 1,000 1,145
1 Provincia de Buenos Aires 9.950% 6/9/21 600 682
1,2 Provincia de Buenos Aires 9.950% 6/9/21 400 455
1 Provincia de Buenos Aires 9.125% 3/16/24 1,000 1,104
1 Provincia de Buenos Aires 7.875% 6/15/27 1,000 1,023
  Provincia de Cordoba 12.375% 8/17/17 149 159
1 Provincia de Mendoza Argentina 8.375% 5/19/24 400 415
1 Provincia del Chubut Argentina 7.750% 7/26/26 500 509
  YPF SA 8.875% 12/19/18 800 873
2 YPF SA 8.875% 12/19/18 50 55
  YPF SA 8.500% 3/23/21 1,000 1,097
1 YPF SA 8.750% 4/4/24 1,145 1,257
  YPF SA 8.500% 7/28/25 775 845
Total Argentina (Cost $37,485)       40,290

 

12

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Armenia (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
2 Republic of Armenia 6.000% 9/30/20 200 207
Republic of Armenia 6.000% 9/30/20 200 207
Republic of Armenia 7.150% 3/26/25 500 528
Total Armenia (Cost $897)       942
Azerbaijan (0.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.5%)        
International Bank of Azerbaijan OJSC 5.625% 6/11/19 800 793
2 Republic of Azerbaijan 4.750% 3/18/24 400 413
Republic of Azerbaijan 4.750% 3/18/24 800 826
3 Southern Gas Corridor CJSC 6.875% 3/24/26 1,150 1,295
State Oil Co. of the Azerbaijan Republic 4.750% 3/13/23 1,700 1,693
State Oil Co. of the Azerbaijan Republic 6.950% 3/18/30 200 217
Total Azerbaijan (Cost $5,009)       5,237
Bahrain (0.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.8%)        
Bahrain Mumtalakat Holding Co. BSC 4.000% 11/25/21 250 243
Batelco International Finance No. 1 Ltd. 4.250% 5/1/20 400 400
Kingdom of Bahrain 6.273% 11/22/18 550 583
2 Kingdom of Bahrain 5.500% 3/31/20 1,650 1,730
Kingdom of Bahrain 5.875% 1/26/21 200 210
2 Kingdom of Bahrain 6.125% 7/5/22 1,400 1,481
Kingdom of Bahrain 6.125% 8/1/23 425 448
2 Kingdom of Bahrain 6.125% 8/1/23 150 158
2 Kingdom of Bahrain 7.000% 1/26/26 1,000 1,064
Kingdom of Bahrain 7.000% 1/26/26 1,050 1,116
Kingdom of Bahrain 7.000% 10/12/28 1,000 1,030
2 Kingdom of Bahrain 6.000% 9/19/44 500 423
Kingdom of Bahrain 6.000% 9/19/44 400 338
Total Bahrain (Cost $9,145)       9,224
Belarus (0.1%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.1%)        
Republic of Belarus 8.950% 1/26/18 450 473
Total Belarus (Cost $439)       473
Belize (0.0%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.0%)        
1 Belize 5.000% 2/20/38 450 236
Total Belize (Cost $289)       236
Bermuda (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
Bermuda 4.854% 2/6/24 400 437
2 Bermuda 4.854% 2/6/24 150 165
1 Bermuda 3.717% 1/25/27 850 851
Total Bermuda (Cost $1,414)       1,453

 

13

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Bolivia (0.0%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.0%)        
Plurinational State of Bolivia 4.875% 10/29/22 200 222
Plurinational State of Bolivia 5.950% 8/22/23 200 236
Total Bolivia (Cost $396)       458
Brazil (7.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (7.3%)        
Banco do Brasil SA 6.000% 1/22/20 500 537
Banco do Brasil SA 5.375% 1/15/21 475 480
Banco do Brasil SA 5.875% 1/26/22 1,675 1,675
Banco do Brasil SA 3.875% 10/10/22 1,626 1,549
Banco do Brasil SA 5.875% 1/19/23 450 442
1 Banco do Brasil SA 8.500% 10/29/49 1,350 1,385
Banco Nacional de Desenvolvimento        
Economico e Social 6.369% 6/16/18 925 976
Banco Nacional de Desenvolvimento        
Economico e Social 6.500% 6/10/19 750 810
Banco Nacional de Desenvolvimento        
Economico e Social 5.500% 7/12/20 400 419
Banco Nacional de Desenvolvimento        
Economico e Social 5.750% 9/26/23 1,300 1,357
Caixa Economica Federal 2.375% 11/6/17 1,275 1,265
Caixa Economica Federal 4.500% 10/3/18 860 872
2 Caixa Economica Federal 4.500% 10/3/18 200 203
Caixa Economica Federal 4.250% 5/13/19 1,600 1,606
Caixa Economica Federal 3.500% 11/7/22 150 138
Centrais Eletricas Brasileiras SA 6.875% 7/30/19 800 840
Centrais Eletricas Brasileiras SA 5.750% 10/27/21 1,700 1,697
Federative Republic of Brazil 5.875% 1/15/19 2,220 2,403
Federative Republic of Brazil 8.875% 10/14/19 175 207
Federative Republic of Brazil 4.875% 1/22/21 3,406 3,602
Federative Republic of Brazil 2.625% 1/5/23 3,136 2,901
Federative Republic of Brazil 8.875% 4/15/24 707 904
Federative Republic of Brazil 4.250% 1/7/25 3,872 3,828
Federative Republic of Brazil 8.750% 2/4/25 350 449
Federative Republic of Brazil 6.000% 4/7/26 900 992
Federative Republic of Brazil 10.125% 5/15/27 916 1,337
Federative Republic of Brazil 8.250% 1/20/34 1,725 2,176
Federative Republic of Brazil 7.125% 1/20/37 2,240 2,559
Federative Republic of Brazil 5.625% 1/7/41 2,626 2,534
Federative Republic of Brazil 5.000% 1/27/45 4,161 3,682
Federative Republic of Brazil 5.625% 2/21/47 200 192
Petrobras Global Finance BV 3.000% 1/15/19 1,000 980
Petrobras Global Finance BV 4.875% 3/17/20 1,925 1,942
Petrobras Global Finance BV 8.375% 5/23/21 6,000 6,637
Petrobras Global Finance BV 4.375% 5/20/23 4,000 3,620
Petrobras Global Finance BV 6.250% 3/17/24 1,125 1,110
Petrobras Global Finance BV 8.750% 5/23/26 3,400 3,829
Petrobras Global Finance BV 5.625% 5/20/43 300 234
Petrobras Global Finance BV 7.250% 3/17/44 110 101
Petrobras Global Finance BV 6.850% 6/5/15 2,475 2,110
Petrobras International Finance Co. SA 7.875% 3/15/19 2,900 3,118

 

14

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Petrobras International Finance Co. SA 5.750% 1/20/20 4,000 4,130
Petrobras International Finance Co. SA 5.375% 1/27/21 3,755 3,703
Petrobras International Finance Co. SA 6.875% 1/20/40 2,415 2,158
Petrobras International Finance Co. SA 6.750% 1/27/41 3,127 2,763
Total Brazil (Cost $76,212)       80,452
Cameroon (0.1%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.1%)        
1 Republic of Cameroon 9.500% 11/19/25 500 556
Total Cameroon (Cost $492)       556
Chile (1.7%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.7%)        
2 Banco del Estado de Chile 2.000% 11/9/17 385 386
2 Banco del Estado de Chile 4.125% 10/7/20 400 424
2 Banco del Estado de Chile 3.875% 2/8/22 625 666
Corp Nacional del Cobre de Chile 3.000% 7/17/22 1,150 1,135
2 Corp. Nacional del Cobre de Chile 7.500% 1/15/19 800 895
Corp. Nacional del Cobre de Chile 3.750% 11/4/20 1,359 1,430
2 Corp. Nacional del Cobre de Chile 3.750% 11/4/20 300 316
2 Corp. Nacional del Cobre de Chile 3.875% 11/3/21 800 831
Corp. Nacional del Cobre de Chile 3.875% 11/3/21 854 886
2 Corp. Nacional del Cobre de Chile 3.000% 7/17/22 150 148
2 Corp. Nacional del Cobre de Chile 4.500% 8/13/23 150 159
Corp. Nacional del Cobre de Chile 4.500% 8/13/23 675 715
Corp. Nacional del Cobre de Chile 4.500% 9/16/25 900 935
2 Corp. Nacional del Cobre de Chile 5.625% 9/21/35 300 328
2 Corp. Nacional del Cobre de Chile 6.150% 10/24/36 100 115
2 Corp. Nacional del Cobre de Chile 4.250% 7/17/42 400 371
2 Corp. Nacional del Cobre de Chile 5.625% 10/18/43 200 220
Corp. Nacional del Cobre de Chile 5.625% 10/18/43 900 987
2 Corp. Nacional del Cobre de Chile 4.875% 11/4/44 400 399
Corp. Nacional del Cobre de Chile 4.875% 11/4/44 900 900
2 Empresa de Transporte de Pasajeros Metro SA 4.750% 2/4/24 200 219
2 Empresa Nacional del Petroleo 4.750% 12/6/21 536 573
Empresa Nacional del Petroleo 4.375% 10/30/24 500 530
Republic of Chile 3.875% 8/5/20 1,300 1,394
Republic of Chile 3.125% 3/27/25 450 471
Republic of Chile 3.125% 1/21/26 2,240 2,324
Republic of Chile 3.625% 10/30/42 300 307
Total Chile (Cost $17,382)       18,064
China (14.0%)        
Sovereign Bonds (U.S. Dollar-Denominated) (14.0%)        
Agricultural Bank Of China 2.000% 5/21/18 1,550 1,553
Agricultural Bank Of China 2.750% 5/21/20 250 255
Agricultural Bank of China Ltd. 2.250% 12/9/17 500 502
Agricultural Bank of China Ltd. 2.875% 12/10/18 500 510
Agricultural Bank of China Ltd. 2.750% 10/20/20 200 204
Amber Circle Funding Ltd. 2.000% 12/4/17 400 402
Amber Circle Funding Ltd. 3.250% 12/4/22 1,200 1,249
Amipeace Ltd. 2.000% 12/6/16 250 250
Avi Funding Co Ltd. 3.800% 9/16/25 1,600 1,695
Avi Funding Co. Ltd. 2.850% 9/16/20 300 306
2 Avi Funding Co. Ltd. 2.850% 9/16/20 400 408

 

15

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Bank of China Ltd. 2.125% 6/30/18 1,300 1,306
Bank of China Ltd. 3.125% 1/23/19 200 205
Bank of China Ltd. 2.875% 6/30/20 2,400 2,453
Bank of China Ltd. 2.375% 3/1/21 750 751
2 Bank of China Ltd. 5.000% 11/13/24 1,000 1,075
Bank of China Ltd. 5.000% 11/13/24 1,100 1,182
Bank of China Ltd. 3.875% 6/30/25 1,000 1,057
Bao-trans Enterprises Ltd. 3.750% 12/12/18 725 743
Beijing State-Owned Assets Management        
Hong Kong Co. Ltd. 4.125% 5/26/25 800 831
Bluestar Finance Holdings Ltd. 3.500% 6/11/18 1,000 1,015
Bluestar Finance Holdings Ltd. 4.375% 12/29/49 700 717
BOC Aviation Ltd. 2.875% 10/10/17 500 505
BOC Aviation Ltd. 3.000% 3/30/20 1,000 1,015
2 BOC Aviation Ltd. 2.375% 9/15/21 900 885
BOC Aviation Ltd. 4.375% 5/2/23 200 215
BOC Aviation Ltd. 3.875% 4/27/26 600 617
CCBL Cayman 1 Corp. Ltd. 2.750% 5/31/21 250 252
CCBL Cayman Corp. Ltd. 3.250% 7/28/20 300 308
1 CCCI Treasure Ltd. 3.500% 12/29/49 550 561
Century Master Investment Co. Ltd. 4.750% 9/19/18 450 470
CGNPC International Ltd. 4.000% 5/19/25 500 526
Charming Light Investments Ltd. 3.750% 9/3/19 1,350 1,401
China Cinda Finance 2014 Ltd. 4.000% 5/14/19 500 520
China Cinda Finance 2014 Ltd. 5.625% 5/14/24 600 673
China Cinda Finance 2015 I Ltd. 3.125% 4/23/20 2,000 2,035
China Cinda Finance 2015 I Ltd. 4.250% 4/23/25 1,500 1,533
China Clean Energy Development Ltd. 4.000% 11/5/25 1,000 1,048
China Construction Bank Asia Corp. Ltd. 3.250% 7/2/19 700 724
1 China Construction Bank Asia Corp. Ltd. 4.250% 8/20/24 400 415
1 China Construction Bank Corp. 3.875% 5/13/25 1,900 1,945
China Development Bank Corp. 2.500% 10/9/20 1,800 1,833
China Development Bank Corp. 2.125% 6/1/21 2,850 2,864
China Great Wall International Holdings II Ltd. 2.500% 6/18/18 1,200 1,207
China Great Wall International Holdings Ltd. 2.500% 9/17/17 200 201
1 China Life Insurance Co. Ltd. 4.000% 7/3/75 1,000 1,006
China Overseas Finance Cayman II Ltd. 5.500% 11/10/20 1,500 1,662
China Overseas Finance Cayman III Ltd. 5.375% 10/29/23 1,500 1,695
2 China Resources Gas Group Ltd. 4.500% 4/5/22 400 434
China Resources Land Ltd. 4.375% 2/27/19 950 998
China Resources Land Ltd. 6.000% 2/27/24 400 467
China Shenhua Overseas Capital Co. Ltd. 2.500% 1/20/18 600 603
China Shenhua Overseas Capital Co. Ltd. 3.125% 1/20/20 650 666
China Shenhua Overseas Capital Co. Ltd. 3.875% 1/20/25 400 421
China Shipping Overseas Finance 2013 Ltd. 4.250% 1/28/19 500 520
CITIC Ltd. 6.875% 1/21/18 200 212
CITIC Ltd. 6.375% 4/10/20 2,200 2,485
CITIC Ltd. 6.625% 4/15/21 200 234
CITIC Ltd. 2.800% 12/14/21 300 303
CITIC Ltd. 6.800% 1/17/23 1,700 2,055
CITIC Ltd. 3.700% 6/14/26 500 513
1 CITIC Ltd. 8.625% 5/29/49 900 1,002
CITIC Securities Finance 2013 Co. Ltd. 2.500% 5/3/18 400 402
CITIC Securities Finance MTN Co. Ltd. 3.500% 10/30/19 1,200 1,239
2 CNOOC Curtis Funding No 1 Pty Ltd. 4.500% 10/3/23 300 328
CNOOC Curtis Funding No 1 pty Ltd. 4.500% 10/3/23 1,920 2,089

 

16

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
2 CNOOC Finance 2011 Ltd. 4.250% 1/26/21 1,888 2,023
2 CNOOC Finance 2011 Ltd. 5.750% 1/26/41 200 246
2 CNOOC Finance 2012 Ltd. 3.875% 5/2/22 1,200 1,275
2 CNOOC Finance 2012 Ltd. 5.000% 5/2/42 200 223
  CNOOC Finance 2013 Ltd. 1.750% 5/9/18 900 899
  CNOOC Finance 2013 Ltd. 3.000% 5/9/23 850 849
  CNOOC Finance 2013 Ltd. 4.250% 5/9/43 1,200 1,203
  CNOOC Finance 2015 Australia Pty Ltd. 2.625% 5/5/20 1,650 1,675
  CNOOC Finance 2015 USA LLC 3.500% 5/5/25 1,300 1,321
  CNOOC Nexen Finance 2014 ULC 4.250% 4/30/24 2,310 2,474
  CNOOC Nexen Finance 2014 ULC 4.875% 4/30/44 1,100 1,216
2 CNPC General Capital Ltd. 2.750% 4/19/17 50 50
2,4 CNPC General Capital Ltd. 1.717% 5/14/17 200 200
  CNPC General Capital Ltd. 1.950% 4/16/18 850 851
2 CNPC General Capital Ltd. 2.750% 5/14/19 200 203
  CNPC General Capital Ltd. 2.750% 5/14/19 450 459
  CNPC General Capital Ltd. 2.700% 11/25/19 1,400 1,431
2 CNPC General Capital Ltd. 3.950% 4/19/22 700 748
  CNPC General Capital Ltd. 3.400% 4/16/23 250 258
2 CNPC HK Overseas Capital Ltd. 4.500% 4/28/21 725 790
2 CNPC HK Overseas Capital Ltd. 5.950% 4/28/41 400 509
  COSCO Finance 2011 Ltd. 4.000% 12/3/22 1,050 1,114
2 COSL Finance BVI Ltd. 3.250% 9/6/22 550 554
  COSL Singapore Capital Ltd. 3.500% 7/30/20 1,200 1,235
1 CRCC Yupeng Ltd. 3.950% 2/28/49 300 309
  CRCC Yuxiang Ltd. 3.500% 5/16/23 950 972
1 Dianjian Haixing Ltd. 4.050% 10/29/49 200 206
  Eastern Creation II Investment Holdings Ltd. 2.625% 11/20/17 400 403
2 Export-Import Bank of China 2.500% 7/31/19 200 204
  Export-Import Bank of China 2.500% 7/31/19 1,960 2,000
  Export-Import Bank of China 3.625% 7/31/24 200 211
  Export-Import Bank of China 2.875% 4/26/26 1,400 1,391
  Franshion Brilliant Ltd. 5.750% 3/19/19 600 638
2 Franshion Development Ltd. 6.750% 4/15/21 500 574
  Franshion Investment Ltd. 4.700% 10/26/17 200 204
  Huarong Finance Co. Ltd. 4.000% 7/17/19 700 728
  Huarong Finance II Co. Ltd. 3.500% 1/16/18 550 558
  Huarong Finance II Co. Ltd. 2.875% 11/19/18 1,800 1,820
  Huarong Finance II Co. Ltd. 4.500% 1/16/20 1,650 1,737
  Huarong Finance II Co. Ltd. 3.750% 11/19/20 550 570
  Huarong Finance II Co. Ltd. 5.500% 1/16/25 1,300 1,436
  Huarong Finance II Co. Ltd. 5.000% 11/19/25 600 646
  Huarong Finance II Co. Ltd. 4.625% 6/3/26 1,250 1,317
2 ICBCIL Finance Co. Ltd. 2.375% 5/19/19 700 701
  ICBCIL Finance Co. Ltd. 3.250% 3/17/20 800 817
  ICBCIL Finance Co. Ltd. 3.200% 11/10/20 700 716
2 ICBCIL Finance Co. Ltd. 2.750% 5/19/21 600 603
  Industrial & Commercial Bank of China Asia Ltd. 5.125% 11/30/20 750 819
  Industrial & Commercial Bank of China Ltd. 2.500% 11/21/17 600 604
  Industrial & Commercial Bank of China Ltd. 4.875% 9/21/25 1,750 1,876
  Industrial & Commercial Bank of China Ltd. 2.351% 11/13/17 1,250 1,256
  Industrial & Commercial Bank of China Ltd. 2.000% 5/10/19 1,300 1,300
  Industrial & Commercial Bank of China Ltd. 3.231% 11/13/19 1,300 1,346
  Industrial & Commercial Bank of China Ltd. 2.905% 11/13/20 550 561
  Industrial & Commercial Bank of China Ltd. 2.635% 5/26/21 1,450 1,464
  King Power Capital Ltd. 5.625% 11/3/24 500 563

 

17

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Kunlun Energy Co. Ltd. 2.875% 5/13/20 600 610
  Kunlun Energy Co. Ltd. 3.750% 5/13/25 350 362
  MCC Holding Hong Kong Corp. Ltd. 2.500% 8/28/17 400 401
  Minmetals Bounteous Finance BVI Ltd. 3.500% 7/30/20 300 307
  Minmetals Bounteous Finance BVI Ltd. 4.750% 7/30/25 600 637
  Nexen Energy ULC 7.875% 3/15/32 200 280
  Nexen Energy ULC 5.875% 3/10/35 808 960
  Nexen Energy ULC 6.400% 5/15/37 820 1,042
  Nexen Energy ULC 7.500% 7/30/39 300 428
  Prosperous Ray Ltd. 3.000% 11/12/18 400 408
  Prosperous Ray Ltd. 4.625% 11/12/23 550 604
  Shanghai Electric Group Global Investment Ltd. 3.000% 8/14/19 500 511
  Shanghai Electric Power Finance Ltd. 3.625% 8/11/20 1,100 1,142
  Sino-Ocean Land Treasure Finance I Ltd. 4.625% 7/30/19 1,100 1,145
  Sino-Ocean Land Treasure Finance I Ltd. 6.000% 7/30/24 350 379
  Sino-Ocean Land Treasure Finance II Ltd. 4.450% 2/4/20 400 414
  Sino-Ocean Land Treasure Finance II Ltd. 5.950% 2/4/27 250 270
1,2 Sinochem Global Capital Co. Ltd. 5.000% 12/29/49 200 207
2 Sinochem Offshore Capital Co. Ltd. 3.250% 4/29/19 200 205
  Sinochem Offshore Capital Co. Ltd. 3.250% 4/29/19 700 718
2 Sinochem Overseas Capital Co. Ltd. 4.500% 11/12/20 1,375 1,475
2 Sinochem Overseas Capital Co. Ltd. 6.300% 11/12/40 450 581
  Sinopec Capital 2013 Ltd. 1.875% 4/24/18 800 801
  Sinopec Capital 2013 Ltd. 3.125% 4/24/23 1,200 1,210
2 Sinopec Capital 2013 Ltd. 3.125% 4/24/23 400 406
  Sinopec Capital 2013 Ltd. 4.250% 4/24/43 200 204
  Sinopec Group Overseas Development 2012 Ltd. 3.900% 5/17/22 707 754
2 Sinopec Group Overseas Development 2012 Ltd. 3.900% 5/17/22 1,619 1,727
2 Sinopec Group Overseas Development 2012 Ltd. 4.875% 5/17/42 775 864
  Sinopec Group Overseas Development 2013 Ltd. 2.500% 10/17/18 300 304
  Sinopec Group Overseas Development 2013 Ltd. 4.375% 10/17/23 1,625 1,775
  Sinopec Group Overseas Development 2013 Ltd. 5.375% 10/17/43 200 240
2 Sinopec Group Overseas Development 2014 Ltd. 2.750% 4/10/19 400 408
  Sinopec Group Overseas Development 2014 Ltd. 2.750% 4/10/19 700 713
  Sinopec Group Overseas Development 2014 Ltd. 4.375% 4/10/24 2,000 2,181
  Sinopec Group Overseas Development 2015 Ltd. 2.500% 4/28/20 4,300 4,366
  Sinopec Group Overseas Development 2015 Ltd. 3.250% 4/28/25 1,700 1,710
  Sinopec Group Overseas Development 2015 Ltd. 4.100% 4/28/45 800 804
  Sinopec Group Overseas Development 2016 Ltd. 3.500% 5/3/26 1,000 1,024
  Skysea International Capital Management 4.875% 12/7/21 400 445
  State Elite Global Ltd. 3.125% 1/20/20 1,000 1,024
2 State Grid Overseas Investment 2013 Ltd. 1.750% 5/22/18 200 199
  State Grid Overseas Investment 2013 Ltd. 3.125% 5/22/23 1,410 1,457
2 State Grid Overseas Investment 2013 Ltd. 4.375% 5/22/43 200 222
2 State Grid Overseas Investment 2014 Ltd. 2.750% 5/7/19 700 716
  State Grid Overseas Investment 2014 Ltd. 2.750% 5/7/19 1,370 1,403
  State Grid Overseas Investment 2014 Ltd. 4.125% 5/7/24 1,470 1,597
2 State Grid Overseas Investment 2014 Ltd. 4.850% 5/7/44 350 417
  State Grid Overseas Investment 2014 Ltd. 4.850% 5/7/44 200 238
  State Grid Overseas Investment 2016 Ltd. 2.875% 5/18/26 700 697
  Three Gorges Finance I Cayman Islands Ltd. 2.300% 6/2/21 400 401
  Three Gorges Finance I Cayman Islands Ltd. 3.700% 6/10/25 700 737
  Three Gorges Finance I Cayman Islands Ltd. 3.150% 6/2/26 1,200 1,209
Total China (Cost $149,991)       153,451

 

18

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Colombia (2.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (2.8%)        
Ecopetrol SA 7.625% 7/23/19 725 825
Ecopetrol SA 5.875% 9/18/23 1,490 1,598
Ecopetrol SA 4.125% 1/16/25 1,275 1,216
Ecopetrol SA 5.375% 6/26/26 2,000 2,025
Ecopetrol SA 7.375% 9/18/43 1,200 1,230
Ecopetrol SA 5.875% 5/28/45 1,500 1,327
Empresa de Energia de Bogota SA ESP 6.125% 11/10/21 1,100 1,131
Empresas Publicas de Medellin ESP 7.625% 7/29/19 300 340
Oleoducto Central SA 4.000% 5/7/21 400 408
Republic of Colombia 7.375% 3/18/19 1,485 1,674
Republic of Colombia 11.750% 2/25/20 550 717
Republic of Colombia 4.375% 7/12/21 2,134 2,273
1 Republic of Colombia 2.625% 3/15/23 960 929
Republic of Colombia 4.000% 2/26/24 2,195 2,283
Republic of Colombia 8.125% 5/21/24 540 699
1 Republic of Colombia 4.500% 1/28/26 1,400 1,500
Republic of Colombia 7.375% 9/18/37 1,550 1,999
Republic of Colombia 6.125% 1/18/41 2,207 2,549
1 Republic of Colombia 5.625% 2/26/44 2,134 2,348
1 Republic of Colombia 5.000% 6/15/45 2,700 2,761
Transportadora de Gas Internacional SA ESP 5.700% 3/20/22 600 619
Total Colombia (Cost $29,521)       30,451
Costa Rica (0.6%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.6%)        
Banco de Costa Rica 5.250% 8/12/18 250 255
Banco Nacional de Costa Rica 4.875% 11/1/18 400 407
2 Banco Nacional de Costa Rica 4.875% 11/1/18 200 204
2 Banco Nacional de Costa Rica 5.875% 4/25/21 1,000 1,039
Banco Nacional de Costa Rica 6.250% 11/1/23 200 208
Instituto Costarricense de Electricidad 6.950% 11/10/21 475 507
Instituto Costarricense de Electricidad 6.375% 5/15/43 200 173
Republic of Costa Rica 4.250% 1/26/23 1,132 1,091
Republic of Costa Rica 5.625% 4/30/43 1,200 1,068
Republic of Costa Rica 7.000% 4/4/44 800 830
Republic of Costa Rica 7.158% 3/12/45 800 838
Total Costa Rica (Cost $6,316)       6,620
Cote d’Ivoire (0.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.4%)        
Republic of Cote d’Ivoire 5.375% 7/23/24 950 958
1 Republic of Cote d’Ivoire 6.375% 3/3/28 900 938
1 Republic of Cote d’Ivoire 5.750% 12/31/32 2,272 2,228
Total Cote d’Ivoire (Cost $3,910)       4,124
Croatia (0.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.8%)        
Hrvatska Elektroprivreda 5.875% 10/23/22 500 544
Republic of Croatia 6.750% 11/5/19 1,922 2,107
Republic of Croatia 6.625% 7/14/20 1,294 1,433

 

19

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Republic of Croatia 6.375% 3/24/21 1,600 1,777
  Republic of Croatia 5.500% 4/4/23 700 764
  Republic of Croatia 6.000% 1/26/24 1,935 2,182
Total Croatia (Cost $8,416)       8,807
Dominican Republic (0.9%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.9%)        
1 Dominican Republic 7.500% 5/6/21 1,352 1,489
  Dominican Republic 6.600% 1/28/24 450 490
1 Dominican Republic 5.875% 4/18/24 350 363
  Dominican Republic 5.500% 1/27/25 1,760 1,788
  Dominican Republic 6.875% 1/29/26 2,100 2,314
  Dominican Republic 7.450% 4/30/44 450 500
2 Dominican Republic 6.850% 1/27/45 1,000 1,050
1 Dominican Republic 6.850% 1/27/45 1,444 1,506
Total Dominican Republic (Cost $9,277)       9,500
Ecuador (0.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.5%)        
  Republic of Ecuador 10.500% 3/24/20 1,300 1,373
  Republic of Ecuador 10.750% 3/28/22 1,900 2,012
  Republic of Ecuador 7.950% 6/20/24 1,950 1,845
Total Ecuador (Cost $4,971)       5,230
Egypt (0.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.3%)        
  African Export-Import Bank 3.875% 6/4/18 450 456
  African Export-Import Bank 4.750% 7/29/19 400 417
  Arab Republic of Egypt 5.750% 4/29/20 812 828
  Arab Republic of Egypt 5.875% 6/11/25 1,650 1,524
  Arab Republic of Egypt 6.875% 4/30/40 300 273
Total Egypt (Cost $3,590)       3,498
El Salvador (0.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.5%)        
  Republic of El Salvador 7.375% 12/1/19 345 364
  Republic of El Salvador 7.750% 1/24/23 1,035 1,131
  Republic of El Salvador 5.875% 1/30/25 300 298
2 Republic of El Salvador 6.375% 1/18/27 300 300
  Republic of El Salvador 6.375% 1/18/27 400 399
  Republic of El Salvador 8.250% 4/10/32 604 659
  Republic of El Salvador 7.650% 6/15/35 1,390 1,444
  Republic of El Salvador 7.625% 2/1/41 608 624
Total El Salvador (Cost $4,975)       5,219
Ethiopia (0.1%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.1%)        
  Republic of Ethiopia 6.625% 12/11/24 1,150 1,089
Total Ethiopia (Cost $1,113)       1,089
Gabon (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
1 Gabonese Republic 6.375% 12/12/24 1,261 1,156
1,2 Gabonese Republic 6.375% 12/12/24 400 366
  Gabonese Republic 6.950% 6/16/25 200 184
Total Gabon (Cost $1,788)       1,706

 

20

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
Georgia (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
  Georgian Railway JSC 7.750% 7/11/22 700 782
  Republic of Georgia 6.875% 4/12/21 700 780
Total Georgia (Cost $1,537)       1,562
Ghana (0.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.3%)        
  Republic of Ghana 8.500% 10/4/17 300 311
1 Republic of Ghana 9.250% 9/15/22 300 311
  Republic of Ghana 7.875% 8/7/23 200 191
2 Republic of Ghana 7.875% 8/7/23 600 574
1,2 Republic of Ghana 8.125% 1/18/26 300 288
1 Republic of Ghana 8.125% 1/18/26 750 718
1 Republic of Ghana 10.750% 10/14/30 1,000 1,177
Total Ghana (Cost $3,355)       3,570
Guatemala (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
  Republic of Guatemala 5.750% 6/6/22 700 774
  Republic of Guatemala 4.500% 5/3/26 1,000 1,020
  Republic of Guatemala 4.875% 2/13/28 600 631
Total Guatemala (Cost $2,334)       2,425
Honduras (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
  Republic of Honduras 8.750% 12/16/20 700 793
1 Republic of Honduras 7.500% 3/15/24 200 222
Total Honduras (Cost $950)       1,015
Hungary (1.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.5%)        
5 Magyar Export-Import Bank Zrt 5.500% 2/12/18 750 784
2,5 MFB Magyar Fejlesztesi Bank Zrt 6.250% 10/21/20 900 1,014
  MFB Magyar Fejlesztesi Bank Zrt 6.250% 10/21/20 200 225
  Republic of Hungary 4.125% 2/19/18 1,150 1,184
  Republic of Hungary 4.000% 3/25/19 500 523
  Republic of Hungary 6.250% 1/29/20 1,315 1,471
  Republic of Hungary 6.375% 3/29/21 3,672 4,237
  Republic of Hungary 5.375% 2/21/23 2,162 2,448
  Republic of Hungary 5.750% 11/22/23 1,570 1,829
  Republic of Hungary 5.375% 3/25/24 1,025 1,179
  Republic of Hungary 7.625% 3/29/41 1,050 1,592
Total Hungary (Cost $15,601)       16,486
India (1.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.8%)        
  Bank of Baroda 4.875% 7/23/19 975 1,033
  Bank of India 3.625% 9/21/18 350 356
  Bank of India 3.125% 5/6/20 400 400
  Bank of India 6.250% 2/16/21 900 1,006
  Bharat Petroleum Corp. Ltd. 4.625% 10/25/22 400 433
  Bharat Petroleum Corp. Ltd. 4.000% 5/8/25 400 410
  Canara Bank 5.250% 10/18/18 600 632
  Export-Import Bank of India 3.875% 10/2/19 1,500 1,567

 

21

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Export-Import Bank of India 2.750% 4/1/20 1,000 1,011
Export-Import Bank of India 4.000% 1/14/23 400 420
Export-Import Bank of India 3.375% 8/5/26 850 845
IDBI Bank Ltd. 4.375% 3/26/18 400 408
IDBI Bank Ltd. 3.750% 1/25/19 600 610
Indian Oil Corp. Ltd. 5.625% 8/2/21 500 559
Indian Oil Corp. Ltd. 5.750% 8/1/23 400 456
Indian Overseas Bank 4.625% 2/21/18 400 408
Indian Railway Finance Corp. Ltd. 3.917% 2/26/19 600 625
NTPC Ltd. 5.625% 7/14/21 400 450
NTPC Ltd. 4.750% 10/3/22 450 493
NTPC Ltd. 4.375% 11/26/24 400 426
Oil India Ltd. 3.875% 4/17/19 600 621
Oil India Ltd. 5.375% 4/17/24 250 275
ONGC Videsh Ltd. 3.250% 7/15/19 900 922
ONGC Videsh Ltd. 3.750% 5/7/23 700 717
ONGC Videsh Ltd. 4.625% 7/15/24 700 749
Power Grid Corp. of India Ltd. 3.875% 1/17/23 600 622
State Bank of India 3.250% 4/18/18 1,300 1,321
State Bank of India 3.622% 4/17/19 1,300 1,341
2 State Bank of India 4.875% 4/17/24 400 442
Syndicate Bank 4.125% 4/12/18 400 407
Total India (Cost $19,530)       19,965
Indonesia (5.6%)        
Sovereign Bonds (U.S. Dollar-Denominated) (5.6%)        
Majapahit Holding BV 8.000% 8/7/19 350 400
Majapahit Holding BV 7.750% 1/20/20 1,925 2,204
Majapahit Holding BV 7.875% 6/29/37 400 516
2 Pelabuhan Indonesia II PT 4.250% 5/5/25 600 602
Pelabuhan Indonesia II PT 4.250% 5/5/25 950 952
Pelabuhan Indonesia II PT 5.375% 5/5/45 500 496
2 Pelabuhan Indonesia III PT 4.875% 10/1/24 200 209
Pertamina Persero PT 5.250% 5/23/21 450 486
Pertamina Persero PT 4.875% 5/3/22 2,750 2,924
Pertamina Persero PT 4.300% 5/20/23 900 933
2 Pertamina Persero PT 4.300% 5/20/23 430 446
Pertamina Persero PT 6.500% 5/27/41 200 224
Pertamina Persero PT 6.000% 5/3/42 1,450 1,521
2 Pertamina Persero PT 6.000% 5/3/42 750 788
Pertamina Persero PT 5.625% 5/20/43 625 625
2 Pertamina Persero PT 5.625% 5/20/43 200 200
Pertamina Persero PT 6.450% 5/30/44 1,100 1,237
Perusahaan Gas Negara Persero Tbk 5.125% 5/16/24 800 854
2 Perusahaan Gas Negara Persero Tbk PT 5.125% 5/16/24 400 424
Perusahaan Listrik Negara PT 5.500% 11/22/21 950 1,053
Perusahaan Listrik Negara PT 5.250% 10/24/42 500 497
2 Perusahaan Listrik Negara PT 5.250% 10/24/42 300 298
Perusahaan Penerbit SBSN Indonesia II 4.000% 11/21/18 600 625
2 Perusahaan Penerbit SBSN Indonesia III 6.125% 3/15/19 200 219
Perusahaan Penerbit SBSN Indonesia III 6.125% 3/15/19 600 656
Perusahaan Penerbit SBSN Indonesia III 3.300% 11/21/22 1,178 1,199
2 Perusahaan Penerbit SBSN Indonesia III 4.350% 9/10/24 600 632
Perusahaan Penerbit SBSN Indonesia III 4.350% 9/10/24 2,250 2,371
6 Perusahaan Penerbit SBSN Indonesia III 4.325% 5/28/25 1,200 1,255

 

22

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Perusahaan Penerbit SBSN Indonesia III 4.550% 3/29/26 1,050 1,106
Republic of Indonesia 6.875% 1/17/18 1,957 2,073
Republic of Indonesia 11.625% 3/4/19 2,386 2,898
Republic of Indonesia 5.875% 3/13/20 810 901
2 Republic of Indonesia 5.875% 3/13/20 350 389
Republic of Indonesia 4.875% 5/5/21 2,300 2,500
Republic of Indonesia 3.750% 4/25/22 950 984
Republic of Indonesia 3.375% 4/15/23 1,100 1,111
Republic of Indonesia 5.375% 10/17/23 1,109 1,252
Republic of Indonesia 5.875% 1/15/24 1,400 1,625
2 Republic of Indonesia 4.125% 1/15/25 200 210
Republic of Indonesia 4.125% 1/15/25 1,300 1,363
Republic of Indonesia 4.750% 1/8/26 3,800 4,141
Republic of Indonesia 8.500% 10/12/35 1,685 2,491
Republic of Indonesia 6.625% 2/17/37 1,267 1,594
Republic of Indonesia 7.750% 1/17/38 1,863 2,612
Republic of Indonesia 5.250% 1/17/42 1,500 1,646
Republic of Indonesia 4.625% 4/15/43 2,175 2,240
Republic of Indonesia 6.750% 1/15/44 1,850 2,439
2 Republic of Indonesia 6.750% 1/15/44 100 132
Republic of Indonesia 5.125% 1/15/45 3,069 3,342
Total Indonesia (Cost $58,231)       61,895
Iraq (0.2%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.2%)        
1 Republic of Iraq 5.800% 1/15/28 2,460 1,979
Total Iraq (Cost $1,981)       1,979
Jamaica (0.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.4%)        
1 Jamaica 7.625% 7/9/25 450 527
Jamaica 6.750% 4/28/28 1,800 2,034
1 Jamaica 8.000% 3/15/39 848 996
Jamaica 7.875% 7/28/45 600 691
Total Jamaica (Cost $3,861)       4,248
Jordan (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
The Hashemite Kingdom of Jordan 6.125% 1/29/26 350 367
The Hashemite Kingdom of Jordan 5.750% 1/31/27 1,000 993
Total Jordan (Cost $1,353)       1,360
Kazakhstan (1.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.5%)        
Development Bank of Kazakhstan JSC 4.125% 12/10/22 2,050 2,000
KazAgro National Management Holding JSC 4.625% 5/24/23 850 795
2 Kazakhstan Temir Zholy Finance BV 6.375% 10/6/20 600 643
Kazakhstan Temir Zholy Finance BV 6.950% 7/10/42 1,100 1,133
KazMunayGas National Co. JSC 9.125% 7/2/18 1,425 1,561
KazMunayGas National Co. JSC 7.000% 5/5/20 1,570 1,742
KazMunayGas National Co. JSC 6.375% 4/9/21 1,029 1,127
KazMunayGas National Co. JSC 5.750% 4/30/43 350 352
Republic of Kazakhstan 3.875% 10/14/24 2,900 2,998
Republic of Kazakhstan 5.125% 7/21/25 1,900 2,107

 

23

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
2 Republic of Kazakhstan 4.875% 10/14/44 400 404
Republic of Kazakhstan 4.875% 10/14/44 300 303
Republic of Kazakhstan 6.500% 7/21/45 800 957
Total Kazakhstan (Cost $15,141)       16,122
Kenya (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
Republic of Kenya 5.875% 6/24/19 300 310
2 Republic of Kenya 5.875% 6/24/19 200 207
Republic of Kenya 6.875% 6/24/24 1,925 1,921
2 Republic of Kenya 6.875% 6/24/24 200 199
Total Kenya (Cost $2,595)       2,637
Lebanon (1.7%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.7%)        
Republic of Lebanon 5.150% 6/12/18 150 148
Republic of Lebanon 5.150% 11/12/18 1,275 1,256
Republic of Lebanon 5.500% 4/23/19 50 49
Republic of Lebanon 6.000% 5/20/19 450 448
Republic of Lebanon 5.450% 11/28/19 925 910
Republic of Lebanon 6.375% 3/9/20 2,541 2,553
Republic of Lebanon 5.800% 4/14/20 100 99
Republic of Lebanon 8.250% 4/12/21 2,378 2,547
Republic of Lebanon 6.100% 10/4/22 1,914 1,871
Republic of Lebanon 6.000% 1/27/23 1,335 1,292
Republic of Lebanon 6.650% 4/22/24 1,391 1,374
Republic of Lebanon 6.200% 2/26/25 100 96
Republic of Lebanon 6.250% 6/12/25 400 383
Republic of Lebanon 6.600% 11/27/26 1,700 1,653
Republic of Lebanon 6.750% 11/29/27 961 946
Republic of Lebanon 6.650% 11/3/28 750 729
Republic of Lebanon 6.850% 5/25/29 800 786
Republic of Lebanon 6.650% 2/26/30 1,100 1,061
Republic of Lebanon 7.050% 11/2/35 500 496
Total Lebanon (Cost $19,071)       18,697
Malaysia (1.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.8%)        
1MDB Global Investments Ltd. 4.400% 3/9/23 1,000 880
Axiata SPV2 Bhd. 3.466% 11/19/20 350 364
Axiata SPV2 Bhd. 4.357% 3/24/26 700 750
Cagamas Global plc 2.745% 12/10/19 500 507
Danga Capital Bhd. 3.035% 3/1/21 400 408
Export-Import Bank of Malaysia Bhd. 2.875% 12/14/17 650 659
2 Federation of Malaysia 4.646% 7/6/21 750 832
7 Federation of Malaysia 3.179% 4/27/26 1,550 1,592
1 Malayan Banking Bhd. 3.905% 10/29/26 700 723
Malaysia Sovereign Sukuk Bhd. 3.043% 4/22/25 900 914
7 Malaysia Sovereign Sukuk Bhd. 4.236% 4/22/45 550 594
Petroliam Nasional Bhd. 7.625% 10/15/26 430 606
2 Petronas Capital Ltd. 5.250% 8/12/19 1,423 1,555
Petronas Capital Ltd. 5.250% 8/12/19 1,963 2,146
Petronas Capital Ltd. 3.125% 3/18/22 400 415
2 Petronas Capital Ltd. 7.875% 5/22/22 750 962
Petronas Capital Ltd. 3.500% 3/18/25 2,450 2,594

 

24

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Petronas Capital Ltd. 4.500% 3/18/45 1,250 1,361
Petronas Global Sukuk Ltd. 2.707% 3/18/20 850 862
SSG Resources Ltd. 4.250% 10/4/22 700 743
Total Malaysia (Cost $18,902)       19,467
Mexico (8.0%)        
Sovereign Bonds (U.S. Dollar-Denominated) (8.0%)        
Banco Nacional de Comercio Exterior SNC 4.375% 10/14/25 700 723
Comision Federal de Electricidad 4.875% 5/26/21 1,450 1,537
2 Comision Federal de Electricidad 4.875% 1/15/24 900 943
Comision Federal de Electricidad 4.875% 1/15/24 600 628
2 Comision Federal de Electricidad 4.750% 2/23/27 1,000 1,018
Comision Federal de Electricidad 5.750% 2/14/42 700 715
2 Comision Federal de Electricidad 6.125% 6/16/45 200 212
2 Mexico City Airport Trust 4.250% 10/31/26 1,000 1,019
Petroleos Mexicanos 3.500% 7/18/18 800 817
2 Petroleos Mexicanos 5.500% 2/4/19 500 528
Petroleos Mexicanos 8.000% 5/3/19 500 563
Petroleos Mexicanos 6.000% 3/5/20 1,600 1,733
Petroleos Mexicanos 3.500% 7/23/20 1,300 1,306
Petroleos Mexicanos 5.500% 1/21/21 1,789 1,904
2 Petroleos Mexicanos 6.375% 2/4/21 1,800 1,961
Petroleos Mexicanos 6.375% 2/4/21 1,300 1,416
Petroleos Mexicanos 4.875% 1/24/22 1,280 1,310
Petroleos Mexicanos 3.500% 1/30/23 1,550 1,462
2 Petroleos Mexicanos 4.625% 9/21/23 2,343 2,349
Petroleos Mexicanos 4.875% 1/18/24 1,569 1,577
Petroleos Mexicanos 4.250% 1/15/25 1,460 1,396
Petroleos Mexicanos 4.500% 1/23/26 1,250 1,211
2 Petroleos Mexicanos 6.875% 8/4/26 3,950 4,419
Petroleos Mexicanos 6.625% 6/15/35 2,305 2,332
Petroleos Mexicanos 6.500% 6/2/41 3,220 3,180
Petroleos Mexicanos 5.500% 6/27/44 2,936 2,527
Petroleos Mexicanos 6.375% 1/23/45 1,460 1,391
Petroleos Mexicanos 5.625% 1/23/46 3,422 2,951
2 Petroleos Mexicanos 6.750% 9/21/47 3,117 3,084
United Mexican States 5.950% 3/19/19 1,100 1,220
United Mexican States 8.125% 12/30/19 850 1,024
United Mexican States 5.125% 1/15/20 1,580 1,749
United Mexican States 3.500% 1/21/21 200 211
United Mexican States 3.625% 3/15/22 4,117 4,304
United Mexican States 4.000% 10/2/23 3,641 3,832
United Mexican States 3.600% 1/30/25 3,349 3,421
United Mexican States 4.125% 1/21/26 2,350 2,486
United Mexican States 8.300% 8/15/31 520 824
United Mexican States 7.500% 4/8/33 1,190 1,651
United Mexican States 6.750% 9/27/34 2,174 2,811
United Mexican States 6.050% 1/11/40 3,104 3,694
United Mexican States 4.750% 3/8/44 3,550 3,554
United Mexican States 5.550% 1/21/45 3,175 3,560
United Mexican States 4.600% 1/23/46 3,155 3,104
United Mexican States 4.350% 1/15/47 1,800 1,712
United Mexican States 5.750% 10/12/10 2,400 2,458
Total Mexico (Cost $87,477)       87,827

 

25

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
Mongolia (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
  Mongolia 4.125% 1/5/18 800 769
  Mongolia 5.125% 12/5/22 1,050 927
8 Trade & Development Bank of Mongolia LLC 9.375% 5/19/20 400 399
2,8 Trade & Development Bank of Mongolia LLC 9.375% 5/19/20 200 198
Total Mongolia (Cost $2,275)       2,293
Morocco (0.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.5%)        
  Kingdom of Morocco 4.250% 12/11/22 1,950 2,075
  Kingdom of Morocco 5.500% 12/11/42 425 478
  OCP SA 5.625% 4/25/24 1,100 1,183
2 OCP SA 5.625% 4/25/24 350 376
2 OCP SA 4.500% 10/22/25 450 453
  OCP SA 4.500% 10/22/25 750 754
2 OCP SA 6.875% 4/25/44 200 220
  OCP SA 6.875% 4/25/44 300 330
Total Morocco (Cost $5,592)       5,869
Mozambique (0.0%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.0%)        
  Republic of Mozambique 10.500% 1/18/23 644 365
Total Mozambique (Cost $540)       365
Namibia (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
  Republic of Namibia 5.500% 11/3/21 500 536
  Republic of Namibia 5.250% 10/29/25 700 727
Total Namibia (Cost $1,233)       1,263
Nigeria (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
2 Africa Finance Corp. 4.375% 4/29/20 350 365
2 Federal Republic of Nigeria 5.125% 7/12/18 200 201
  Federal Republic of Nigeria 6.750% 1/28/21 250 248
  Federal Republic of Nigeria 6.375% 7/12/23 600 580
Total Nigeria (Cost $1,359)       1,394
Oman (0.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.4%)        
  Lamar Funding Ltd. 3.958% 5/7/25 1,300 1,243
  Sultanate of Oman 4.750% 6/15/26 500 503
2 Sultanate of Oman 4.750% 6/15/26 2,900 2,915
Total Oman (Cost $4,675)       4,661
Pakistan (0.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.4%)        
2 Islamic Republic of Pakistan 7.250% 4/15/19 400 424
  Islamic Republic of Pakistan 7.250% 4/15/19 1,100 1,166
  Islamic Republic of Pakistan 6.750% 12/3/19 800 847
  Islamic Republic of Pakistan 8.250% 4/15/24 750 844

 

26

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
2 Islamic Republic of Pakistan 8.250% 4/15/24 250 281
  Islamic Republic of Pakistan 8.250% 9/30/25 200 227
  Third Pakistan International Sukuk Co. Ltd. 5.500% 10/13/21 500 508
Total Pakistan (Cost $4,062)       4,297
Panama (1.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.3%)        
1,2 Aeropuerto Internacional de Tocumen SA 5.625% 5/18/36 1,000 1,069
  Republic of Panama 5.200% 1/30/20 1,973 2,180
1 Republic of Panama 4.000% 9/22/24 550 592
1 Republic of Panama 3.750% 3/16/25 1,800 1,913
  Republic of Panama 7.125% 1/29/26 760 1,005
  Republic of Panama 8.875% 9/30/27 1,445 2,131
1 Republic of Panama 3.875% 3/17/28 900 955
  Republic of Panama 9.375% 4/1/29 800 1,217
1 Republic of Panama 6.700% 1/26/36 1,737 2,312
1 Republic of Panama 4.300% 4/29/53 600 614
Total Panama (Cost $13,349)       13,988
Paraguay (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
  Republic of Paraguay 4.625% 1/25/23 800 834
  Republic of Paraguay 6.100% 8/11/44 1,250 1,384
Total Paraguay (Cost $2,115)       2,218
Peru (1.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.2%)        
  Corp. Financiera de Desarrollo SA 3.250% 7/15/19 1,200 1,243
2 Corp. Financiera de Desarrollo SA 3.250% 7/15/19 250 259
  Corp. Financiera de Desarrollo SA 4.750% 2/8/22 200 219
  Fondo MIVIVIENDA SA 3.500% 1/31/23 750 773
  Republic of Peru 4.125% 8/25/27 1,400 1,566
  Republic of Peru 8.750% 11/21/33 2,982 4,729
1 Republic of Peru 6.550% 3/14/37 1,361 1,877
  Republic of Peru 5.625% 11/18/50 2,023 2,589
Total Peru (Cost $12,340)       13,255
Philippines (2.6%)        
Sovereign Bonds (U.S. Dollar-Denominated) (2.6%)        
9 Power Sector Assets & Liabilities Management        
  Corp. 7.250% 5/27/19 1,064 1,193
9 Power Sector Assets & Liabilities Management        
  Corp. 7.390% 12/2/24 1,050 1,401
  Republic of the Philippines 9.875% 1/15/19 650 769
  Republic of the Philippines 8.375% 6/17/19 1,066 1,251
  Republic of the Philippines 6.500% 1/20/20 150 172
  Republic of the Philippines 4.000% 1/15/21 1,310 1,415
  Republic of the Philippines 4.200% 1/21/24 1,964 2,200
  Republic of the Philippines 10.625% 3/16/25 834 1,331
  Republic of the Philippines 5.500% 3/30/26 1,850 2,271
  Republic of the Philippines 9.500% 2/2/30 1,453 2,425
  Republic of the Philippines 7.750% 1/14/31 2,154 3,250
  Republic of the Philippines 6.375% 1/15/32 1,200 1,634

 

27

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Republic of the Philippines 6.375% 10/23/34 1,800 2,504
  Republic of the Philippines 5.000% 1/13/37 1,880 2,298
  Republic of the Philippines 3.950% 1/20/40 2,000 2,152
  Republic of the Philippines 3.700% 3/1/41 2,000 2,093
Total Philippines (Cost $27,266)       28,359
Poland (1.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.4%)        
  Republic of Poland 6.375% 7/15/19 4,081 4,601
  Republic of Poland 5.125% 4/21/21 1,710 1,930
  Republic of Poland 5.000% 3/23/22 2,484 2,813
  Republic of Poland 3.000% 3/17/23 1,175 1,209
  Republic of Poland 4.000% 1/22/24 2,428 2,650
  Republic of Poland 3.250% 4/6/26 1,700 1,764
Total Poland (Cost $14,496)       14,967
Qatar (3.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (3.4%)        
1,2 Nakilat Inc. 6.067% 12/31/33 700 843
2 Ooredoo International Finance Ltd. 7.875% 6/10/19 300 345
2 Ooredoo International Finance Ltd. 4.750% 2/16/21 500 548
2 Ooredoo International Finance Ltd. 3.250% 2/21/23 1,050 1,069
2 Ooredoo International Finance Ltd. 5.000% 10/19/25 900 1,013
2 Ooredoo International Finance Ltd. 3.750% 6/22/26 250 256
2 Ooredoo International Finance Ltd. 3.875% 1/31/28 1,750 1,794
  Ooredoo Tamweel Ltd. 3.039% 12/3/18 425 433
2,10 Qatari Diar Finance QSC 5.000% 7/21/20 2,230 2,456
  QNB Finance Ltd. 2.125% 2/14/18 500 500
  QNB Finance Ltd. 2.750% 10/31/18 400 405
  QNB Finance Ltd. 2.875% 4/29/20 2,650 2,700
1,2 Ras Laffan Liquefied Natural Gas Co. Ltd. II 5.298% 9/30/20 320 343
2 Ras Laffan Liquefied Natural Gas Co. Ltd. III 6.750% 9/30/19 950 1,077
1,2 Ras Laffan Liquefied Natural Gas Co. Ltd. III 5.838% 9/30/27 770 888
1,2 Ras Laffan Liquefied Natural Gas Co. Ltd. III 6.332% 9/30/27 250 299
10 State of Qatar 2.099% 1/18/18 1,700 1,706
2 State of Qatar 6.550% 4/9/19 950 1,058
2 State of Qatar 5.250% 1/20/20 2,007 2,203
  State of Qatar 5.250% 1/20/20 1,600 1,755
  State of Qatar 2.375% 6/2/21 3,800 3,814
2 State of Qatar 4.500% 1/20/22 1,050 1,155
10 State of Qatar 3.241% 1/18/23 475 499
  State of Qatar 3.250% 6/2/26 3,300 3,343
  State of Qatar 9.750% 6/15/30 325 531
2 State of Qatar 9.750% 6/15/30 600 983
2 State of Qatar 6.400% 1/20/40 500 673
  State of Qatar 6.400% 1/20/40 1,262 1,698
2 State of Qatar 5.750% 1/20/42 616 778
  State of Qatar 5.750% 1/20/42 600 756
  State of Qatar 4.625% 6/2/46 1,400 1,474
Total Qatar (Cost $36,412)       37,395
Romania (0.6%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.6%)        
  Republic of Romania 6.750% 2/7/22 2,642 3,135
  Republic of Romania 4.375% 8/22/23 1,754 1,904
  Republic of Romania 4.875% 1/22/24 300 336

 

28

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
2 Republic of Romania 4.875% 1/22/24 100 112
2 Republic of Romania 6.125% 1/22/44 200 260
Republic of Romania 6.125% 1/22/44 520 675
Total Romania (Cost $6,106)       6,422
Russia (6.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (6.8%)        
AK Transneft OJSC Via TransCapitalInvest Ltd. 8.700% 8/7/18 770 847
Gazprom Neft OAO Via GPN Capital SA 4.375% 9/19/22 1,200 1,184
2 Gazprom Neft OAO Via GPN Capital SA 6.000% 11/27/23 200 211
Gazprom Neft OAO Via GPN Capital SA 6.000% 11/27/23 1,350 1,427
Gazprom OAO Via Gaz Capital SA 8.146% 4/11/18 1,600 1,720
Gazprom OAO Via Gaz Capital SA 9.250% 4/23/19 2,800 3,195
Gazprom OAO Via Gaz Capital SA 3.850% 2/6/20 478 479
Gazprom OAO Via Gaz Capital SA 5.999% 1/23/21 1,100 1,179
Gazprom OAO Via Gaz Capital SA 6.510% 3/7/22 1,225 1,343
Gazprom OAO Via Gaz Capital SA 4.950% 7/19/22 350 360
Gazprom OAO Via Gaz Capital SA 4.950% 2/6/28 650 638
Gazprom OAO Via Gaz Capital SA 8.625% 4/28/34 725 929
Gazprom OAO Via Gaz Capital SA 7.288% 8/16/37 1,375 1,563
Gazprombank OJSC Via GPB Eurobond        
Finance plc 7.250% 5/3/19 200 213
Gazprombank OJSC Via GPB Eurobond        
Finance plc 4.960% 9/5/19 1,100 1,125
2 Rosneft Finance SA 7.875% 3/13/18 100 107
Rosneft Finance SA 7.875% 3/13/18 1,350 1,435
Rosneft Finance SA 7.250% 2/2/20 200 220
Rosneft Oil Co. via Rosneft International        
Finance Ltd. 4.199% 3/6/22 1,727 1,697
Russian Agricultural Bank OJSC Via RSHB        
Capital SA 5.298% 12/27/17 818 837
Russian Agricultural Bank OJSC Via RSHB        
Capital SA 7.750% 5/29/18 1,000 1,066
Russian Agricultural Bank OJSC Via RSHB        
Capital SA 5.100% 7/25/18 1,700 1,745
2 Russian Agricultural Bank OJSC Via RSHB        
Capital SA 5.100% 7/25/18 100 103
Russian Federation 11.000% 7/24/18 2,053 2,357
2 Russian Federation 3.500% 1/16/19 300 306
Russian Federation 3.500% 1/16/19 1,400 1,427
Russian Federation 5.000% 4/29/20 4,700 5,015
Russian Federation 4.500% 4/4/22 2,600 2,741
2 Russian Federation 4.875% 9/16/23 450 484
Russian Federation 4.875% 9/16/23 4,800 5,158
Russian Federation 12.750% 6/24/28 1,585 2,770
1 Russian Federation 7.500% 3/31/30 7,337 8,879
Russian Federation 5.625% 4/4/42 2,800 3,084
Russian Federation 5.875% 9/16/43 1,600 1,826
Russian Railways via RZD Capital plc 5.700% 4/5/22 1,550 1,652
Sberbank of Russia Via SB Capital SA 5.180% 6/28/19 750 787
Sberbank of Russia Via SB Capital SA 5.717% 6/16/21 1,700 1,811
Sberbank of Russia Via SB Capital SA 6.125% 2/7/22 2,300 2,498
Sberbank of Russia Via SB Capital SA 5.125% 10/29/22 224 225
SCF Capital Ltd. 5.375% 6/16/23 400 414
Vnesheconombank Via VEB Finance plc 4.224% 11/21/18 1,000 1,012

 

29

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Vnesheconombank Via VEB Finance plc 6.902% 7/9/20 1,350 1,454
Vnesheconombank Via VEB Finance plc 6.025% 7/5/22 1,025 1,072
2 Vnesheconombank Via VEB Finance plc 5.942% 11/21/23 200 205
Vnesheconombank Via VEB Finance plc 5.942% 11/21/23 1,125 1,162
Vnesheconombank Via VEB Finance plc 6.800% 11/22/25 1,150 1,231
VTB Bank OJSC Via VTB Capital SA 6.000% 4/12/17 275 279
VTB Bank OJSC Via VTB Capital SA 6.315% 2/22/18 400 416
VTB Bank OJSC Via VTB Capital SA 6.875% 5/29/18 875 923
VTB Bank OJSC Via VTB Capital SA 6.551% 10/13/20 550 596
VTB Bank OJSC Via VTB Capital SA 6.950% 10/17/22 1,725 1,801
Total Russia (Cost $70,844)       75,208
Saudi Arabia (2.0%)        
Sovereign Bonds (U.S. Dollar-Denominated) (2.0%)        
2 Kingdom of Saudi Arabia 2.375% 10/26/21 5,000 4,991
Kingdom of Saudi Arabia 3.250% 10/26/26 5,050 4,978
Kingdom of Saudi Arabia 4.500% 10/26/46 5,950 5,860
SABIC Capital II BV 2.625% 10/3/18 1,000 1,010
Saudi Electricity Global Sukuk Co. 4.211% 4/3/22 625 665
Saudi Electricity Global Sukuk Co. 2 3.473% 4/8/23 1,050 1,069
Saudi Electricity Global Sukuk Co. 2 5.060% 4/8/43 700 691
Saudi Electricity Global Sukuk Co. 3 4.000% 4/8/24 1,550 1,603
2 Saudi Electricity Global Sukuk Co. 3 4.000% 4/8/24 650 672
2 Saudi Electricity Global Sukuk Co. 3 5.500% 4/8/44 300 313
Saudi Electricity Global Sukuk Co. 3 5.500% 4/8/44 500 519
Total Saudi Arabia (Cost $22,265)       22,371
Senegal (0.1%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.1%)        
Republic of Senegal 8.750% 5/13/21 500 565
Republic of Senegal 6.250% 7/30/24 200 206
Total Senegal (Cost $736)       771
Serbia, Republic Of (0.5%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.5%)        
Republic of Serbia 5.250% 11/21/17 720 740
2 Republic of Serbia 5.875% 12/3/18 200 212
Republic of Serbia 5.875% 12/3/18 1,300 1,374
Republic of Serbia 4.875% 2/25/20 700 724
Republic of Serbia 7.250% 9/28/21 2,300 2,636
Total Serbia, Republic Of (Cost $5,526)       5,686
South Africa (1.7%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.7%)        
Eskom Holdings SOC Ltd. 5.750% 1/26/21 2,400 2,412
Eskom Holdings SOC Ltd. 6.750% 8/6/23 1,130 1,165
2 Eskom Holdings SOC Ltd. 7.125% 2/11/25 200 206
Eskom Holdings SOC Ltd. 7.125% 2/11/25 100 103
Republic of South Africa 6.875% 5/27/19 300 331
Republic of South Africa 5.500% 3/9/20 1,995 2,165
Republic of South Africa 5.875% 5/30/22 971 1,095
Republic of South Africa 4.665% 1/17/24 1,900 1,988
Republic of South Africa 5.875% 9/16/25 1,800 2,016
Republic of South Africa 4.300% 10/12/28 3,250 3,149
Republic of South Africa 6.250% 3/8/41 993 1,157

 

30

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Republic of South Africa 5.375% 7/24/44 700 728
  Republic of South Africa 5.000% 10/12/46 950 920
2 Transnet SOC Ltd. 4.000% 7/26/22 800 782
  ZAR Sovereign Capital Fund Propriety Ltd. 3.903% 6/24/20 200 206
Total South Africa (Cost $18,062)       18,423
Sri Lanka (0.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.8%)        
  Bank of Ceylon 6.875% 5/3/17 250 253
  Bank of Ceylon 5.325% 4/16/18 500 506
2 Democratic Socialist Republic of Sri Lanka 6.000% 1/14/19 200 206
  Democratic Socialist Republic of Sri Lanka 6.000% 1/14/19 800 826
2 Democratic Socialist Republic of Sri Lanka 5.125% 4/11/19 250 253
  Democratic Socialist Republic of Sri Lanka 6.250% 10/4/20 1,232 1,288
  Democratic Socialist Republic of Sri Lanka 6.250% 7/27/21 1,550 1,619
  Democratic Socialist Republic of Sri Lanka 5.875% 7/25/22 1,000 1,020
  Democratic Socialist Republic of Sri Lanka 6.125% 6/3/25 500 502
  Democratic Socialist Republic of Sri Lanka 6.850% 11/3/25 1,200 1,264
  Democratic Socialist Republic of Sri Lanka 6.825% 7/18/26 1,000 1,055
  National Savings Bank 8.875% 9/18/18 400 430
Total Sri Lanka (Cost $8,943)       9,222
Thailand (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
  Krung Thai Bank PCL 2.250% 9/11/18 400 403
1 Krung Thai Bank PCL 5.200% 12/26/24 750 786
  PTT Public Co. Ltd. 3.375% 10/25/22 525 546
  PTT Public Co. Ltd. 4.500% 10/25/42 400 399
Total Thailand (Cost $2,044)       2,134
Trinidad And Tobago (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
2 Petroleum Co. of Trinidad & Tobago Ltd. 9.750% 8/14/19 700 772
2 Republic of Trinidad & Tobago 4.375% 1/16/24 200 208
  Republic of Trinidad & Tobago 4.500% 8/4/26 1,250 1,269
Total Trinidad And Tobago (Cost $2,218)       2,249
Tunisia (0.1%)        
Sovereign Bond (U.S. Dollar-Denominated) (0.1%)        
  Banque Centrale de Tunisie SA 5.750% 1/30/25 1,300 1,253
Total Tunisia (Cost $1,246)       1,253
Turkey (4.8%)        
Sovereign Bonds (U.S. Dollar-Denominated) (4.8%)        
  Export Credit Bank of Turkey 5.875% 4/24/19 600 623
2 Export Credit Bank of Turkey 5.375% 2/8/21 500 508
2 Export Credit Bank of Turkey 5.000% 9/23/21 400 401
  Hazine Mustesarligi Varlik Kiralama AS 4.251% 6/8/21 1,250 1,246
2 Hazine Mustesarligi Varlik Kiralama AS 4.489% 11/25/24 800 788
  Republic of Turkey 7.500% 7/14/17 991 1,027
11 Republic of Turkey 2.803% 3/26/18 700 695
  Republic of Turkey 6.750% 4/3/18 2,187 2,305
2 Republic of Turkey 4.557% 10/10/18 500 513
  Republic of Turkey 7.000% 3/11/19 2,680 2,901
  Republic of Turkey 7.500% 11/7/19 966 1,073

 

31

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Republic of Turkey 7.000% 6/5/20 2,630 2,890
  Republic of Turkey 5.625% 3/30/21 2,301 2,430
  Republic of Turkey 5.125% 3/25/22 825 853
  Republic of Turkey 6.250% 9/26/22 2,004 2,182
  Republic of Turkey 3.250% 3/23/23 1,601 1,489
  Republic of Turkey 5.750% 3/22/24 2,550 2,709
  Republic of Turkey 7.375% 2/5/25 2,850 3,338
  Republic of Turkey 4.250% 4/14/26 1,950 1,867
  Republic of Turkey 4.875% 10/9/26 1,900 1,895
  Republic of Turkey 6.875% 3/17/36 2,698 3,066
  Republic of Turkey 6.750% 5/30/40 1,210 1,366
  Republic of Turkey 6.000% 1/14/41 2,400 2,475
  Republic of Turkey 4.875% 4/16/43 5,419 4,809
  Republic of Turkey 6.625% 2/17/45 3,565 3,997
2 TC Ziraat Bankasi AS 4.250% 7/3/19 200 199
2 TC Ziraat Bankasi AS 4.750% 4/29/21 800 793
2 Turkiye Halk Bankasi AS 4.750% 6/4/19 250 249
  Turkiye Halk Bankasi AS 4.750% 6/4/19 400 398
  Turkiye Halk Bankasi AS 3.875% 2/5/20 400 383
  Turkiye Halk Bankasi AS 4.750% 2/11/21 700 675
2 Turkiye Halk Bankasi AS 5.000% 7/13/21 500 482
  Turkiye Vakiflar Bankasi Tao 5.750% 4/24/17 200 202
  Turkiye Vakiflar Bankasi Tao 3.750% 4/15/18 700 692
  Turkiye Vakiflar Bankasi TAO 5.000% 10/31/18 500 505
  Turkiye Vakiflar Bankasi Tao 6.000% 11/1/22 800 788
1 Turkiye Vakiflar Bankasi Tao 6.875% 2/3/25 200 198
Total Turkey (Cost $53,585)       53,010
Ukraine (1.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.3%)        
2 Oschadbank Via SSB #1 plc 9.625% 3/20/25 200 192
1 Oschadbank Via SSB #1 plc 9.625% 3/20/25 1,400 1,347
  Ukraine 7.750% 9/1/19 1,500 1,497
2 Ukraine 7.750% 9/1/20 1,728 1,713
  Ukraine 7.750% 9/1/20 600 593
2 Ukraine 7.750% 9/1/21 907 892
  Ukraine 7.750% 9/1/22 800 781
  Ukraine 7.750% 9/1/23 1,700 1,651
  Ukraine 7.750% 9/1/24 1,750 1,686
  Ukraine 7.750% 9/1/25 250 240
  Ukraine 7.750% 9/1/26 1,600 1,527
  Ukraine 7.750% 9/1/27 800 760
2 Ukraine Railways via Shortline plc 9.875% 9/15/21 200 192
1 Ukreximbank Via Biz Finance plc 9.625% 4/27/22 600 591
1,2 Ukreximbank Via Biz Finance plc 9.750% 1/22/25 200 192
1 Ukreximbank Via Biz Finance plc 9.750% 1/22/25 500 481
Total Ukraine (Cost $13,856)       14,335
United Arab Emirates (4.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (4.4%)        
2 Abu Dhabi National Energy Co. PJSC 6.165% 10/25/17 1,150 1,199
2 Abu Dhabi National Energy Co. PJSC 2.500% 1/12/18 400 401
2 Abu Dhabi National Energy Co. PJSC 6.250% 9/16/19 275 306
2 Abu Dhabi National Energy Co. PJSC 5.875% 12/13/21 200 227
2 Abu Dhabi National Energy Co. PJSC 3.625% 1/12/23 2,100 2,137

 

32

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
  Abu Dhabi National Energy Co. PJSC 3.875% 5/6/24 650 669
2 Abu Dhabi National Energy Co. PJSC 4.375% 6/22/26 1,000 1,048
2 Abu Dhabi National Energy Co. PJSC 6.500% 10/27/36 1,075 1,422
4 ADCB Finance Cayman Ltd. 2.176% 1/9/17 200 200
  ADCB Finance Cayman Ltd. 2.500% 3/6/18 1,200 1,207
  ADCB Finance Cayman Ltd. 3.000% 3/4/19 800 811
  ADCB Finance Cayman Ltd. 2.625% 3/10/20 1,300 1,308
  ADCB Finance Cayman Ltd. 4.500% 3/6/23 425 443
  AHB Sukuk Co. Ltd. 3.267% 10/8/18 200 204
  DEWA Sukuk 2013 Ltd. 3.000% 3/5/18 650 658
1,2 Dolphin Energy Ltd. 5.888% 6/15/19 636 673
2 Dolphin Energy Ltd. 5.500% 12/15/21 820 938
  DP World Crescent Ltd. 3.908% 5/31/23 1,000 1,026
  DP World Ltd. 3.250% 5/18/20 1,250 1,285
2 DP World Ltd. 6.850% 7/2/37 1,500 1,713
2 DP World Sukuk Ltd. 6.250% 7/2/17 670 689
  Dubai DOF Sukuk Ltd. 6.450% 5/2/22 200 233
2 Dubai Electricity & Water Authority 7.375% 10/21/20 1,975 2,326
2 Emirate of Abu Dhabi 6.750% 4/8/19 1,583 1,781
  Emirate of Abu Dhabi 2.125% 5/3/21 1,765 1,769
2 Emirate of Abu Dhabi 3.125% 5/3/26 1,800 1,870
  Emirate of Abu Dhabi 3.125% 5/3/26 1,057 1,098
  Emirate of Dubai 7.750% 10/5/20 1,000 1,185
  Emirate of Dubai 3.875% 1/30/23 1,100 1,136
  Emirate of Dubai 5.250% 1/30/43 200 192
1,2 Emirates Airline 4.500% 2/6/25 777 802
  Emirates NBD PJSC 3.250% 11/19/19 735 753
1 Emirates NBD PJSC 4.875% 3/28/23 950 976
  Emirates Telecommunications Group Co. PJSC 2.375% 6/18/19 800 807
  Emirates Telecommunications Group Co. PJSC 3.500% 6/18/24 500 526
  ICD Sukuk Co. Ltd. 3.508% 5/21/20 250 251
  IPIC GMTN Ltd. 5.000% 11/15/20 250 276
2 IPIC GMTN Ltd. 5.000% 11/15/20 1,400 1,545
2 IPIC GMTN Ltd. 5.500% 3/1/22 710 818
2 IPIC GMTN Ltd. 6.875% 11/1/41 800 1,146
  Jafz Sukuk Ltd. 7.000% 6/19/19 400 444
2 MDC-GMTN B.V. 7.625% 5/6/19 500 572
2 MDC-GMTN B.V. 5.500% 4/20/21 450 514
2 MDC-GMTN B.V. 3.250% 4/28/22 200 208
  MDC-GMTN B.V. 3.250% 4/28/22 500 518
  MDC-GMTN B.V. 2.750% 5/11/23 250 250
1 Medjool Ltd. 3.875% 3/19/23 246 251
  National Bank of Abu Dhabi PJSC 3.000% 8/13/19 1,300 1,327
  National Bank of Abu Dhabi PJSC 2.250% 2/11/20 775 776
  Noor Sukuk Co. Ltd. 2.788% 4/28/20 350 347
2 NOVA Chemicals Corp. 5.250% 8/1/23 900 925
  RAK Capital 3.297% 10/21/18 600 612
  RAK Capital 3.094% 3/31/25 700 689
  RAKFunding Cayman Ltd. 3.250% 6/24/19 950 954
1 Ruwais Power Co. PJSC 6.000% 8/31/36 800 965
  Sharjah Sukuk Ltd. 3.764% 9/17/24 400 414
1,2 Waha Aerospace BV 3.925% 7/28/20 592 612
Total United Arab Emirates (Cost $47,379)       48,432

 

33

 

Emerging Markets Government Bond Index Fund        
 
 
 
      Face Market
    Maturity Amount Value•
  Coupon Date ($000) ($000)
Uruguay (1.0%)        
Sovereign Bonds (U.S. Dollar-Denominated) (1.0%)        
1 Oriental Republic of Uruguay 8.000% 11/18/22 298 383
1 Oriental Republic of Uruguay 4.500% 8/14/24 1,589 1,730
1 Oriental Republic of Uruguay 4.375% 10/27/27 2,230 2,364
Oriental Republic of Uruguay 7.875% 1/15/33 346 479
1 Oriental Republic of Uruguay 7.625% 3/21/36 1,516 2,084
1 Oriental Republic of Uruguay 4.125% 11/20/45 850 778
1 Oriental Republic of Uruguay 5.100% 6/18/50 3,320 3,312
Total Uruguay (Cost $10,686)       11,130
Venezuela (2.4%)        
Sovereign Bonds (U.S. Dollar-Denominated) (2.4%)        
Bolivarian Republic of Venezuela 13.625% 8/15/18 566 411
Bolivarian Republic of Venezuela 7.000% 12/1/18 1,760 1,034
Bolivarian Republic of Venezuela 7.750% 10/13/19 1,606 820
Bolivarian Republic of Venezuela 6.000% 12/9/20 956 428
1 Bolivarian Republic of Venezuela 12.750% 8/23/22 3,565 2,067
Bolivarian Republic of Venezuela 9.000% 5/7/23 2,151 989
Bolivarian Republic of Venezuela 8.250% 10/13/24 2,679 1,186
Bolivarian Republic of Venezuela 7.650% 4/21/25 1,700 734
Bolivarian Republic of Venezuela 11.750% 10/21/26 1,927 1,064
Bolivarian Republic of Venezuela 9.250% 9/15/27 3,122 1,565
Bolivarian Republic of Venezuela 9.250% 5/7/28 640 297
1 Bolivarian Republic of Venezuela 11.950% 8/5/31 4,229 2,332
Bolivarian Republic of Venezuela 9.375% 1/13/34 1,900 881
Bolivarian Republic of Venezuela 7.000% 3/31/38 1,375 578
CA La Electricidad de Caracas 8.500% 4/10/18 320 182
2 CITGO Holding Inc. 10.750% 2/15/20 1,150 1,175
CITGO Holding Inc. 10.750% 2/15/20 100 102
2 CITGO Petroleum Corp. 6.250% 8/15/22 535 540
CITGO Petroleum Corp. 6.250% 8/15/22 100 101
1 Petroleos de Venezuela SA 8.500% 11/2/17 1,819 1,314
1 Petroleos de Venezuela SA 9.000% 11/17/21 1,858 914
1 Petroleos de Venezuela SA 12.750% 2/17/22 555 325
1 Petroleos de Venezuela SA 6.000% 5/16/24 6,250 2,338
1 Petroleos de Venezuela SA 6.000% 11/15/26 4,991 1,838
Petroleos de Venezuela SA 5.375% 4/12/27 4,145 1,501
1 Petroleos de Venezuela SA 9.750% 5/17/35 2,963 1,300
Petroleos de Venezuela SA 5.500% 4/12/37 1,810 651
Total Venezuela (Cost $26,544)       26,667
Vietnam (0.2%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.2%)        
Socialist Republic of Vietnam 6.750% 1/29/20 659 733
2 Socialist Republic of Vietnam 4.800% 11/19/24 200 211
Socialist Republic of Vietnam 4.800% 11/19/24 775 820
Total Vietnam (Cost $1,695)       1,764

 

34

 

Emerging Markets Government Bond Index Fund        
 
 
 
        Face Market
      Maturity Amount Value•
    Coupon Date ($000) ($000)
Zambia (0.3%)        
Sovereign Bonds (U.S. Dollar-Denominated) (0.3%)        
  Republic of Zambia 5.375% 9/20/22 725 630
2 Republic of Zambia 8.500% 4/14/24 450 438
  Republic of Zambia 8.500% 4/14/24 800 781
1 Zambia Government International Bond 8.970% 7/30/27 900 885
Total Zambia (Cost $2,694)       2,734
Temporary Cash Investments (0.9%)        
12 Vanguard Market Liquidity Fund 0.718%   94,583 9,459
Total Temporary Cash Investments (Cost $9,459)       9,459
Total Investments (99.3%) (Cost $1,056,689)       1,090,053
 
          Amount
          ($000)
Other Assets and Liabilities (0.7%)        
Other Assets        
Investment in Vanguard       83
Receivables for Investment Securities Sold       10,133
Receivables for Accrued Income       14,206
Receivables for Capital Shares Issued       519
Other Assets       62
Total Other Assets       25,003
Liabilities        
Payables for Investment Securities Purchased       (16,717)
Payables for Capital Shares Redeemed       (80)
Payables for Distributions       (128)
Payables to Vanguard       (315)
Other Liabilities       (276)
Total Liabilities       (17,516)
Net Assets (100%)       1,097,540
 
 
At October 31, 2016, net assets consisted of:        
          Amount
          ($000)
Paid-in Capital       1,065,691
Undistributed Net Investment Income       3,353
Accumulated Net Realized Losses       (4,868)
Unrealized Appreciation (Depreciation)       33,364
Net Assets       1,097,540

 

35

 

Emerging Markets Government Bond Index Fund  
 
 
 
  Amount
  ($000)
Investor Shares—Net Assets  
Applicable to 1,175,964 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 11,811
Net Asset Value Per Share—Investor Shares $10.04
 
ETF Shares—Net Assets  
Applicable to 10,905,979 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 873,634
Net Asset Value Per Share—ETF Shares $80.11
 
Admiral Shares—Net Assets  
Applicable to 9,507,413 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 190,976
Net Asset Value Per Share—Admiral Shares $20.09
 
Institutional Shares—Net Assets  
Applicable to 655,117 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 21,119
Net Asset Value Per Share—Institutional Shares $32.24

 

• See Note A in Notes to Financial Statements.
1 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
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 October 31, 2016, the aggregate value of these securities was
$131,549,000, representing 12.0% of net assets.
3 Guaranteed by the Republic of Azerbaijan.
4 Adjustable-rate security.
5 Guaranteed by the Republic of Hungary.
6 Guaranteed by the Republic of Indonesia.
7 Guaranteed by the Federation of Malaysia.
8 Guaranteed by the Government of Mongolia.
9 Guaranteed by the Republic of the Philippines.
10 Guaranteed by the State of Qatar.
11 Guaranteed by the Republic of Turkey.
12 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is
the 7-day yield.
See accompanying Notes, which are an integral part of the Financial Statements.

36

 

Emerging Markets Government Bond Index Fund  
 
 
Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Interest1 44,495
Total Income 44,495
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 23
Management and Administrative—Investor Shares 37
Management and Administrative—ETF Shares 1,978
Management and Administrative—Admiral Shares 461
Management and Administrative—Institutional Shares 47
Marketing and Distribution—Investor Shares 2
Marketing and Distribution—ETF Shares 54
Marketing and Distribution—Admiral Shares 15
Marketing and Distribution—Institutional Shares 1
Custodian Fees 46
Auditing Fees 48
Shareholders’ Reports—Investor Shares 9
Shareholders’ Reports—ETF Shares 19
Shareholders’ Reports—Admiral Shares 1
Shareholders’ Reports—Institutional Shares —
Total Expenses 2,741
Net Investment Income 41,754
Realized Net Gain (Loss) on Investment Securities Sold1 (1,858)
Change in Unrealized Appreciation (Depreciation) of Investment Securities 47,756
Net Increase (Decrease) in Net Assets Resulting from Operations 87,652

1 Interest income and realized net gain (loss) from an affiliated company of the fund was $37,000 and $0, respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

37

 

Emerging Markets Government Bond Index Fund    
 
 
Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 41,754 22,613
Realized Net Gain (Loss) (1,858) (3,826)
Change in Unrealized Appreciation (Depreciation) 47,756 (18,102)
Net Increase (Decrease) in Net Assets Resulting from Operations 87,652 685
Distributions    
Net Investment Income    
Investor Shares (465) (399)
ETF Shares (31,046) (15,477)
Admiral Shares (7,488) (5,622)
Institutional Shares (845) (388)
Realized Capital Gain    
Investor Shares — —
ETF Shares — —
Admiral Shares — —
Institutional Shares — —
Total Distributions (39,844) (21,886)
Capital Share Transactions    
Investor Shares 2,244 2,155
ETF Shares 335,485 292,555
Admiral Shares 51,874 18,272
Institutional Shares 9,579 10,675
Net Increase (Decrease) from Capital Share Transactions 399,182 323,657
Total Increase (Decrease) 446,990 302,456
Net Assets    
Beginning of Period 650,550 348,094
End of Period1 1,097,540 650,550
1 Net Assets—End of Period includes undistributed net investment income of $3,353,000 and $1,443,000.  

 

See accompanying Notes, which are an integral part of the Financial Statements.

38

 

Emerging Markets Government Bond Index Fund        
 
 
Financial Highlights        
 
 
Investor Shares        
        May 14,
        20131 to
  Year Ended October 31, Oct. 31,
For a Share Outstanding Throughout Each Period 2016 2015 2014 2013
Net Asset Value, Beginning of Period $9.50 $9.95 $9.74 $10.00
Investment Operations        
Net Investment Income .454 .427 .417 .149
Net Realized and Unrealized Gain (Loss) on Investments2 . 533 (. 447) . 213 (. 261)
Total from Investment Operations . 987 (. 020) . 630 (.112)
Distributions        
Dividends from Net Investment Income (. 447) (. 430) (. 420) (.148)
Distributions from Realized Capital Gains — — — —
Total Distributions (. 447) (. 430) (. 420) (.148)
Net Asset Value, End of Period $10.04 $9.50 $9.95 $9.74
 
Total Return3 10.65% -0.16% 6.62% -1.38%
 
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $12 $9 $7 $4
Ratio of Total Expenses to Average Net Assets 0.49% 0.49% 0.49% 0.49%4
Ratio of Net Investment Income to Average Net Assets 4.72% 4.52% 4.35% 3.81%4
Portfolio Turnover Rate 5 24% 20% 27% 38%

1 Subscription period for the fund was May 14, 2013, to May 30, 2013, during which time all assets were held in money market instruments.
Performance measurement began May 31, 2013, at a net asset value of $10.03.
2 Includes increases from purchase fees of $.01, $.01, $.00, and $.03
3 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.
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.

39

 

Emerging Markets Government Bond Index Fund        
 
 
Financial Highlights        
 
 
ETF Shares        
        May 31,
        20131 to
  Year Ended October 31, Oct. 31,
For a Share Outstanding Throughout Each Period 2016 2015 2014 2013
Net Asset Value, Beginning of Period $75.81 $79.40 $77.71 $79.52
Investment Operations        
Net Investment Income 3.753 3.516 3.429 1.217
Net Realized and Unrealized Gain (Loss) on Investments2 4.228 (3.556) 1.700 (2.086)
Total from Investment Operations 7.981 (.040) 5.129 (.869)
Distributions        
Dividends from Net Investment Income (3.681) (3.550) (3.439) (.941)
Distributions from Realized Capital Gains — — — —
Total Distributions (3.681) (3.550) (3.439) (.941)
Net Asset Value, End of Period $80.11 $75.81 $79.40 $77.71
 
Total Return 10.84% -0.01% 6.79% -1.39%
 
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $874 $501 $222 $85
Ratio of Total Expenses to Average Net Assets 0.32% 0.34% 0.34% 0.35%3
Ratio of Net Investment Income to Average Net Assets 4.89% 4.67% 4.50% 3.95%3
Portfolio Turnover Rate4 24% 20% 27% 38%

1 Inception.
2 Includes increases from purchase fees of $.04, $.06, $.01, and $.30.
3 Annualized.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares,
including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

40

 

Emerging Markets Government Bond Index Fund        
 
 
Financial Highlights        
 
 
Admiral Shares        
        May 14,
        20131 to
  Year Ended October 31, Oct. 31,
For a Share Outstanding Throughout Each Period 2016 2015 2014 2013
Net Asset Value, Beginning of Period $19.00 $19.90 $19.48 $20.00
Investment Operations        
Net Investment Income . 941 . 885 . 863 . 309
Net Realized and Unrealized Gain (Loss) on Investments2 1.076 (. 894) . 427 (. 522)
Total from Investment Operations 2.017 (.009) 1.290 (.213)
Distributions        
Dividends from Net Investment Income (. 927) (. 891) (. 870) (. 307)
Distributions from Realized Capital Gains — — — —
Total Distributions (. 927) (. 891) (. 870) (. 307)
Net Asset Value, End of Period $20.09 $19.00 $19.90 $19.48
 
Total Return3 10.89% 0% 6.78% -1.37%
 
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $191 $131 $118 $55
Ratio of Total Expenses to Average Net Assets 0.32% 0.33% 0.34% 0.34%4
Ratio of Net Investment Income to Average Net Assets 4.89% 4.68% 4.50% 3.96%4
Portfolio Turnover Rate 5 24% 20% 27% 38%

1 Subscription period for the fund was May 14, 2013, to May 30, 2013, during which time all assets were held in money market instruments.
Performance measurement began May 31, 2013, at a net asset value of $20.07.
2 Includes increases from purchase fees of $.01, $.02, $.00, and $.06.
3 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.
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.

41

 

Emerging Markets Government Bond Index Fund      
 
 
Financial Highlights      
 
 
Institutional Shares      
  Year Feb 11, Nov. 25,
  Ended 20151 to 20141 to
  October 31, Oct. 31, Dec. 18,
For a Share Outstanding Throughout Each Period 2016 2015 2014
Net Asset Value, Beginning of Period $30.50 $30.72 $31.53
Investment Operations      
Net Investment Income 1.521 1.019 .108
Net Realized and Unrealized Gain (Loss) on Investments2 1.715 (.159) (1.240)
Total from Investment Operations 3.236 .860 (1.132)
Distributions      
Dividends from Net Investment Income (1.496) (1.080) (.108)
Distributions from Realized Capital Gains — — —
Total Distributions (1.496) (1.080) (.108)
Net Asset Value, End of Period $32.24 $30.50 $30.29
 
Total Return3 10.89% 2.82% -3.60%
 
Ratios/Supplemental Data      
Net Assets, End of Period (Millions) $21 $10 $0
Ratio of Total Expenses to Average Net Assets 0.29% 0.29% 0.30%
Ratio of Net Investment Income to Average Net Assets 4.92% 4.75% 4.72%
Portfolio Turnover Rate 4 24% 20%5 20%5

1 The class commenced operations on November 25, 2014. On December 18, 2014, all outstanding shares were redeemed and the Net Asset
Value represents the per share amount at which such shares were redeemed. On February 11, 2015, the class recommenced operations.
2 Includes increases from purchase fees of $.02 for the current period and $.04 in aggregate for periods prior to November 1, 2015.
3 Total returns do not include transaction or account service fees that may have applied in the period shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares,
including ETF Creation Units.
5 Reflects the fund’s portfolio turnover for the fiscal year ended October 31, 2015.

See accompanying Notes, which are an integral part of the Financial Statements.

42

 

Emerging Markets Government Bond Index Fund

Notes to Financial Statements

Vanguard Emerging Markets Government Bond Index 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 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 Nasdaq; they can be purchased and sold through a broker. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Bonds and temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Other temporary cash investments are valued at amortized cost, which approximates market value. 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.

2. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

4. 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

43

 

Emerging Markets Government Bond Index Fund

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 October 31, 2016, or at any time during the period then ended.

5. Other: 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. Fees assessed on capital share transactions are credited to paid-in capital.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $83,000, representing 0.01% of the fund’s net assets and 0.03% 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).

44

 

Emerging Markets Government Bond Index Fund

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Sovereign Bonds — 1,080,594 —
Temporary Cash Investments 9,459 — —
Total 9,459 1,080,594 —

 

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 October 31, 2016, the fund realized $669,000 of net capital losses resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such losses 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 October 31, 2016, the fund had $3,634,000 of ordinary income available for distribution. The fund had available capital losses totaling $4,868,000 that may be carried forward indefinitely to offset future net capital gains.

At October 31, 2016, the cost of investment securities for tax purposes was $1,056,689,000. Net unrealized appreciation of investment securities for tax purposes was $33,364,000, consisting of unrealized gains of $39,277,000 on securities that had risen in value since their purchase and $5,913,000 in unrealized losses on securities that had fallen in value since their purchase.

E. During the year ended October 31, 2016, the fund purchased $615,548,000 of investment securities and sold $219,189,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $0 and $99,000, respectively. Total purchases and sales include $332,352,000 and $21,492,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

45

 

Emerging Markets Government Bond Index Fund

F. Capital share transactions for each class of shares were:      
      Year Ended October 31,
    2016   2015
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued1 5,566 565 6,261 646
Issued in Lieu of Cash Distributions 392 40 339 35
Redeemed (3,714) (379) (4,445) (461)
Net Increase (Decrease)—Investor Shares 2,244 226 2,155 220
ETF Shares        
Issued1 357,502 4,601 338,399 4,403
Issued in Lieu of Cash Distributions — — — —
Redeemed (22,017) (300) (45,844) (600)
Net Increase (Decrease)—ETF Shares 335,485 4,301 292,555 3,803
Admiral Shares        
Issued1 77,994 3,984 53,419 2,758
Issued in Lieu of Cash Distributions 6,294 323 4,782 249
Redeemed (32,414) (1,673) (39,929) (2,079)
Net Increase (Decrease)—Admiral Shares 51,874 2,634 18,272 928
Institutional Shares2        
Issued1 8,772 295 19,856 637
Issued in Lieu of Cash Distributions 845 27 354 12
Redeemed (38) (1) (9,535) (315)
Net Increase (Decrease)—Institutional Shares 9,579 321 10,675 334

1 Includes purchase fees for fiscal 2016 and 2015 of $620,000 and $592,000, respectively (fund totals).

2 Institutional shares were first issued on November 25, 2014, and were redeemed shortly thereafter. Institutional shares were next issued on February 11, 2015. The table reflects all Institutional transactions beginning November 25, 2014.

G. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

46

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Emerging Markets Government Bond Index Fund:

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Emerging Markets Government Bond Index Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

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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 October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Emerging Markets Government Bond Index Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,053.98 $2.48
ETF Shares 1,000.00 1,055.68 1.60
Admiral Shares 1,000.00 1,055.94 1.60
Institutional Shares 1,000.00 1,055.87 1.45
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,022.72 $2.44
ETF Shares 1,000.00 1,023.58 1.58
Admiral Shares 1,000.00 1,023.58 1.58
Institutional Shares 1,000.00 1,023.73 1.42

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 0.48% for Investor Shares, 0.31% for ETF Shares, 0.31% for Admiral Shares, and 0.28% for Institutional Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

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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.

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

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.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Barclays and are from Moody’s, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available.

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.

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.

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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.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

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Vanguard Emerging Markets Government Bond Index Fund is not sponsored, endorsed, issued, sold, or promoted by Barclays Risk Analytics and Index Solutions Limited or any of its affiliates (“Barclays”). Barclays makes no representation or warranty, express or implied, to the owners or purchasers of Vanguard Emerging Markets Government Bond Index Fund or any member of the public regarding the advisability of investing in securities generally or in Vanguard Emerging Markets Government Bond Index Fund particularly or the ability of the Barclays Index to track general bond market performance. Barclays has not passed on the legality or suitability of Vanguard Emerging Markets Government Bond Index Fund with respect to any person or entity. Barclays’ only relationship to Vanguard and Vanguard Emerging Markets Government Bond Index Fund is the licensing of the Barclays index, which is determined, composed, and calculated by Barclays without regard to Vanguard or Vanguard Emerging Markets Government Bond Index Fund or any owners or purchasers of Vanguard Emerging Markets Government Bond Index Fund. Barclays has no obligation to take the needs of Vanguard, Vanguard Emerging Markets Government Bond Index Fund, or the owners of Vanguard Emerging Markets Government Bond Index Fund into consideration in determining, composing, or calculating the Barclays Index. Barclays is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of Vanguard Emerging Markets Government Bond Index Fund to be issued. Barclays has no obligation or liability in connection with the administration, marketing, or trading of Vanguard Emerging Markets Government Bond Index Fund.

BARCLAYS SHALL HAVE NO LIABILITY TO THIRD PARTIES FOR THE QUALITY, ACCURACY, AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. BARCLAYS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF VANGUARD EMERGING MARKETS GOVERNMENT BOND INDEX FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. BARCLAYS RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS USD EMERGING MARKETS GOVERNMENT RIC CAPPED INDEX, AND BARCLAYS SHALL NOT BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED, OR INTERRUPTED PUBLICATION WITH RESPECT TO THE BLOOMBERG BARCLAYS USD EMERGING MARKETS GOVERNMENT RIC CAPPED INDEX. BARCLAYS MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE

INDEX OR ANY DATA INCLUDED THEREIN. BARCLAYS SHALL NOT BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY INDIRECT OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN.

© 2016 Barclays. Used with Permission.

Source: Barclays Global Family of Indices. Copyright 2016, Barclays. All rights reserved.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior Management Team

Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

P.O. Box 2600

Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com
Fund Information > 800-662-7447  
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q11200 122016

 


 
Annual Report | October 31, 2016
Vanguard Global Minimum Volatility Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 2
Advisor’s Report. 6
Fund Profile. 9
Performance Summary. 11
Financial Statements. 13
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: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard Global Minimum Volatility Fund returned more than 4% for the 12 months ended October 31, 2016, ahead of its benchmark and the average performance of its peers.

• The fund’s objective is to create a portfolio that has broad equity exposure with less volatility than the global equity market. During the fiscal year, the fund produced lower daily volatility and a higher risk-adjusted return than its benchmark, the FTSE Global All Cap Index (USD Hedged). (We calculate daily volatility and risk-adjusted return using standard deviation, as we discuss in the Advisor’s Report.)

• Overweight allocations to some benchmark sectors with less volatile returns, such as consumer staples, telecommunication services, and utilities, helped performance. An underweight allocation to energy limited exposure to one of the benchmark’s most volatile sectors.

• The fund benefited from having less exposure to South Africa than the benchmark but was hampered by small overweight positions in Brazil and Russia.

Total Returns: Fiscal Year Ended October 31, 2016  
  Total
  Returns
Vanguard Global Minimum Volatility Fund  
Investor Shares 4.23%
Admiral™ Shares 4.39
FTSE Global All Cap Index (USD Hedged) 3.09
Global Funds Average 0.98
Global 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.  

 

Expense Ratios      
Your Fund Compared With Its Peer Group      
  Investor Admiral Peer Group
  Shares Shares Average
Global Minimum Volatility Fund 0.27% 0.21% 1.27%

The fund expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratios were 0.25% for Investor Shares and 0.17% 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 2015.

Peer group: Global Funds.

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Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute,

2

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

3

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors

shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

4

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

5

 

Advisor’s Report

For the 12 months ended October 31, 2016, Vanguard Global Minimum Volatility Fund returned 4.23% for Investor Shares and 4.39% for Admiral Shares, with an annualized daily volatility of 10.7%. By comparison, its benchmark, the FTSE Global All Cap Index (USD Hedged), returned 3.09%, with an annualized daily volatility of 12.7%. (To get the annualized daily volatility, we calculate the standard deviation of daily returns and multiply it by the square root of 252, generally the number of trading days in a year.)

Investment objective

Our objective is to create a portfolio that has broad equity exposure with less volatility than the global equity market. We achieved this over the performance period, as the fund’s daily volatility averaged about 15.8% less than that of its benchmark.

It is important to mention, as we have in the past, that we do not target a specific volatility level. Rather, we seek to provide an equity fund that has lower absolute risk than the broad global market. Thus, when the broad global equity market is experiencing periods with spikes in volatility, you should expect this fund’s volatility to rise as well—just not by the same magnitude.

We recognize that equity-like returns are also an important outcome of an investment in this fund, but achieving a total return higher than the benchmark’s is not our objective. Although our research leads us to expect that, on average, a minimum volatility fund may outperform the overall global market in sharp

downturns (while still experiencing losses), the fund should be expected to trail in strong bull markets. With that in mind, because the fund is expected to have a lower level of risk than the global equity market, you should not expect it to outperform the market over the long run.

Over the long term, we think an acceptable comparative performance measure for the fund is its risk-adjusted return. This can be calculated by dividing the portfolio’s total return for the period by the annualized standard deviation of daily returns. We view 12 months to be a relatively short time, but for the most recent fiscal year, the risk-adjusted return was 0.40, compared with 0.24 for the benchmark. Over a slightly longer period—since the fund’s inception on December 12, 2013—its risk-adjusted return was 1.02, compared with 0.58 for the benchmark.

Investment strategy

In building our portfolio, we use quantitative models that evaluate a variety of factors that drive a stock’s volatility. These fundamental drivers include risk factors such as growth, value, dividend yields, size, volatility, and liquidity. In addition, our portfolio construction process includes estimates of each stock’s correlation—or how its factors move in relation to one another. This approach allows us to make appropriate risk/diversification trade-offs, while not relying solely on volatility estimates.

Our process also approaches currency exposure and its impact on a portfolio in a specific manner. We recognize that owning companies in foreign markets involves the

6

 

risk of movements in foreign currency exchange rates relative to the U.S. dollar. Because of this, an optimization process that focuses solely on volatilities tied to an investor’s home currency will tend to overweight exposures to that currency. We aim to avoid such currency-specific exposures by focusing on equity volatilities and correlations measured in local currency terms. Then we use currency forward contracts to hedge the resulting exposure for U.S. investors. We believe this process can further reduce the volatility of the portfolio overall in the long run.

Finally, when constructing the portfolio, we apply constraints to reduce stock, sector, and country concentration risk. We find that these constraints, which allow for broader diversification and liquidity, reduce unnecessarily high risk exposures without significantly affecting our ability to reduce overall volatility. Drawing from the universe of about 7,700 stocks in the FTSE index, we construct a portfolio of about 400–450 stocks.

The investment environment

The unhedged FTSE Global All Cap Index returned 2.74% for the fiscal year. This performance highlights the lower return environment for global equities, which struggled in late 2015 and early 2016 but recovered in the second and third quarters. Although only three of the 11 sectors in the benchmark had negative returns, larger sectors such as health care and financials drove down its overall return.

The fund’s hedged benchmark outperformed its unhedged counterpart by about a third of a percentage point.

In the second half of the fiscal year, we saw foreign currencies weaken relative to the U.S. dollar, helping absolute returns. However, those currencies strengthened in the first half of the year and therefore detracted from performance. As we have mentioned, Vanguard doesn’t forecast exchange rates or use currency hedging to enhance returns. Rather, hedging currency exposure is an important element of our volatility-reduction strategy.

Although the market did experience spikes in volatility over the period, average levels were still below longer-term expectations. For example, the Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility of Standard & Poor’s 500 Index options, had a ten-year average level of 20.7, compared with 16.38 for the fiscal year.

The fund’s successes and shortfalls

We have cautioned that during periods of low volatility, expectations for the size of the portfolio’s volatility discount relative to the market should be tempered. Toward the end of the fiscal year, we saw the benchmark’s volatility levels drop significantly. At times, that volatility over these short measurement periods was lower than what the fund realized. For example, the 60-day annualized volatility of daily returns as of October 7 was 7.25% for the benchmark, compared with 8.33% for the fund.

It is important to recognize that there will be periods such as this, particularly when the market is experiencing historically low levels of volatility; however, we still maintain confidence in our process to

7

 

deliver lower volatility over the long term. In this regard, the fund met its objective of lower volatility than the broader equity market measured by daily volatility for the annual period. Additionally, the benefits of our strategy become even clearer when you seek to remove some of the noise caused by short-term reversals in daily returns, which can increase volatility levels, and focus on a longer return horizon such as monthly returns. For example, since inception, the fund has delivered a 31.3% reduction in the annualized volatility of monthly returns relative to its benchmark.

A combination of factors helped reduce the fund’s volatility during the fiscal year. Our strategy of holding stocks that have lower correlations with one another provided diversification benefits. On average, we were overweighted in less volatile sectors, such as consumer staples, telecommunication services, and utilities, and underweighted in two of the benchmark’s more volatile industry groups, energy and financials. As for country allocations, the fund benefited from having less exposure to South Africa than the benchmark but was hampered by small overweight positions in Brazil and Russia.

We continue to see our approach to portfolio construction pay off in reduced volatility. The portfolio also outperformed the benchmark in terms of relative return, but as we’ve noted, a strategy such as ours can reward or fall short of investor expectations over shorter periods. With this in mind, we find that focusing on the long-term risk-adjusted returns of the portfolio relative to the benchmark realigns expectations with the fund’s objective. We thank you for your investment and look forward to the new fiscal year.

Portfolio Managers:

Michael R. Roach, CFA

Anatoly Shtekhman, CFA

Binbin Guo, Principal, Head of Equity
Research and Portfolio Strategies

Vanguard Quantitative Equity Group

November 10, 2016

8

 

Global Minimum Volatility Fund

Fund Profile
As of October 31, 2016

Share-Class Characteristics  
  Investor Admiral
  Shares Shares
Ticker Symbol VMVFX VMNVX
Expense Ratio1 0.27% 0.21%

 

Portfolio Characteristics    
    FTSE Global
    All Cap Index
  Fund (USD Hedged)
Number of Stocks 370 7,707
Median Market Cap $8.6B $33.4B
Price/Earnings Ratio 22.4x 21.9x
Price/Book Ratio 2.5x 2.0x
Return on Equity 15.4% 15.5%
Earnings Growth    
Rate 5.7% 7.8%
Dividend Yield 2.6% 2.5%
Turnover Rate 58% —
Short-Term Reserves -0.4% —

 

Sector Diversification (% of equity exposure)
    FTSE Global
    All Cap Index
  Fund (USD Hedged) 
Consumer Discretionary 7.9% 12.3%
Consumer Staples 13.9 9.5
Energy 2.2 6.7
Financials 12.5 17.3
Health Care 13.9 10.9
Industrials 13.1 11.6
Information Technology 10.8 15.3
Materials 5.1 5.7
Real Estate 5.3 4.1
Telecommunication Services 7.1 3.2
Utilities 8.2 3.4

 

Ten Largest Holdings (% of total net assets)
Taiwan Semiconductor    
Manufacturing Co. Ltd. Semiconductors 1.5%
RenaissanceRe Holdings    
Ltd. Reinsurance 1.5
Waste Management Inc. Environmental &  
  Facilities Services 1.5
Expeditors International Air Freight &  
of Washington Inc. Logistics 1.5
United Parcel Service Air Freight &  
Inc. Logistics 1.5
HDFC Bank Ltd. Diversified Banks 1.5
CLP Holdings Ltd. Electric Utilities 1.5
Johnson & Johnson Pharmaceuticals 1.5
BCE Inc. Integrated  
  Telecommunication  
  Services 1.4
Church & Dwight Co.    
Inc. Household Products 1.4
Top Ten   14.8%

The holdings listed exclude any temporary cash investments and equity index products.

Allocation by Region (% of equity exposure)


1 The expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratios were 0.25% for Investor Shares and 0.17% for Admiral Shares.

9

 

Global Minimum Volatility Fund

Market Diversification (% of equity exposure)
    FTSE
    Global
    All Cap
    Index
    (USD
  Fund Hedged)
Europe    
Switzerland 5.3% 2.7%
United Kingdom 2.3 6.0
Germany 1.5 2.9
Other 2.7 8.5
Subtotal 11.8% 20.1%
Pacific    
Australia 4.8% 2.4%
Japan 3.9 8.6
South Korea 3.2 1.6
Hong Kong 3.0 1.3
Other 0.9 0.5
Subtotal 15.8% 14.4%
Emerging Markets    
India 2.3% 1.2%
Taiwan 2.2 1.5
Brazil 1.6 0.9
Other 2.6 5.7
Subtotal 8.7% 9.3%
North America    
United States 56.8% 52.7%
Canada 6.4 3.3
Subtotal 63.2% 56.0%
Middle East 0.5% 0.2%

 

10

 

Global Minimum Volatility 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: December 12, 2013, Through October 31, 2016
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended October 31, 2016  
    Since Final Value
  One Inception of a $10,000
  Year (12/12/2013) Investment
Global Minimum Volatility      
Fund*Investor Shares 4.23% 9.82% $13,104
FTSE Global All Cap Index (USD      
Hedged) 3.09 6.72 12,063
Global Funds Average 0.98 2.46 10,725

Global Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

 

 

    Since Final Value
  One Inception of a $50,000
  Year (12/12/2013) Investment
Global Minimum Volatility Fund Admiral Shares 4.39% 9.92% $65,697
FTSE Global All Cap Index (USD Hedged) 3.09 6.72 60,314
"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

 

See Financial Highlights for dividend and capital gains information.

11

 

Global Minimum Volatility Fund

Fiscal-Year Total Returns (%): December 12, 2013, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

  Inception One Since
  Date Year Inception
Investor Shares 12/12/2013 10.99% 11.08%
Admiral Shares 12/12/2013 11.12 11.19

 

12

 

Global Minimum Volatility Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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 (99.1%)1    
Australia (4.7%)    
AGL Energy Ltd. 827,252 12,051
Wesfarmers Ltd. 367,202 11,434
Transurban Group 1,226,320 9,676
Stockland 2,204,185 7,403
Ramsay Health Care Ltd. 98,463 5,483
Cochlear Ltd. 44,476 4,321
JB Hi-Fi Ltd. 193,336 4,168
DUET Group 2,084,006 3,773
Caltex Australia Ltd. 151,102 3,517
Coca-Cola Amatil Ltd. 358,529 2,597
ASX Ltd. 72,176 2,582
GPT Group 514,397 1,819
Sonic Healthcare Ltd. 107,293 1,669
Aurizon Holdings Ltd. 407,600 1,510
BWP Trust 383,701 865
Goodman Group 119,454 616
Charter Hall Retail REIT 191,055 602
    74,086
Belgium (0.6%)    
Colruyt SA 113,482 6,099
Elia System Operator SA/NV  23,212  1,201
Sofina SA 6,290 879
Cofinimmo SA 5,474 641
    8,820
Brazil (1.6%)    
Telefonica Brasil SA ADR 726,126 10,456
BRF SA ADR 474,056 7,926
Ambev SA ADR 889,910 5,251
TIM Participacoes SA ADR 61,005 845
Cia de Saneamento Basico    
do Estado de Sao Paulo    
ADR 66,423 699
    25,177
Canada (6.4%)    
BCE Inc. 499,910 22,713
TELUS Corp. 447,081 14,476
^ Dollarama Inc. 184,597 13,794

 

  Emera Inc. 316,311 11,032
  Shaw Communications Inc.    
  Class B 403,497 7,996
^ Canadian Tire Corp. Ltd.    
  Class A 63,338 6,157
  TransCanada Corp. 87,611 3,966
^ Bank of Montreal 60,681 3,862
  Pembina Pipeline Corp. 108,535 3,335
  Intact Financial Corp. 35,402 2,406
^ Metro Inc. 72,882 2,253
  Fortis Inc. 62,428 2,055
^ Cineplex Inc. 49,300 1,874
  Parkland Fuel Corp. 66,839 1,561
2 Hydro One Ltd. 59,688 1,089
  Open Text Corp. 17,262 1,072
  H&R REIT 37,097 631
^ RioCan REIT 30,410 591
      100,863
Chile (0.2%)    
  Enersis Americas SA ADR 150,624 1,306
  Sociedad Quimica y Minera    
  de Chile SA ADR 41,614 1,217
  Cia Cervecerias Unidas SA    
  ADR 30,786 662
      3,185
China (0.3%)    
  China Mobile Ltd. ADR 76,191 4,376
 
Denmark (0.2%)    
  ISS A/S 44,768 1,757
  William Demant Holding A/S 30,782 573
  Royal Unibrew A/S 9,785 458
      2,788
France (0.0%)    
  BioMerieux 4,866 709
 
Germany (1.4%)    
  Merck KGaA 56,421 5,807
  adidas AG 23,444 3,852
  STADA Arzneimittel AG 71,425 3,582

 

13

 

Global Minimum Volatility Fund

    Market
    Value•
  Shares ($000)
Fielmann AG 39,184 2,720
Celesio AG 61,654 1,730
MTU Aero Engines AG 15,632 1,632
LANXESS AG 21,418 1,373
RHOEN-KLINIKUM AG 44,813 1,247
Henkel AG & Co. KGaA    
Preference Shares 4,820 620
    22,563
Hong Kong (3.0%)    
CLP Holdings Ltd. 2,289,850 23,276
Hang Seng Bank Ltd. 298,000 5,374
Power Assets Holdings    
Ltd. 531,500 4,988
AAC Technologies    
Holdings Inc. 414,000 3,944
Yuexiu REIT 5,326,000 3,055
Cheung Kong    
Infrastructure Holdings    
Ltd. 297,000 2,431
Want Want China    
Holdings Ltd. 3,487,000 2,123
Chow Tai Fook Jewellery    
Group Ltd. 1,969,600 1,397
    46,588
India (2.3%)    
HDFC Bank Ltd. ADR 330,170 23,369
Dr Reddy’s Laboratories    
Ltd. ADR 177,457 8,747
Infosys Ltd. ADR 255,677 3,902
    36,018
Indonesia (0.5%)    
Telekomunikasi Indonesia    
Persero Tbk PT ADR 246,300 8,002
 
Ireland (0.1%)    
Kerry Group plc Class A 11,196 813
 
Israel (0.5%)    
Bank Hapoalim BM 400,095 2,308
Bezeq The Israeli    
Telecommunication Corp.    
Ltd. 893,813 1,623
Teva Pharmaceutical    
Industries Ltd. 37,909 1,583
Teva Pharmaceutical    
Industries Ltd. ADR 26,908 1,150
Paz Oil Co. Ltd. 5,690 889
    7,553
Italy (0.1%)    
Terna Rete Elettrica    
Nazionale SPA 305,099 1,493

 

Japan (3.8%)    
Sawai Pharmaceutical Co.    
Ltd. 136,000 8,789
Mitsubishi Tanabe    
Pharma Corp. 386,900 7,531
Daiichi Sankyo Co. Ltd. 283,100 6,803
Takeda Pharmaceutical    
Co. Ltd. 151,100 6,758
Kagome Co. Ltd. 221,800 5,816
Sumitomo Dainippon    
Pharma Co. Ltd. 290,100 5,024
Taisho Pharmaceutical    
Holdings Co. Ltd. 37,700 3,678
TonenGeneral Sekiyu KK 355,000 3,495
MOS Food Services Inc. 60,500 2,032
Canon Inc. 69,800 2,005
Toho Co. Ltd. 49,100 1,473
Sankyo Co. Ltd. 40,300 1,420
Takashimaya Co. Ltd. 119,000 970
Rohto Pharmaceutical Co.    
Ltd. 51,000 895
Ringer Hut Co. Ltd. 28,800 733
ABC-Mart Inc. 10,200 621
Earth Chemical Co. Ltd. 13,200 613
Toyo Suisan Kaisha Ltd. 15,000 608
Studio Alice Co. Ltd. 28,500 575
    59,839
Mexico (0.8%)    
Fomento Economico    
Mexicano SAB de CV ADR 91,132  8,719
Grupo Aeroportuario del    
Pacifico SAB de CV ADR 34,717 3,355
Grupo Televisa SAB ADR 34,665 850
    12,924
Norway (0.5%)    
Orkla ASA 673,403 6,358
Norsk Hydro ASA 269,503 1,205
    7,563
Russia (0.8%)    
Novatek OJSC GDR 50,176 5,350
MMC Norilsk Nickel PJSC    
ADR 301,262 4,544
Gazprom PJSC ADR 546,875 2,358
    12,252
Singapore (0.9%)    
Oversea-Chinese Banking    
Corp. Ltd. 1,025,748 6,249
United Overseas Bank Ltd. 249,700 3,369
Singapore Airlines Ltd. 409,400 2,979
Wilmar International Ltd. 481,400 1,143
CapitaLand Mall Trust 270,700 403
    14,143

 

14

 

Global Minimum Volatility Fund

      Market
      Value•
    Shares ($000)
South Korea (3.2%)    
  KT Corp. 510,114 14,390
  Korea Zinc Co. Ltd. 26,278 10,434
  SK Telecom Co. Ltd. 49,961 9,794
  Woori Bank 260,724 2,841
  NAVER Corp. 3,041 2,275
  GS Holdings Corp. 45,783 2,037
  Hotel Shilla Co. Ltd. 24,691 1,235
  Kakao Corp. 16,227 1,082
  E-MART Inc. 7,382 1,047
  Kangwon Land Inc. 30,739 1,019
  S-Oil Corp. 13,445 919
  Macquarie Korea    
  Infrastructure Fund 106,880 823
  CJ CheilJedang Corp. 2,635 804
  Samsung Card Co. Ltd. 19,017 801
  LG Corp. 13,123 702
  Daewoong Pharmaceutical    
  Co. Ltd. 8,065 480
      50,683
Spain (0.2%)    
  Endesa SA 74,331 1,578
* Red Electrica Corp. SA 62,340 1,299
  Viscofan SA 9,941 468
  Ebro Foods SA 17,809 384
      3,729
Sweden (0.9%)    
  Swedish Match AB 351,800 12,243
^ Tele2 AB 133,241 1,100
* Tele2 AB Rights Exp.    
  11/16/2016 133,241 40
      13,383
Switzerland (5.3%)    
  Kuehne & Nagel    
  International AG 108,640 14,725
  Swisscom AG 32,097 14,672
  Sonova Holding AG 103,137 13,832
  Logitech International SA 567,125 13,717
  Baloise Holding AG 54,703 6,730
  Sika AG 742 3,566
  dorma&kaba Holding AG 4,796 3,333
  Swiss Prime Site AG 38,590 3,201
  Chocoladefabriken Lindt &    
  Spruengli AG Participation    
  Certificates 493 2,560
* Flughafen Zuerich AG 9,890 1,818
  Partners Group Holding AG 3,186 1,613
  Allreal Holding AG 9,242 1,360
  Siegfried Holding AG 3,851 792
  EMS-Chemie Holding AG 1,292 649
  Straumann Holding AG 1,611 604
  Chocoladefabriken Lindt &    
  Spruengli AG Registered    
  Shares 5 310
      83,482

 

Taiwan (2.2%)    
  Taiwan Semiconductor    
  Manufacturing Co. Ltd.    
  ADR 781,827 24,315
  Chunghwa Telecom Co.    
  Ltd. ADR 161,501 5,515
  Siliconware Precision    
  Industries Co. Ltd. ADR 486,505 3,644
  United Microelectronics    
  Corp. ADR 649,400 1,234
      34,708
United Kingdom (2.2%)    
  Royal Mail plc 926,507 5,559
  DCC plc 56,090 4,563
  GlaxoSmithKline plc 179,759 3,551
  UBM plc 329,554 2,893
2 Merlin Entertainments plc 454,738 2,563
  Tate & Lyle plc 237,881 2,269
  Direct Line Insurance    
  Group plc 488,288 2,066
  Reckitt Benckiser Group plc 19,275 1,724
  SSE plc 79,867 1,553
  RELX NV 62,909 1,123
  Croda International plc 25,289 1,081
  UK Commercial Property    
  Trust Ltd. 899,207 859
  Playtech plc 73,865 838
  Meggitt plc 126,346 672
  F&C Commercial Property    
  Trust Ltd. 434,498 667
  Greene King plc 71,219 637
  Indivior plc 156,397 601
  RPC Group plc 51,115 593
  Inchcape plc 73,936 588
  Regus plc 175,484 534
  Ultra Electronics Holdings    
  plc 17,786 404
      35,338
United States (56.4%)    
Consumer Discretionary (4.0%)    
  Aramark 349,903 13,027
  Pool Corp. 84,362 7,810
  Genuine Parts Co. 71,939 6,517
  Service Corp. International 164,437 4,210
* Madison Square Garden Co.    
  Class A 23,169 3,834
  Ross Stores Inc. 53,680 3,357
  Children’s Place Inc. 42,525 3,230
* AutoZone Inc. 4,052 3,007
* Murphy USA Inc. 31,141 2,142
* O’Reilly Automotive Inc. 7,200 1,904
  Monro Muffler Brake Inc. 29,134 1,602
  Cable One Inc. 2,569 1,482
  Churchill Downs Inc. 10,875 1,479

 

15

 

Global Minimum Volatility Fund  
 
 
 
      Market
      Value•
    Shares ($000)
* Liberty Media Corp-Liberty    
  Media Class A 47,245 1,315
  Vail Resorts Inc. 8,163 1,302
* Liberty Broadband Corp. 18,359 1,224
^ Regal Entertainment Group    
  Class A 52,989 1,140
* LifeLock Inc. 52,557 846
  John Wiley & Sons Inc.    
  Class A 14,755 761
  DineEquity Inc. 9,310 736
  Choice Hotels International    
  Inc. 13,846 671
* Liberty Media Corp-Liberty    
  Media 22,710 622
  New York Times Co. Class A 45,523 496
      62,714
Consumer Staples (8.5%)    
  Church & Dwight Co. Inc. 463,846 22,385
  Spectrum Brands Holdings    
  Inc. 162,208 21,937
  Clorox Co. 165,989 19,922
  Kimberly-Clark Corp. 131,329 15,025
  Vector Group Ltd. 668,791 14,005
  Sysco Corp. 225,737 10,862
  Colgate-Palmolive Co. 146,189 10,432
  Altria Group Inc. 103,245 6,827
  Lancaster Colony Corp. 33,726 4,406
  Philip Morris International    
  Inc. 31,600 3,048
  Ingredion Inc. 9,889 1,297
  WD-40 Co. 7,491 799
  Fresh Del Monte Produce    
  Inc. 12,537 757
  J&J Snack Foods Corp. 4,400 537
  McCormick & Co. Inc. 5,400 518
      132,757
Energy (0.4%)    
  Cosan Ltd. 289,575 2,577
  World Fuel Services Corp. 61,476 2,474
  Exxon Mobil Corp. 23,497 1,958
      7,009
Financials (8.2%)    
  RenaissanceRe Holdings    
  Ltd. 194,300 24,150
  Washington Federal Inc. 397,132 10,822
  Brown & Brown Inc. 226,200 8,338
  Chimera Investment Corp. 453,330 7,104
  ProAssurance Corp. 132,894 7,083
  Two Harbors Investment    
  Corp. 818,470 6,818
  Capitol Federal Financial    
  Inc. 455,900 6,688
  Beneficial Bancorp Inc. 433,982 6,293
  Arthur J Gallagher & Co. 107,283 5,174

 

  Blackstone Mortgage Trust    
  Inc. Class A 151,797 4,584
* Essent Group Ltd. 150,286 3,974
  TFS Financial Corp. 219,700 3,915
  Starwood Property Trust    
  Inc. 159,460 3,546
  Oritani Financial Corp. 206,400 3,230
  MFA Financial Inc. 418,444 3,059
  Marsh & McLennan Cos.    
  Inc. 46,600 2,954
* Arch Capital Group Ltd. 36,803 2,870
  AGNC Investment Corp. 133,795 2,684
  Capstead Mortgage Corp. 241,849 2,300
  American Financial Group    
  Inc. 23,331 1,738
  People’s United Financial    
  Inc. 103,849 1,686
  Northwest Bancshares Inc. 97,172 1,529
  Axis Capital Holdings Ltd. 25,360 1,445
  Allied World Assurance Co.    
  Holdings AG 28,896 1,242
  Annaly Capital Management    
  Inc. 108,600 1,125
  Torchmark Corp. 15,808 1,002
  White Mountains Insurance    
  Group Ltd. 1,126 934
  CYS Investments Inc. 102,919 887
  Brookline Bancorp Inc. 68,100 872
  Investors Bancorp Inc. 54,095 663
  Safety Insurance Group Inc. 6,600 447
  Dime Community    
  Bancshares Inc. 25,000 405
      129,561
Health Care (7.7%)    
  Johnson & Johnson 198,616 23,037
  Owens & Minor Inc. 481,544 15,626
* Intuitive Surgical Inc. 20,646 13,876
  CR Bard Inc. 38,267 8,292
  Patterson Cos. Inc. 171,936 7,343
* Laboratory Corp. of    
  America Holdings 53,901 6,756
  Teleflex Inc. 43,021 6,158
  Chemed Corp. 42,398 5,996
* Henry Schein Inc. 32,476 4,845
  Pfizer Inc. 135,771 4,305
  Hill-Rom Holdings Inc. 62,433 3,459
  Quest Diagnostics Inc. 41,446 3,375
  Danaher Corp. 36,900 2,899
* Integra LifeSciences    
  Holdings Corp. 33,397 2,655
  Eli Lilly & Co. 34,411 2,541
* Varian Medical Systems Inc. 20,456 1,856
* ICU Medical Inc. 11,241 1,566
  Cantel Medical Corp. 21,506 1,532
* HealthEquity Inc. 34,293 1,140

 

16

 

Global Minimum Volatility Fund

      Market
      Value•
    Shares ($000)
  Dentsply Sirona Inc. 19,519 1,124
* Bio-Rad Laboratories Inc.    
  Class A 5,785 915
* Premier Inc. Class A 26,952 858
* WellCare Health Plans Inc. 5,571 632
* Masimo Corp. 19 1
      120,787
Industrials (9.5%)    
  Waste Management Inc. 366,593 24,071
  Expeditors International of    
  Washington Inc. 457,904 23,568
  United Parcel Service Inc.    
  Class B 217,051 23,389
  Northrop Grumman Corp. 56,788 13,004
  L-3 Communications    
  Holdings Inc. 90,664 12,416
  Carlisle Cos. Inc. 78,206 8,200
  Rollins Inc. 194,918 6,007
  BWX Technologies Inc. 137,363 5,387
  Republic Services Inc.    
  Class A 97,995 5,158
* Copart Inc. 82,419 4,325
  General Dynamics Corp. 20,100 3,030
  Lockheed Martin Corp. 11,992 2,955
  Cintas Corp. 22,330 2,382
  3M Co. 14,100 2,331
  Healthcare Services    
  Group Inc. 62,724 2,319
  Huntington Ingalls    
  Industries Inc. 12,812 2,067
* Teledyne Technologies Inc. 17,400 1,874
  National Presto Industries    
  Inc. 20,674 1,804
  KAR Auction Services Inc. 42,236 1,798
  Matthews International Corp.    
  Class A 16,715 1,001
  UniFirst Corp. 7,195 881
  Rockwell Collins Inc. 8,803 742
  Raytheon Co. 4,852 663
      149,372
Information Technology (7.0%)    
  Jack Henry & Associates    
  Inc. 273,567 22,164
  Paychex Inc. 288,625 15,932
  Amdocs Ltd. 253,968 14,845
  Broadridge Financial    
  Solutions Inc. 148,843 9,624
  Automatic Data Processing    
  Inc. 58,893 5,127
  Motorola Solutions Inc. 68,600 4,979
* Synopsys Inc. 72,182 4,281
  Harris Corp. 47,898 4,273
  InterDigital Inc. 43,826 3,096
  Amphenol Corp. Class A 44,813 2,955

 

* CACI International Inc.    
  Class A 28,540 2,793
* Euronet Worldwide Inc. 20,797 1,654
  Mentor Graphics Corp. 52,586 1,520
  Science Applications    
  International Corp. 20,701 1,427
* Cardtronics plc Class A 27,712 1,386
* Genpact Ltd. 60,068 1,381
  Dolby Laboratories Inc.    
  Class A 28,616 1,362
  CDW Corp. 29,393 1,320
* Viavi Solutions Inc. 184,091 1,311
* Gartner Inc. 14,108 1,214
  Cognex Corp. 22,595 1,166
  DST Systems Inc. 11,785 1,133
* NETGEAR Inc. 19,490 984
  Littelfuse Inc. 5,994 836
* Itron Inc. 13,161 709
  CSG Systems    
  International Inc. 18,286 695
* Sohu.com Inc. 15,378 576
  National Instruments Corp. 19,000 534
* Progress Software Corp. 19,000 511
      109,788
Materials (3.4%)    
  Kaiser Aluminum Corp. 205,576 14,902
  Compass Minerals    
  International Inc. 203,358 14,611
  AptarGroup Inc. 185,036 13,219
  Sonoco Products Co. 186,390 9,374
  Worthington Industries Inc. 25,051 1,177
  Silgan Holdings Inc. 16,625 847
      54,130
Real Estate (3.8%)    
  Lamar Advertising Co.    
  Class A 158,167 10,036
* Equity Commonwealth 311,369 9,406
  Rayonier Inc. 272,400 7,306
  Healthcare Trust of    
  America Inc. Class A 186,634 5,711
  PS Business Parks Inc. 34,375 3,774
  New York REIT Inc. 356,734 3,360
  Piedmont Office Realty    
  Trust Inc. Class A 120,630 2,471
  WP Carey Inc. 34,915 2,121
  Acadia Realty Trust 56,000 1,887
  Equity One Inc. 50,389 1,436
3 Hudson Pacific Properties    
  Inc. 42,608 1,432
  Healthcare Realty Trust Inc. 43,610 1,391
  Empire State Realty Trust    
  Inc. 68,170 1,334
  DCT Industrial Trust Inc. 27,929 1,306
  EastGroup Properties Inc. 18,339 1,245

 

17

 

Global Minimum Volatility Fund

    Market
    Value•
  Shares ($000)
Ramco-Gershenson    
Properties Trust 60,746 1,053
Urstadt Biddle Properties Inc.  
Class A 40,998 881
Franklin Street Properties    
Corp. 72,029 833
Education Realty Trust Inc. 19,133 815
STAG Industrial Inc. 25,426 587
Universal Health Realty    
Income Trust 8,800 517
Investors Real Estate Trust 82,500 501
    59,403
Telecommunication Services (0.2%)  
Cogent Communications    
Holdings Inc. 42,888 1,583
Windstream Holdings Inc. 106,003 832
    2,415
Utilities (3.7%)    
IDACORP Inc. 147,196 11,539
Vectren Corp. 190,567 9,588
Portland General Electric    
Co. 163,848 7,150
Southern Co. 133,667 6,893
ALLETE Inc. 80,705 4,946
MDU Resources Group Inc. 146,470 3,839
Avista Corp. 77,012 3,188
NorthWestern Corp. 54,051 3,111
Ameren Corp. 36,454 1,821
Duke Energy Corp. 18,700 1,496
Spire Inc. 20,533 1,290
Avangrid Inc. 23,699 934
OGE Energy Corp. 28,179 875
Enersis Chile SA ADR 152,793 759
Dominion Resources Inc. 6,600 496
    57,925
    885,861
Total Common Stocks    
(Cost $1,474,071)   1,556,939
Temporary Cash Investments (2.0%)1  
Money Market Fund (1.9%)    
4,5 Vanguard Market Liquidity    
Fund, 0.718% 301,817 30,184

 

U.S. Government and Agency Obligations (0.1%)
United States Treasury Bill,    
0.291%, 12/22/16 100 100
United States Treasury Bill,    
0.292%–0.325%, 12/29/16 200 200
United States Treasury Bill,    
0.287%, 1/5/17 100 100
    400
Total Temporary Cash Investments    
(Cost $30,584)   30,584
Total Investments (101.1%)    
(Cost $1,504,655)   1,587,523
 
    Amount
    ($000)
Other Assets and Liabilities (-1.1%)    
Other Assets    
Investment in Vanguard   122
Receivables for Accrued Income   2,354
Receivables for Capital Shares Issued 3,123
Other Assets   9,479
Total Other Assets   15,078
Liabilities    
Payables for Investment Securities    
Purchased   (6)
Collateral for Securities on Loan   (28,229)
Payables for Capital Shares Redeemed (1,330)
Payables to Vanguard   (390)
Other Liabilities   (1,668)
Total Liabilities   (31,623)
Net Assets (100%)   1,570,978

 

18

 

Global Minimum Volatility Fund

At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 1,470,274
Undistributed Net Investment Income 32,307
Accumulated Net Realized Losses (20,982)
Unrealized Appreciation (Depreciation)  
Investment Securities 82,868
Futures Contracts 59
Forward Currency Contracts 6,487
Foreign Currencies (35)
Net Assets 1,570,978
 
 
Investor Shares—Net Assets  
Applicable to 35,173,048 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 419,412
Net Asset Value Per Share—  
Investor Shares $11.92
 
 
Admiral Shares—Net Assets  
Applicable to 48,259,232 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,151,566
Net Asset Value Per Share—  
Admiral Shares $23.86

 

• 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 $26,616,000.
* Non-income-producing security.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures
investments, the fund’s effective common stock and temporary cash investment positions represent 99.7% and 1.4%, respectively, of net
assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31, 2016, the aggregate value of these securities was $3,652,000,
representing 0.2% of net assets.
3 Securities with a value of $958,000 have been segregated as initial margin for open futures contracts.
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 $28,229,000 of collateral received for securities on loan.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.

19

 

Global Minimum Volatility Fund  
 
 
Statement of Operations  
 
  Year Ended
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends1 42,483
Interest2 72
Securities Lending—Net 453
Total Income 43,008
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 1,217
Management and Administrative—Investor Shares 638
Management and Administrative—Admiral Shares 572
Marketing and Distribution—Investor Shares 121
Marketing and Distribution—Admiral Shares 106
Custodian Fees 227
Auditing Fees 47
Shareholders’ Reports—Investor Shares 12
Shareholders’ Reports—Admiral Shares 12
Trustees’ Fees and Expenses 1
Total Expenses 2,953
Net Investment Income 40,055
Realized Net Gain (Loss)  
Investment Securities Sold2 (22,242)
Futures Contracts 1,256
Foreign Currencies and Forward Currency Contracts 2,558
Realized Net Gain (Loss) (18,428)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 43,813
Futures Contracts (172)
Foreign Currencies and Forward Currency Contracts 4,607
Change in Unrealized Appreciation (Depreciation) 48,248
Net Increase (Decrease) in Net Assets Resulting from Operations 69,875

1 Dividends are net of foreign withholding taxes of $2,158,000.
2 Interest income and realized net gain (loss) from an affiliated company of the fund were $72,000 and $2,000, respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

20

 

Global Minimum Volatility Fund    
 
 
Statement of Changes in Net Assets    
 
  Year Ended October 31,
  2016 2015
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 40,055 21,205
Realized Net Gain (Loss) (18,428) 31,565
Change in Unrealized Appreciation (Depreciation) 48,248 11,764
Net Increase (Decrease) in Net Assets Resulting from Operations 69,875 64,534
Distributions    
Net Investment Income    
Investor Shares (8,415) (9,075)
Admiral Shares (15,208) (3,883)
Realized Capital Gain1    
Investor Shares (6,527) (13,061)
Admiral Shares (11,326) (5,350)
Total Distributions (41,476) (31,369)
Capital Share Transactions    
Investor Shares (41,867) 73,567
Admiral Shares 376,134 626,768
Net Increase (Decrease) from Capital Share Transactions 334,267 700,335
Total Increase (Decrease) 362,666 733,500
Net Assets    
Beginning of Period 1,208,312 474,812
End of Period2 1,570,978 1,208,312

1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $2,919,000 and $13,523,000, 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 $32,307,000 and $15,621,000.

See accompanying Notes, which are an integral part of the Financial Statements.

21

 

Global Minimum Volatility Fund      
 
 
Financial Highlights      
 
 
Investor Shares      
      Dec. 12,
  Year Ended 20131 to
  October 31, Oct. 31,
For a Share Outstanding Throughout Each Period 2016 2015 2014
Net Asset Value, Beginning of Period $11.81 $11.41 $10.00
Investment Operations      
Net Investment Income . 293 . 288 2 .262
Net Realized and Unrealized Gain (Loss) on Investments .181 .795 1.172
Total from Investment Operations .474 1.083 1.434
Distributions      
Dividends from Net Investment Income (. 205) (. 280) (. 024)
Distributions from Realized Capital Gains (.159) (.403) —
Total Distributions (. 364) (. 683) (. 024)
Net Asset Value, End of Period $11.92 $11.81 $11.41
 
Total Return3 4.23% 9.93% 14.37%
 
Ratios/Supplemental Data      
Net Assets, End of Period (Millions) $419 $451 $360
Ratio of Total Expenses to Average Net Assets 0.25% 0.27% 0.30%4
Ratio of Net Investment Income to Average Net Assets 2.63% 2.52% 3.18%4
Portfolio Turnover Rate 58% 57% 49%

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.

See accompanying Notes, which are an integral part of the Financial Statements.

22

 

Global Minimum Volatility Fund      
 
 
Financial Highlights      
 
 
Admiral Shares      
      Dec. 12,
  Year Ended 20131 to
  October 31, Oct. 31,
For a Share Outstanding Throughout Each Period 2016 2015 2014
Net Asset Value, Beginning of Period $23.62 $22.83 $20.00
Investment Operations      
Net Investment Income . 608 . 605 2 .546
Net Realized and Unrealized Gain (Loss) on Investments .377 1.576 2.332
Total from Investment Operations .985 2.181 2.878
Distributions      
Dividends from Net Investment Income (. 427) (. 585) (. 048)
Distributions from Realized Capital Gains (.318) (.806) —
Total Distributions (.745) (1.391) (.048)
Net Asset Value, End of Period $23.86 $23.62 $22.83
 
Total Return3 4.39% 10.00% 14.42%
 
Ratios/Supplemental Data      
Net Assets, End of Period (Millions) $1,152 $757 $115
Ratio of Total Expenses to Average Net Assets 0.17% 0.21% 0.20%4
Ratio of Net Investment Income to Average Net Assets 2.71% 2.58% 3.28%4
Portfolio Turnover Rate 58% 57% 49%

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.

See accompanying Notes, which are an integral part of the Financial Statements.

23

 

Global Minimum Volatility Fund

Notes to Financial Statements

Vanguard Global Minimum Volatility 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. To minimize the currency risk and volatility associated with investment in securities denominated in currencies other than the U.S. dollar, the fund attempts to hedge its currency exposure. The fund offers two classes of shares: Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. 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

24

 

Global Minimum Volatility Fund

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.

The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and 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 gains (losses) on futures or forward currency contracts.

During the year ended October 31, 2016, 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’s average investment in forward currency contracts represented 47% 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 (October 31, 2014–2016), 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

25

 

Global Minimum Volatility Fund

day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.

8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.

26

 

Global Minimum Volatility Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $122,000, representing 0.01% of the fund’s net assets and 0.05% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks—International 226,403 444,675 —
Common Stocks—United States 885,861 — —
Temporary Cash Investments 30,184 400 —
Futures Contracts—Assets1 7 — —
Futures Contracts—Liabilities1 (18) — —
Forward Currency Contracts—Assets — 7,855 —
Forward Currency Contracts—Liabilities — (1,368) —
Total 1,142,437 451,562 —
1 Represents variation margin on the last day of the reporting period.      

 

D. At October 31, 2016, the fair values of derivatives were reflected in the Statement of Net Assets as follows:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Statement of Net Assets Caption ($000) ($000) ($000)
Other Assets 7 7,855 7,862
Other Liabilities (18) (1,368) (1,386)

 

27

 

Global Minimum Volatility Fund

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the year ended October 31, 2016, were:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts 1,256 — 1,256
Forward Currency Contracts — 2,659 2,659
Realized Net Gain (Loss) on Derivatives 1,256 2,659 3,915
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts (172) — (172)
Forward Currency Contracts — 4,628 4,628
Change in Unrealized Appreciation (Depreciation) on Derivatives (172) 4,628 4,456

 

At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index December 2016 56 5,936 (61)
S&P ASX 200 Index December 2016 8 805 33
Dow Jones EURO STOXX 50 Index December 2016 22 736 23
Topix Index December 2016 5 664 29
FTSE 100 Index December 2016 7 592 35
        59

 

Unrealized appreciation (depreciation) on open E-mini S&P 500 Index, Dow Jones EURO STOXX 50 Index, and FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.

28

 

Global Minimum Volatility Fund

At October 31, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts, except for Danish krone, Hong Kong dollar, Indonesian rupiah, Singapore dollar, and Taiwanese dollar contracts, is treated as realized gain (loss) for tax purposes.

            Unrealized
  Contract         Appreciation
  Settlement Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Goldman Sachs International 11/18/16 GBP 10,053 USD 12,375 (66)
Credit Suisse International 11/18/16 HKD 45,291 USD 5,840 —
Goldman Sachs International 11/18/16 USD 99,644 CAD 131,702 1,444
BNP Paribas 11/18/16 USD 82,579 CHF 80,694 958
Goldman Sachs International 11/18/16 USD 76,228 AUD 100,747 (375)
Credit Suisse International 11/18/16 USD 60,012 JPY 6,227,076 599
Goldman Sachs International 11/18/16 USD 55,000 HKD 426,523 (1)
BNP Paribas 11/18/16 USD 50,949 KRW 56,988,799 1,148
Goldman Sachs International 11/18/16 USD 48,942 GBP 38,707 1,548
Goldman Sachs International 11/18/16 USD 38,544 EUR 34,421 731
BNP Paribas 11/18/16 USD 35,713 INR 2,399,315 (115)
BNP Paribas 11/18/16 USD 34,376 TWD 1,084,734 (10)
BNP Paribas 11/18/16 USD 24,755 BRL 80,859 (436)
Goldman Sachs International 11/18/16 USD 14,288 SGD 19,609 191
Goldman Sachs International 11/18/16 USD 12,854 MXN 248,491 (264)
BNP Paribas 11/18/16 USD 12,295 RUB 771,953 173
Goldman Sachs International 11/18/16 USD 11,660 SEK 100,349 540
BNP Paribas 11/18/16 USD 8,324 IDR 109,051,794 (15)
Goldman Sachs International 11/17/16 USD 7,740 ILS 29,301 100
Goldman Sachs International 11/18/16 USD 7,194 NOK 57,923 184
BNP Paribas 11/18/16 USD 3,760 CLP 2,515,904 (86)
Goldman Sachs International 11/18/16 USD 2,947 DKK 19,589 53
BNP Paribas 11/18/16 USD 2,844 CAD 3,720 70

 

29

 

Global Minimum Volatility Fund            
 
 
 
 
            Unrealized
  Contract         Appreciation
  Settlement Contract Amount (000) (Depreciation)
Counterparty Date   Receive   Deliver ($000)
Goldman Sachs International 11/18/16 USD 2,633 CHF 2,573 31
Goldman Sachs International 11/18/16 USD 1,961 HKD 15,210 —
Goldman Sachs International 11/18/16 USD 1,331 JPY 138,156 13
BNP Paribas 11/18/16 USD 1,064 SEK 9,155 49
BNP Paribas 11/18/16 USD 713 GBP 564 23
            6,487

 

AUD—Australian dollar.
BRL—Brazilian real.
CAD—Canadian dollar.
CHF—Swiss franc.
CLP—Chilean peso.
DKK—Danish krone.
EUR—Euro.
GBP—British pound.
HKD—Hong Kong dollar.
IDR—Indonesian rupiah.
ILS—Israeli shekel.
INR—Indian rupee.
JPY—Japanese yen.
KRW—Korean won.
MXN—Mexican peso.
NOK—Norwegian krone.
RUB—Russian ruble.
SEK—Swedish krona.
SGD—Singapore dollar.
TWD—Taiwanese dollar.
USD—U.S. dollar.

At October 31, 2016, the counterparties had deposited in segregated accounts securities and cash with a value of $7,142,000 in connection with open forward currency contracts.

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

30

 

Global Minimum Volatility Fund

During the year ended October 31, 2016, the fund realized net foreign currency losses of $101,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.

For tax purposes, at October 31, 2016, the fund had $34,470,000 of ordinary income available for distribution. The fund had available capital losses totaling $14,548,000 that may be carried forward indefinitely to offset future net capital gains.

At October 31, 2016, the cost of investment securities for tax purposes was $1,506,723,000. Net unrealized appreciation of investment securities for tax purposes was $80,800,000, consisting of unrealized gains of $121,564,000 on securities that had risen in value since their purchase and $40,764,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the year ended October 31, 2016, the fund purchased $1,200,737,000 of investment securities and sold $859,684,000 of investment securities, other than temporary cash investments.

G. Capital share transactions for each class of shares were:

      Year Ended October 31,
    2016   2015
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 214,536 18,493 259,472 22,420
Issued in Lieu of Cash Distributions 14,502 1,302 21,996 2,000
Redeemed (270,905) (22,823) (207,901) (17,760)
Net Increase (Decrease)—Investor Shares (41,867) (3,028) 73,567 6,660
Admiral Shares        
Issued 705,818 30,468 772,864 33,351
Issued in Lieu of Cash Distributions 23,214 1,042 8,043 366
Redeemed (352,898) (15,309) (154,139) (6,699)
Net Increase (Decrease)—Admiral Shares 376,134 16,201 626,768 27,018

 

H. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

31

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Global Minimum Volatility Fund:

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Global Minimum Volatility Fund (constituting a separate portfolio of Vanguard Whitehall Funds, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

 

Special 2016 tax information (unaudited) for Vanguard Global Minimum Volatility Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $14,934,000 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 $17,278,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 32.9% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

32

 

Your Fund’s After-Tax Returns

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2016. (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: Global Minimum Volatility Fund Investor Shares
Periods Ended October 31, 2016

    Since
  One Inception
  Year (12/12/2013)
Returns Before Taxes 4.23% 9.82%
Returns After Taxes on Distributions 3.33 8.69
Returns After Taxes on Distributions and Sale of Fund Shares 2.86 7.27

 

33

 

About Your Fund’s Expenses

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

The accompanying table illustrates your fund’s costs in two ways:

• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“

• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

34

 

Six Months Ended October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Global Minimum Volatility Fund 4/30/2016 10/31/2016 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,041.05 $1.18
Admiral Shares 1,000.00 1,041.47 0.87
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,023.98 $1.17
Admiral Shares 1,000.00 1,024.28 0.87

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 0.23% for Investor Shares and 0.17% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/366).

35

 

Glossary

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.

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.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior Management Team

Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com
Fund Information > 800-662-7447 CFA® is a registered trademark owned by CFA Institute.
Direct Investor Account Services > 800-662-2739  
Institutional Investor Services > 800-523-1036  
Text Telephone for People  
Who Are Deaf or Hard of Hearing> 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or Morningstar, Inc., unless  
otherwise noted.  
 
You can obtain a free copy of Vanguard’s proxy voting  
guidelines by visiting vanguard.com/proxyreporting or by  
calling Vanguard at 800-662-2739. The guidelines are  
also available from the SEC’s website, sec.gov. In  
addition, you may obtain a free report on how your fund  
voted the proxies for securities it owned during the 12  
months ended June 30. To get the report, visit either  
vanguard.com/proxyreporting or sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
 
  © 2016 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q11940 122016

 


 
Annual Report | October 31, 2016
Vanguard International Dividend Index Funds
Vanguard International Dividend Appreciation Index Fund
Vanguard International High Dividend Yield Index Fund

 

 

A new format, unwavering commitment

As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.

Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.

In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.

We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.

At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.

Contents  
Your Fund’s Performance at a Glance. 1
Chairman’s Perspective. 3
International Dividend Appreciation Index Fund. 7
International High Dividend Yield Index Fund. 27
About Your Fund’s Expenses. 59
Glossary. 61

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

 

Your Fund’s Performance at a Glance

• Vanguard International Dividend Appreciation Index Fund returned 9.57% for Investor Shares and 9.64% for ETF Shares (based on net asset value) from their February 25, 2016, inception through October 31, 2016. The fund’s Admiral Shares, from their March 2, 2016, inception, returned 6.54%.

• Vanguard International High Dividend Yield Index Fund returned 13.26% for Investor Shares and 13.37% for ETF Shares from their February 25 inception through October 31. The fund’s Admiral Shares, from their March 2 inception, returned 9.73%.

• The funds trailed their benchmark indexes as the process of launching the funds served as an initial drag on performance.

• Emerging markets posted the highest returns. Pacific region results were also strong, boosted in part by the rising Japanese yen and Australian dollar.

• Please note that on November 30, we announced that purchase and redemption fees of 0.25% would be added for Investor and Admiral Shares, effective February 7, 2017.

Total Returns: Period Ended October 31, 2016  
 
  Returns Since
  Inception
Vanguard International Dividend Appreciation Index Fund  
Investor Shares (Inception: 2/25/2016) 9.57%
ETF Shares (Inception: 2/25/2016)  
Market Price 10.03
Net Asset Value 9.64
Admiral™ Shares (Inception: 3/2/2016) 6.54
NASDAQ International Dividend Achievers Select Index 10.47
International Large-Cap Core Funds Average 10.00
International Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

 

1

 

  Returns Since
  Inception
Vanguard International High Dividend Yield Index Fund  
Investor Shares (Inception: 2/25/2016) 13.26%
ETF Shares (Inception: 2/25/2016)  
Market Price 13.79
Net Asset Value 13.37
Admiral Shares (Inception: 3/2/2016) 9.73
FTSE All-World ex US High Dividend Yield Index 14.71
International Income Funds Average 5.05
International Income 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. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq 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.

Benchmark returns are calculated from the start of the reporting period or from the earliest share-class inception date.

Expense Ratios        
Your Fund Compared With Its Peer Group        
  Investor ETF Admiral Peer Group
  Shares Shares Shares Average
International Dividend Appreciation        
Index Fund 0.35% 0.25% 0.25% 1.23%
International High Dividend Yield Index        
Fund 0.40 0.30 0.30 1.05

 

The fund expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the period from inception through October 31, 2016, the funds’ annualized expense ratios were: for the International Dividend Appreciation Index Fund, 0.35% for Investor Shares, 0.25% for ETF Shares, and 0.25% for Admiral Shares; and for the International High Dividend Yield Index Fund, 0.42% for Investor Shares, 0.32% for ETF Shares, and 0.32% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.

Peer groups: For the International Dividend Appreciation Index Fund, International Large-Cap Core Funds; for the International High Dividend Yield Index Fund, International Income Funds.

2

 

Chairman’s Perspective


Bill McNabb
Chairman and Chief Executive Officer

Dear Shareholder,

Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1

By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.

This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?

Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.

High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index

1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.

3

 

funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.

But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.

Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.

The future of active management

In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition

Market Barometer      
    Average Annual Total Returns
    Periods Ended October 31, 2016
  One Three Five
  Year Years Years
Stocks      
Russell 1000 Index (Large-caps) 4.26% 8.48% 13.51%
Russell 2000 Index (Small-caps) 4.11 4.12 11.51
Russell 3000 Index (Broad U.S. market) 4.24 8.13 13.35
FTSE All-World ex US Index (International) 0.64 -0.94 4.09
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) 4.37% 3.48% 2.90%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 4.06 4.89 4.34
Citigroup Three-Month U.S. Treasury Bill Index 0.22 0.07 0.07
 
CPI      
Consumer Price Index 1.64% 1.15% 1.32%

 

4

 

for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.

Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.

Know what you own and why

Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.

Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.

Worried about the election’s impact on your portfolio?

The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.

These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.

As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.

Average annual stock market returns based on party control of the White House (1853–2015)


Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.

5

 

But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.

Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.

Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.

As always, thank you for investing with Vanguard.

Sincerely,


F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016

6

 

International Dividend Appreciation Index Fund

Fund Profile
As of October 31, 2016

Share-Class Characteristics    
 
  Investor ETF Admiral
  Shares Shares Shares
Ticker Symbol VIAIX VIGI VIAAX
Expense Ratio1 0.35% 0.25% 0.25%

 

Portfolio Characteristics    
    NASDAQ
    International
    Dividend
    Achievers
  Fund Select Index
Number of Stocks 198 198
Median Market Cap $42.3B $42.3B
Price/Earnings Ratio 25.2x 26.1x
Price/Book Ratio 2.6x 2.6x
Return on Equity 19.7% 19.6%
Earnings Growth    
Rate 8.1% 8.4%
Dividend Yield 2.2% 2.2%
Turnover Rate 8% —
Short-Term Reserves 8.2% —

 

Sector Diversification (% of equity exposure)
    NASDAQ
    International
    Dividend
    Achievers
  Fund Select Index
Basic Materials 3.5% 3.5%
Consumer Goods 18.2 18.7
Consumer Services 10.3 10.5
Financials 8.9 8.2
Health Care 23.3 23.3
Industrials 8.8 8.5
Oil & Gas 6.9 7.0
Technology 10.1 10.0
Telecommunications 6.4 6.6
Utilities 3.6 3.7

 

Ten Largest Holdings (% of total net assets)
Tencent Holdings Ltd. Internet 5.3%
Nestle SA Food Products 3.8
Novartis AG Pharmaceuticals 3.6
Sanofi Pharmaceuticals 3.4
L'Oreal SA Personal Products 3.3
Roche Holding AG Pharmaceuticals 3.3
Nippon Telegraph & Fixed Line  
Telephone Corp. Telecommunications 3.0
BHP Billiton General Mining 2.9
Novo Nordisk A/S Pharmaceuticals 2.4
Naspers Ltd. Broadcasting &  
  Entertainment 2.4
Top Ten   33.4%

The holdings listed exclude any temporary cash investments and equity index products.

Allocation by Region (% of equity exposure)


Investment Focus


1 The expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the period from inception through October 31, 2016, the annualized expense ratios were 0.35% for Investor Shares, 0.25% for ETF Shares, and 0.25% for Admiral Shares.

7

 

International Dividend Appreciation Index Fund

Market Diversification (% of equity exposure)
    NASDAQ
    International
    Dividend
    Achievers
  Fund Select Index
Europe    
Switzerland 11.1% 11.1%
France 9.5 9.4
United Kingdom 5.4 5.6
Denmark 3.3 3.2
Netherlands 2.9 2.8
Germany 2.8 2.7
Spain 1.4 1.2
Other 1.6 1.7
Subtotal 38.0% 37.7%
Pacific    
Japan 9.2% 9.3%
Hong Kong 5.6 5.7
Australia 4.5 4.5
South Korea 1.7 1.7
Other 0.1 0.1
Subtotal 21.1% 21.3%
Emerging Markets    
India 10.7% 10.4%
China 7.4 7.6
South Africa 2.7 2.7
Mexico 1.4 1.4
Other 1.5 1.8
Subtotal 23.7% 23.9%
North America    
Canada 15.8% 15.7%
Middle East    
Israel 1.4% 1.4%

 

8

 

International 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: February 25, 2016, Through October 31, 2016
Initial Investment of $10,000


  Total Returns  
  Period Ended October 31, 2016  
  Since Final Value
  Inception of a $10,000
  (2/25/2016) Investment
International Dividend Appreciation    
Index Fund Investor Shares 9.57% $10,957
NASDAQ International Dividend    
Achievers Select Index 10.47 11,047
International Large-Cap Core Funds    
Average 10.00 11,000

International Large-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

 

 

  Since Final Value
  Inception of a $10,000
  (2/25/2016) Investment
International Dividend Appreciation Index Fund    
ETF Shares Net Asset Value 9.64% $10,964
International Dividend Appreciation Index Fund    
ETF Shares Market Price 10.03 11,003
NASDAQ International Dividend Achievers Select Index 10.47 11,047
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

 

See Financial Highlights for dividend and capital gains information.

9

 

International Dividend Appreciation Index Fund    
 
 
 
 
  Total Returns  
  Period Ended October 31, 2016  
  Since Final Value
  Inception of a $10,000
  (3/2/2016) Investment
International Dividend Appreciation Index    
Fund Admiral Shares 6.54% $10,654
NASDAQ International Dividend Achievers    
Select Index 7.23 10,723

"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

 

Cumulative Returns of ETF Shares: February 25, 2016, Through October 31, 2016  
  Since
  Inception
  (2/25/2016)
International Dividend Appreciation Index Fund ETF  
Shares Market Price 10.03%
International Dividend Appreciation Index Fund ETF  
Shares Net Asset Value 9.64
NASDAQ International Dividend Achievers Select  
Index 10.47

 

"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

10

 

International Dividend Appreciation Index Fund

Fiscal-Period Total Returns (%): February 25, 2016, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

    Since Inception
  Inception Date Total
Investor Shares 2/25/2016 14.20%
ETF Shares 2/25/2016  
Market Price   14.90
Net Asset Value   14.29
Admiral Shares 3/2/2016 11.05

 

11

 

International Dividend Appreciation Index Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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 (99.1%)1    
Australia (4.4%)    
BHP Billiton Ltd. 238,155 4,161
CSL Ltd. 34,281 2,616
Woolworths Ltd. 95,294 1,710
Ramsay Health Care Ltd. 15,428 859
Domino’s Pizza Enterprises    
Ltd. 7,133 348
Washington H Soul    
Pattinson & Co. Ltd. 15,847 191
InvoCare Ltd. 10,897 108
Retail Food Group Ltd. 13,999 72
FlexiGroup Ltd. 41,082 70
Collection House Ltd. 19,469 20
    10,155
Belgium (0.6%)    
Groupe Bruxelles Lambert    
SA 12,022 1,033
Sofina SA 2,059 288
* Fagron 6,297 62
    1,383
Brazil (0.0%)    
Ez Tec Empreendimentos    
e Participacoes SA 15,488 80
 
Canada (15.7%)    
Canadian National Railway    
Co. 59,378 3,733
Suncor Energy Inc. 114,473 3,435
BCE Inc. 64,714 2,940
Enbridge Inc. 65,128 2,812
TransCanada Corp. 58,536 2,650
Canadian Natural    
Resources Ltd. 80,086 2,542
Thomson Reuters Corp. 59,128 2,330
Imperial Oil Ltd. 62,802 2,037
TELUS Corp. 44,550 1,443
Rogers Communications    
Inc. Class B 31,244 1,257

 

  Saputo Inc. 28,785 1,034
  Fortis Inc. 30,049 989
  Franco-Nevada Corp. 12,960 848
  Shaw Communications Inc.    
  Class B 35,943 712
  Intact Financial Corp. 10,232 696
  Metro Inc. 19,356 598
  Emera Inc. 14,794 516
  Inter Pipeline Ltd. 24,378 505
  CCL Industries Inc. Class B 2,584 460
  SNC-Lavalin Group Inc. 11,108 451
  Canadian Utilities Ltd.    
  Class A 14,489 414
  Keyera Corp. 13,602 408
  Ritchie Bros Auctioneers Inc. 8,229 285
  CAE Inc. 18,818 264
  Finning International Inc. 13,550 252
  Atco Ltd. 6,670 234
  Empire Co. Ltd. 15,043 217
  Stella-Jones Inc. 5,795 206
  Toromont Industries Ltd. 5,882 173
^ Canadian Western Bank 8,000 152
  Cogeco Communications    
  Inc. 3,249 152
  ShawCor Ltd. 5,680 142
  Molson Coors Canada Inc.    
  Class B 1,183 123
  Enghouse Systems Ltd. 3,231 121
  Jean Coutu Group PJC Inc.    
  Class A 7,716 116
  Laurentian Bank of Canada 3,086 114
  Pason Systems Inc. 7,836 89
  Transcontinental Inc.    
  Class A 6,112 82
  Gluskin Sheff & Associates    
  Inc. 6,506 78
  Boyd Group Income Fund 1,212 75
  Computer Modelling Group    
  Ltd. 7,988 59
  High Liner Foods Inc. 3,100 57

 

12

 

International Dividend Appreciation Index Fund

    Market
    Value•
  Shares ($000)
Ensign Energy Services Inc. 5,693 34
^ Home Capital Group Inc.    
Class B 600 12
    35,847
China (7.4%)    
Tencent Holdings Ltd. 455,900 12,082
China Overseas Land &    
Investment Ltd. 826,000 2,536
Hengan International Group    
Co. Ltd. 88,000 699
China Gas Holdings Ltd. 363,000 553
China Everbright    
International Ltd. 349,000 417
ENN Energy Holdings Ltd. 84,000 395
Shanghai Lujiazui Finance &    
Trade Zone Development    
Co. Ltd. Class B 49,940 78
Huaxin Cement Co. Ltd.    
Class B 70,500 50
* Qinqin Foodstuffs Group    
Cayman Co. Ltd. 8,100 3
    16,813
Colombia (0.3%)    
Grupo de Inversiones    
Suramericana SA 34,741 448
Bancolombia SA ADR 7,225 276
Bancolombia SA Preference    
Shares 4,617 44
    768
Denmark (3.2%)    
Novo Nordisk A/S Class B 155,827 5,551
Coloplast A/S Class B 15,534 1,082
Novozymes A/S 20,475 760
    7,393
Finland (0.0%)    
Raisio Oyj 14,266 60
 
France (9.4%)    
Sanofi 98,833 7,691
L’Oreal SA 42,706 7,651
Hermes International 8,045 3,259
Essilor International SA 16,770 1,885
SEB SA 3,810 561
Rubis SCA 3,328 303
IPSOS 3,920 128
    21,478
Germany (2.7%)    
Fresenius SE & Co. KGaA 41,534 3,069
Fresenius Medical Care    
AG & Co. KGaA 23,937 1,950
Fielmann AG 6,559 455
CTS Eventim AG & Co.    
KGaA 8,321 299

 

Fuchs Petrolub SE    
Preference Shares 5,373 240
AURELIUS Equity    
Opportunities SE & Co.    
KGaA 2,541 152
BayWa AG 2,913 98
    6,263
Hong Kong (5.6%)    
Jardine Matheson Holdings    
Ltd. 52,383 3,191
Jardine Strategic Holdings    
Ltd. 82,400 2,891
MTR Corp. Ltd. 425,500 2,355
Hong Kong & China Gas    
Co. Ltd. 904,600 1,767
Cheung Kong Infrastructure    
Holdings Ltd. 189,000 1,546
Techtronic Industries Co.    
Ltd. 145,000 545
Minth Group Ltd. 139,000 492
    12,787
India (10.6%)    
Tata Consultancy Services    
Ltd. 148,672 5,341
HDFC Bank Ltd. ADR 55,558 3,932
ITC Ltd. 903,985 3,293
Housing Development    
Finance Corp. Ltd. 120,990 2,525
Infosys Ltd. ADR 136,156 2,078
Larsen & Toubro Ltd. 68,392 1,518
Axis Bank Ltd. 182,684 1,334
Asian Paints Ltd. 71,117 1,139
IndusInd Bank Ltd. 44,469 800
Lupin Ltd. 34,724 774
HDFC Bank Ltd. 22,105 417
Power Finance Corp. Ltd. 199,519 371
LIC Housing Finance Ltd. 41,600 363
Infosys Ltd. 16,805 251
Reliance Infrastructure Ltd. 20,163 164
Larsen & Toubro Ltd. GDR 1,491 33
    24,333
Indonesia (0.2%)    
Indocement Tunggal    
Prakarsa Tbk PT 290,300 365
 
Ireland (0.3%)    
Kerry Group plc Class A 7,783 565
Glanbia plc 1,319 21
    586
Israel (1.4%)    
Teva Pharmaceutical    
Industries Ltd. 77,426 3,234

 

13

 

International Dividend Appreciation Index Fund

    Market
    Value•
  Shares ($000)
Italy (0.1%)    
DiaSorin SPA 4,364 268
 
Japan (9.2%)    
Nippon Telegraph &    
Telephone Corp. 155,788 6,907
Yahoo Japan Corp. 411,400 1,578
Asahi Group Holdings Ltd. 34,600 1,234
Unicharm Corp. 44,800 1,065
Sysmex Corp. 14,900 1,033
Nitori Holdings Co. Ltd. 8,300 992
Daito Trust Construction    
Co. Ltd. 5,500 922
West Japan Railway Co. 13,600 837
M3 Inc. 23,800 724
Lawson Inc. 7,200 547
Don Quijote Holdings Co.    
Ltd. 11,100 422
Sundrug Co. Ltd. 4,800 378
Shimamura Co. Ltd. 2,500 320
Rinnai Corp. 3,200 307
Mitsubishi UFJ Lease &    
Finance Co. Ltd. 62,400 302
Kakaku.com Inc. 15,600 262
Kobayashi Pharmaceutical    
Co. Ltd. 5,000 261
San-A Co. Ltd. 4,600 250
Miraca Holdings Inc. 4,900 237
Fuyo General Lease Co. Ltd. 4,600 233
Kaken Pharmaceutical Co.    
Ltd. 3,200 202
Yaoko Co. Ltd. 4,600 193
Siix Corp. 4,300 172
Relo Group Inc. 1,000 166
Glory Ltd. 5,000 165
Hamakyorex Co. Ltd. 8,500 158
NEC Networks & System    
Integration Corp. 8,600 153
Modec Inc. 8,700 147
Ci:z Holdings Co. Ltd. 4,900 141
Aeon Delight Co. Ltd. 4,700 139
SHO-BOND Holdings Co.    
Ltd. 2,652 128
Kissei Pharmaceutical Co.    
Ltd. 4,700 123
Hiday Hidaka Corp. 4,500 112
F@N Communications Inc. 13,400 100
GMO Payment Gateway Inc. 400 18
Meiko Network Japan Co.    
Ltd. 400 4
JP-Holdings Inc. 400 1
    20,933

 

Mexico (1.4%)    
America Movil SAB    
de CV 3,209,032 2,126
Grupo Financiero Inbursa    
SAB de CV 522,340 847
Kimberly-Clark de Mexico    
SAB de CV Class A 130,600 282
    3,255
Netherlands (2.8%)    
Unilever NV 131,760 5,511
Wolters Kluwer NV 24,481 947
    6,458
New Zealand (0.1%)    
Ryman Healthcare Ltd. 42,998 273
 
Norway (0.1%)    
Tomra Systems ASA 13,917 151
 
Philippines (0.8%)    
SM Investments Corp. 90,705 1,257
Jollibee Foods Corp. 84,136 413
Manila Water Co. Inc. 162,500 102
    1,772
Poland (0.1%)    
Asseco Poland SA 9,078 121
 
South Africa (2.7%)    
Naspers Ltd. 32,945 5,518
Discovery Ltd. 53,879 460
* EOH Holdings Ltd. 14,225 169
    6,147
South Korea (1.7%)    
Hyundai Motor Co. 16,863 2,059
Hyundai Mobis Co. Ltd. 7,480 1,784
Dongsuh Cos. Inc. 171 4
    3,847
Spain (1.4%)    
Abertis Infraestructuras SA 78,482 1,163
* Red Electrica Corp. SA 45,448 947
Enagas SA 20,646 592
Viscofan SA 4,490 212
Vidrala SA 2,220 127
Miquel y Costas & Miquel SA 916  39
    3,080
Sweden (0.5%)    
Castellum AB 23,956 325
Hufvudstaden AB Class A 19,422 301
Intrum Justitia AB 6,765 208
Wihlborgs Fastigheter AB 9,702 188
    1,022
Switzerland (11.0%)    
Nestle SA 119,707 8,681
Novartis AG 117,003 8,303

 

14

 

International Dividend Appreciation Index Fund

    Market
    Value•
  Shares ($000)
Roche Holding AG 32,707 7,512
Chocoladefabriken Lindt &    
Spruengli AG 96 499
Galenica AG 128 128
    25,123
Thailand (0.1%)    
* Glow Energy PCL 113,700 250
 
Turkey (0.0%)    
BIM Birlesik Magazalar AS 2,056 33
 
United Kingdom (5.3%)    
Shire plc 69,287 3,912
BHP Billiton plc 163,518 2,459
Experian plc 88,006 1,692
Associated British Foods plc 43,377 1,305
Smith & Nephew plc 84,306 1,219
Micro Focus International plc 19,914 521
John Wood Group plc 44,979 423
JD Sports Fashion plc 19,114 355
Abcam plc 22,206 237
Hikma Pharmaceuticals plc 2,252 48
Rightmove plc 549 25
    12,196
Total Common Stocks (Cost $229,039) 226,474
Temporary Cash Investments (9.9%)1  
Money Market Fund (9.9%)    
2,3 Vanguard Market Liquidity    
Fund, 0.718% 226,443 22,647
 
  Face  
  Amount  
  ($000)  
U.S. Government and Agency Obligations (0.0%)
4 United States Treasury    
Bill, 0.330%, 12/29/16 100 100
Total Temporary Cash Investments  
(Cost $22,746)   22,747
Total Investments (109.0%)    
(Cost $251,785)   249,221
Other Assets and Liabilities (-9.0%)  
Other Assets 5   4,851
Liabilities 3   (25,510)
    (20,659)
Net Assets (100%)   228,562

 

  Amount
  ($000)
Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 226,574
Affiliated Vanguard Funds 22,647
Total Investments in Securities 249,221
Investment in Vanguard 16
Receivables for Investment Securities Sold 3,163
Receivables for Accrued Income 240
Receivables for Capital Shares Issued 210
Other Assets 1,222
Total Assets 254,072
Liabilities  
Payables for Investment Securities  
Purchased (25,082)
Collateral for Securities on Loan (183)
Payables for Capital Shares Redeemed (208)
Payables to Vanguard (34)
Other Liabilities (3)
Total Liabilities (25,510)
Net Assets 228,562

 

At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 231,226
Undistributed Net Investment Income 227
Accumulated Net Realized Losses (387)
Unrealized Appreciation (Depreciation)  
Investment Securities (2,564)
Futures Contracts (6)
Foreign Currencies 66
Net Assets 228,562
 
 
Investor Shares—Net Assets  
Applicable to 205,153 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 4,466
Net Asset Value Per Share—  
Investor Shares $21.77
 
 
ETF Shares—Net Assets  
Applicable to 2,700,212 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 146,981
Net Asset Value Per Share—  
ETF Shares $54.43

 

15

 

International Dividend Appreciation Index Fund

  Amount
  ($000)
Admiral Shares—Net Assets  
Applicable to 2,915,505 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 77,115
Net Asset Value Per Share—  
Admiral Shares $26.45

 

• 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 $173,000.
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 9.0%, 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 $183,000 of collateral received for securities on loan.
4 Securities with a value of $100,000 have been segregated as initial margin for open futures contracts.
5 Cash of $105,000 has been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

16

 

International Dividend Appreciation Index Fund  
 
 
Statement of Operations  
 
  February 25, 20161 to
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends2 1,390
Interest3 7
Securities Lending—Net 5
Total Income 1,402
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 8
Management and Administrative—Investor Shares 3
Management and Administrative—ETF Shares 2
Management and Administrative—Admiral Shares 3
Marketing and Distribution—Investor Shares —
Marketing and Distribution—ETF Shares 3
Marketing and Distribution—Admiral Shares 1
Custodian Fees 150
Auditing Fees 17
Shareholders’ Reports—Investor Shares 1
Shareholders’ Reports—ETF Shares 2
Shareholders’ Reports—Admiral Shares 1
Total Expenses 191
Net Investment Income 1,211
Realized Net Gain (Loss)  
Investment Securities Sold3 (340)
Futures Contracts (47)
Foreign Currencies (146)
Realized Net Gain (Loss) (533)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities (2,564)
Futures Contracts (6)
Foreign Currencies 66
Change in Unrealized Appreciation (Depreciation) (2,504)
Net Increase (Decrease) in Net Assets Resulting from Operations (1,826)

1 Inception.
2 Dividends are net of foreign withholding taxes of $141,000.
3 Interest income and realized net gain (loss) from an affiliated company of the fund were $7,000 and $0, respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

17

 

International Dividend Appreciation Index Fund  
 
 
Statement of Changes in Net Assets  
 
  February 25, 20161 to
  October 31, 2016
  ($000)
Increase (Decrease) in Net Assets  
Operations  
Net Investment Income 1,211
Realized Net Gain (Loss) (533)
Change in Unrealized Appreciation (Depreciation) (2,504)
Net Increase (Decrease) in Net Assets Resulting from Operations (1,826)
Distributions  
Net Investment Income  
Investor Shares (15)
ETF Shares (610)
Admiral Shares (213)
Realized Capital Gain  
Investor Shares —
ETF Shares —
Admiral Shares —
Total Distributions (838)
Capital Share Transactions  
Investor Shares 4,517
ETF Shares 148,546
Admiral Shares 78,163
Net Increase (Decrease) from Capital Share Transactions 231,226
Total Increase (Decrease) 228,562
Net Assets  
Beginning of Period —
End of Period2 228,562

1 Inception.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $227,000.

See accompanying Notes, which are an integral part of the Financial Statements.

18

 

International Dividend Appreciation Index Fund  
 
 
Financial Highlights  
 
 
Investor Shares  
  February 25, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $20.00
Investment Operations  
Net Investment Income . 244 2
Net Realized and Unrealized Gain (Loss) on Investments 1.671
Total from Investment Operations 1.915
Distributions  
Dividends from Net Investment Income (.145)
Distributions from Realized Capital Gains —
Total Distributions (.145)
Net Asset Value, End of Period $21.77
 
Total Return3 9.57%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $4
Ratio of Total Expenses to Average Net Assets 0.35%4
Ratio of Net Investment Income to Average Net Assets 1.50%4
Portfolio Turnover Rate 5 8%

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.

19

 

International Dividend Appreciation Index Fund  
 
 
Financial Highlights  
 
 
ETF Shares  
  February 25, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $50.00
Investment Operations  
Net Investment Income . 662 2
Net Realized and Unrealized Gain (Loss) on Investments 4.154
Total from Investment Operations 4.816
Distributions  
Dividends from Net Investment Income (.386)
Distributions from Realized Capital Gains —
Total Distributions (. 386)
Net Asset Value, End of Period $54.43
 
Total Return 9.64%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $147
Ratio of Total Expenses to Average Net Assets 0.25%3
Ratio of Net Investment Income to Average Net Assets 1.60%3
Portfolio Turnover Rate 4 8%

1 Inception.
2 Calculated based on average shares outstanding.
3 Annualized.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares,
including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

20

 

International Dividend Appreciation Index Fund  
 
 
Financial Highlights  
 
 
Admiral Shares  
  March 2, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $25.00
Investment Operations  
Net Investment Income . 285 2
Net Realized and Unrealized Gain (Loss) on Investments 1.352
Total from Investment Operations 1.637
Distributions  
Dividends from Net Investment Income (.187)
Distributions from Realized Capital Gains —
Total Distributions (.187)
Net Asset Value, End of Period $26.45
 
Total Return3 6.54%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $77
Ratio of Total Expenses to Average Net Assets 0.25%4
Ratio of Net Investment Income to Average Net Assets 1.60%4
Portfolio Turnover Rate 5 8%

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.

21

 

International Dividend Appreciation Index Fund

Notes to Financial Statements

Vanguard International Dividend Appreciation Index 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 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 affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk

22

 

International Dividend Appreciation Index Fund

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).

During the year ended October 31, 2016, 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.

4. Federal Income Taxes: The fund intends to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for its open federal income tax year ended October 31, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of 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

23

 

International Dividend Appreciation Index Fund

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 October 31, 2016, or at any time during the period then ended.

8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $16,000, representing 0.01% of the fund’s net assets and 0.01% 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).

24

 

International Dividend Appreciation Index Fund

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks—North and South America 39,950 — —
Common Stocks—Other 6,010 180,436 78
Temporary Cash Investments 22,647 100 —
Futures Contracts—Liabilities1 (4) — —
Total 68,603 180,536 78
1 Represents variation margin on the last day of the reporting period.      

 

D. At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index December 2016 21 2,226 (6)

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

During the year ended October 31, 2016, the fund realized net foreign currency losses of $146,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.

For tax purposes, at October 31, 2016, the fund had $417,000 of ordinary income available for distribution. The fund had available capital losses totaling $393,000 that may be carried forward indefinitely to offset future net capital gains.

At October 31, 2016, the cost of investment securities for tax purposes was $251,968,000. Net unrealized depreciation of investment securities for tax purposes was $2,747,000, consisting of unrealized gains of $7,196,000 on securities that had risen in value since their purchase and $9,943,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the year ended October 31, 2016, the fund purchased $238,511,000 of investment securities and sold $9,133,000 of investment securities, other than temporary cash investments. Purchases and sales include $119,557,000 and $0, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

25

 

International Dividend Appreciation Index Fund    
 
 
 
 
G. Capital share transactions for each class of shares were:    
    Year Ended
  October 31, 2016
  Amount Shares
  ($000) (000)
Investor Shares1    
Issued 6,530 295
Issued in Lieu of Cash Distributions 14 1
Redeemed (2,027) (91)
Net Increase (Decrease)—Investor Shares 4,517 205
ETF Shares1    
Issued 148,546 2,700
Issued in Lieu of Cash Distributions — —
Redeemed — —
Net Increase (Decrease)—ETF Shares 148,546 2,700
Admiral Shares2    
Issued 84,631 3,156
Issued in Lieu of Cash Distributions 163 6
Redeemed (6,631) (246)
Net Increase (Decrease) —Admiral Shares 78,163 2,916
1 Inception was February 25, 2016, for Investor Shares and ETF Shares.
2 Inception was March 2, 2016, for Admiral Shares.

 

H. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

26

 

International High Dividend Yield Index Fund

Fund Profile
As of October 31, 2016

Share-Class Characteristics    
  Investor ETF Admiral
  Shares Shares Shares
Ticker Symbol VIHIX VYMI VIHAX
Expense Ratio1 0.40% 0.30% 0.30%

 

Portfolio Characteristics    
    FTSE
    All-World
    ex US High
    Dividend Yield
  Fund Index
Number of Stocks 912 876
Median Market Cap $43.9B $43.9B
Price/Earnings Ratio 19.1x 19.8x
Price/Book Ratio 1.4x 1.4x
Return on Equity 15.0% 15.0%
Earnings Growth    
Rate 3.0% 3.0%
Dividend Yield 4.3% 4.4%
Turnover Rate 6% —
Short-Term Reserves 8.7% —

 

Sector Diversification (% of equity exposure)
    FTSE
    All-World
    ex US High
    Dividend Yield
  Fund Index
Basic Materials 5.8% 5.9%
Consumer Goods 11.9 11.9
Consumer Services 4.1 3.9
Financials 36.4 36.7
Health Care 7.4 7.3
Industrials 9.4 9.4
Oil & Gas 9.9 9.9
Technology 3.4 3.1
Telecommunications 6.4 6.6
Utilities 5.3 5.3

 

Ten Largest Holdings (% of total net assets)
Nestle SA Food Products 2.6%
Royal Dutch Shell plc Integrated Oil & Gas 2.3
Novartis AG Pharmaceuticals 1.9
Roche Holding AG Pharmaceuticals 1.8
Toyota Motor Corp. Automobiles 1.8
HSBC Holdings plc Banks 1.7
Taiwan Semiconductor    
Manufacturing Co. Ltd. Semiconductors 1.6
BP plc Integrated Oil & Gas 1.3
British American    
Tobacco plc Tobacco 1.2
TOTAL SA Integrated Oil & Gas 1.2
Top Ten   17.4%

The holdings listed exclude any temporary cash investments and equity index products.

Allocation by Region (% of equity exposure)


Investment Focus


1 The expense ratios shown are from the prospectus dated February 25, 2016, and represent estimated costs for the current fiscal year. For the period from inception through October 31, 2016, the annualized expense ratios were 0.42% for Investor Shares, 0.32% for ETF Shares, and 0.32% for Admiral Shares.

27

 

International High Dividend Yield Index Fund

Market Diversification (% of equity exposure)
    FTSE
    All-World
    ex US High
    Dividend
    Yield
  Fund Index
Europe    
United Kingdom 16.5% 16.5%
Switzerland 9.6 9.6
France 6.5 6.5
Germany 6.4 6.4
Spain 3.5 3.5
Sweden 2.6 2.7
Netherlands 2.4 2.4
Italy 2.1 2.1
Finland 1.1 1.1
Other 2.0 2.0
Subtotal 52.7% 52.8%
Pacific    
Australia 8.0% 8.0%
Japan 7.8 7.8
Hong Kong 2.7 2.7
Singapore 1.4 1.4
Other 1.1 1.0
Subtotal 21.0% 20.9%
Emerging Markets    
Taiwan 4.9% 4.9%
China 4.8 4.8
Brazil 3.0 3.0
South Africa 1.4 1.4
Russia 1.1 1.1
Other 4.0 4.0
Subtotal 19.2% 19.2%
North America    
Canada 7.0% 7.0%
Middle East 0.1% 0.1%

 

28

 

International High Dividend Yield Index Fund

Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: February 25, 2016, Through October 31, 2016
Initial Investment of $10,000


  Total Returns  
  Period Ended October 31, 2016  
  Since Final Value
  Inception of a $10,000
  (2/25/2016) Investment
International High Dividend Yield Index    
Fund Investor Shares 13.26% $11,326
FTSE All-World ex US High Dividend    
Yield Index 14.71 11,471
International Income Funds Average 5.05 10,505

International Income Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

 

 

  Since Final Value
  Inception of a $10,000
  (2/25/2016) Investment
International High Dividend Yield Index Fund    
ETF Shares Net Asset Value 13.37% $11,337
International High Dividend Yield Index Fund    
ETF Shares Market Price 13.79 11,379
FTSE All-World ex US High Dividend Yield Index 14.71 11,471
"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

 

See Financial Highlights for dividend and capital gains information.

29

 

International High Dividend Yield Index Fund    
 
 
 
 
  Total Returns  
  Period Ended October 31, 2016  
  Since Final Value
  Inception of a $10,000
  (3/2/2016) Investment
International High Dividend Yield Index Fund    
Admiral Shares 9.73% $10,973
FTSE All-World ex US High Dividend Yield    
Index 10.87 11,087

"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

 

 

Cumulative Returns of ETF Shares: February 25, 2016, Through October 31, 2016  
  Since
  Inception
  (2/25/2016)
International High Dividend Yield Index Fund ETF  
Shares Market Price 13.79%
International High Dividend Yield Index Fund ETF  
Shares Net Asset Value 13.37
FTSE All-World ex US High Dividend Yield Index 14.71

 

"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

30

 

International High Dividend Yield Index Fund

Fiscal-Period Total Returns (%): February 25, 2016, Through October 31, 2016


Average Annual Total Returns: Periods Ended September 30, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

    Since Inception
  Inception Date Total
Investor Shares 2/25/2016 14.12%
ETF Shares 2/25/2016  
Market Price   14.89
Net Asset Value   14.22
Admiral Shares 3/2/2016 10.54

 

31

 

International High Dividend Yield Index Fund

Financial Statements

Statement of Net Assets
As of October 31, 2016

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 (99.0%)1    
Australia (7.9%)    
Commonwealth Bank of    
Australia 39,534 2,201
Westpac Banking Corp. 77,358 1,789
Australia & New Zealand    
Banking Group Ltd. 67,582 1,427
National Australia Bank Ltd. 61,551 1,307
BHP Billiton Ltd. 74,752 1,306
Wesfarmers Ltd. 25,984 809
Woolworths Ltd. 29,417 528
Macquarie Group Ltd. 7,185 434
Rio Tinto Ltd. 9,889 409
Telstra Corp. Ltd. 100,350 379
Transurban Group 47,654 376
Woodside Petroleum Ltd. 17,130 367
Amcor Ltd. 26,923 300
Suncorp Group Ltd. 29,543 268
QBE Insurance Group Ltd. 31,990 242
AMP Ltd. 67,928 236
Insurance Australia Group    
Ltd. 55,534 232
AGL Energy Ltd. 15,674 228
Aurizon Holdings Ltd. 46,082 171
ASX Ltd. 4,684 168
Origin Energy Ltd. 40,915 165
APA Group 26,161 158
James Hardie Industries plc 10,349 154
Sonic Healthcare Ltd. 9,571 149
Caltex Australia Ltd. 6,127 143
LendLease Group 12,946 133
Medibank Pvt Ltd. 64,234 126
Sydney Airport 25,905 123
Challenger Ltd. 13,218 108
Orica Ltd. 8,716 108
Tatts Group Ltd. 34,168 105
DUET Group 57,349 104

 

  Bendigo & Adelaide Bank    
  Ltd. 11,003 93
  Computershare Ltd. 11,506 92
  Coca-Cola Amatil Ltd. 12,285 89
  Incitec Pivot Ltd. 39,761 89
  Boral Ltd. 17,312 83
  Tabcorp Holdings Ltd. 20,490 75
  Bank of Queensland Ltd. 9,290 74
  Alumina Ltd. 60,350 73
  ALS Ltd. 12,084 57
  Orora Ltd. 25,780 57
  CIMIC Group Ltd. 2,218 50
  AusNet Services 42,992 49
  Harvey Norman Holdings    
  Ltd. 12,272 47
  Adelaide Brighton Ltd. 11,469 47
  IOOF Holdings Ltd. 7,150 44
  Magellan Financial Group Ltd. 2,625 42
  Downer EDI Ltd. 9,350 41
  Macquarie Atlas Roads    
  Group 11,467 41
  DuluxGroup Ltd. 8,131 40
  Perpetual Ltd. 1,105 38
  CSR Ltd. 12,442 35
* WorleyParsons Ltd. 4,920 31
  Fairfax Media Ltd. 50,161 31
  Flight Centre Travel Group    
  Ltd. 1,187 30
  Sims Metal Management    
  Ltd. 3,421 26
  Platinum Asset Management    
  Ltd. 5,616 21
      16,148
Austria (0.1%)    
  OMV AG 3,380 106
  voestalpine AG 2,609 92
  Vienna Insurance Group AG    
  Wiener Versicherung Gruppe 744 15
      213

 

32

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
Belgium (0.6%)    
* KBC Group NV 6,453 393
  Solvay SA Class A 1,652 190
  Ageas 4,689 171
  Groupe Bruxelles Lambert SA 1,913 165
  Proximus SADP 3,325 95
* Telenet Group Holding NV 1,031 55
  bpost SA 1,895 50
      1,119
Brazil (3.0%)    
* Petroleo Brasileiro SA ADR    
  Type A 56,116 621
  Itau Unibanco Holding SA    
  ADR 45,217 539
  Ambev SA ADR 70,332 415
  Itau Unibanco Holding SA    
  Preference Shares 30,320 365
  Banco Bradesco SA    
  Preference Shares 34,220 359
  Banco Bradesco SA ADR 28,141 293
  Itausa - Investimentos Itau    
  SA Preference Shares 90,360 267
* Vale SA Class B Pref. ADR 38,038 245
  BM&FBovespa SA -    
  Bolsa de Valores    
  Mercadorias e Futuros 40,400 238
  Ambev SA 39,700 234
* Petroleo Brasileiro SA 37,700 220
  Banco Bradesco SA 18,866 188
  Banco do Brasil SA 20,100 184
  Kroton Educacional SA 35,600 177
* Petroleo Brasileiro SA ADR 13,930 163
  BB Seguridade Participacoes    
  SA 14,100 142
  CCR SA 20,500 111
* Vale SA Preference Shares 16,900 109
* Vale SA Class B ADR 15,188 105
  Banco Santander Brasil SA 9,900 82
  Telefonica Brasil SA ADR 5,137 74
* Centrais Eletricas Brasileiras    
  SA ADR 8,061 70
  CETIP SA - Mercados    
  Organizados 4,952 70
  Telefonica Brasil SA    
  Preference Shares 4,300 62
  Engie Brasil Energia SA 4,600 58
  JBS SA 14,797 45
  CPFL Energia SA ADR 2,875 44
  Natura Cosmeticos SA 4,200 40
  BTG Pactual Group 7,828 40
  Cia Energetica de Minas    
  Gerais ADR 12,204 37
  EDP - Energias do Brasil SA 7,650 37
* Vale SA 5,100 35
  Estacio Participacoes SA 6,000 35

 

  Sul America SA 5,400 33
* Petroleo Brasileiro SA    
  Preference Shares 5,600 31
  TOTVS SA 3,200 29
  Braskem SA ADR 1,590 28
  Smiles SA 1,400 26
* Centrais Eletricas Brasileiras    
  SA Preference Shares 2,600 22
  AES Tiete Energia SA 3,921 20
  Cia de Transmissao de    
  Energia Eletrica Paulista    
  Preference Shares 902 20
  Cia Paranaense de Energia 2,400 18
  Multiplus SA 1,300 18
  Porto Seguro SA 1,800 17
  Transmissora Alianca de    
  Energia Eletrica SA 2,300 15
  Cia Energetica de Minas    
  Gerais 4,400 13
  Cia de Gas de Sao Paulo    
  COMGAS Preference    
  Shares Class A 702 11
  Cia Paranaense de Energia    
  ADR 996 11
* Centrais Eletricas Brasileiras    
  SA 1,400 10
  Cia Energetica de Minas    
  Gerais Preference Shares 3,100 9
  CPFL Energia SA 1,127 9
      6,044
Canada (7.0%)    
  Royal Bank of Canada 34,377 2,148
  Toronto-Dominion Bank 42,863 1,945
  Bank of Nova Scotia 28,147 1,513
^ Bank of Montreal 14,933 950
  Enbridge Inc. 21,557 931
  TransCanada Corp. 18,570 841
  Canadian Imperial Bank of    
  Commerce 9,154 686
  Manulife Financial Corp. 45,986 666
  Sun Life Financial Inc. 14,196 475
  Rogers Communications    
  Inc. Class B 8,542 344
  Potash Corp. of    
  Saskatchewan Inc. 19,585 318
  Thomson Reuters Corp. 7,900 311
  BCE Inc. 6,659 303
  Fortis Inc. 9,093 299
  Agrium Inc. 3,225 296
  National Bank of Canada 7,848 280
  Pembina Pipeline Corp. 9,061 278
  Shaw Communications Inc.    
  Class B 9,740 193
  Great-West Lifeco Inc. 6,937 174
  Power Corp. of Canada 8,104 174

 

33

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  Inter Pipeline Ltd. 7,927 164
  TELUS Corp. 4,545 147
^ Crescent Point Energy Corp. 12,021  143
^ ARC Resources Ltd. 8,292 141
  Canadian Utilities Ltd.    
  Class A 4,553 130
  Power Financial Corp. 5,397 128
  CI Financial Corp. 5,597 103
  IGM Financial Inc. 2,329 63
      14,144
Chile (0.3%)    
  Banco Santander Chile    
  ADR 3,787 86
  Enersis Americas SA    
  ADR 9,197 80
  Banco de Chile 623,881 74
  Sociedad Quimica y    
  Minera de Chile SA    
  Preference Shares    
  Class B 2,092 62
  Banco de Credito e    
  Inversiones 1,139 59
* Itau CorpBanca 4,613,882 42
  Aguas Andinas SA    
  Class A 62,107 41
  Colbun SA 175,754 38
  Enersis Chile SA 198,250 20
      502
China (4.7%)    
  China Construction Bank    
  Corp. 2,128,000 1,554
  China Mobile Ltd. 124,000 1,421
  Industrial & Commercial    
  Bank of China Ltd. 1,675,000 1,005
  Bank of China Ltd. 1,747,000 783
  China Petroleum &    
  Chemical Corp. 585,000 423
  Agricultural Bank of China    
  Ltd. 587,000 247
  China Merchants Bank    
  Co. Ltd. 88,000 214
  PICC Property & Casualty    
  Co. Ltd. 108,000 174
  China Minsheng Banking    
  Corp. Ltd. 148,000 168
  China Shenhua Energy    
  Co. Ltd. 78,500 163
  Bank of Communications    
  Co. Ltd. 182,000 138
  Haitong Securities Co. Ltd. 77,200 137
  Hengan International Group    
  Co. Ltd. 16,997 135
  CITIC Securities Co. Ltd. 53,500 118

 

  China Communications    
  Construction Co. Ltd. 106,000 116
  China CITIC Bank Corp. Ltd. 175,000 113
  Guangdong Investment Ltd. 64,000 96
  Belle International Holdings    
  Ltd. 150,000 91
  Country Garden Holdings    
  Co. Ltd. 173,000 90
2 China Galaxy Securities    
  Co. Ltd. 91,000 86
  China Vanke Co. Ltd. 31,600 82
  China Cinda Asset    
  Management Co. Ltd. 227,000 82
  GF Securities Co. Ltd. 36,400 81
  China Resources Power    
  Holdings Co. Ltd. 46,000 78
  Anhui Conch Cement Co.    
  Ltd. 28,000 77
  China Merchants Port    
  Holdings Co. Ltd. 28,000 72
  Great Wall Motor Co. Ltd. 71,500 70
  Huaneng Power    
  International Inc. 104,000 64
  ANTA Sports Products Ltd. 22,000 63
  Guangzhou Automobile    
  Group Co. Ltd. 52,000 63
  Beijing Enterprises Holdings    
  Ltd. 12,000 60
  China Evergrande Group 90,000 59
*,2 China Huarong Asset    
  Management Co. Ltd. 154,000 59
  Longfor Properties Co. Ltd. 37,500 50
  Shimao Property Holdings    
  Ltd. 32,500 43
  China Everbright Ltd. 22,000 43
  Kingboard Chemical    
  Holdings Ltd. 14,500 43
  Chongqing Rural    
  Commercial Bank Co. Ltd. 69,000 41
  Far East Horizon Ltd. 45,000 41
  Sinopec Shanghai    
  Petrochemical Co. Ltd. 80,000 41
2 BAIC Motor Corp. Ltd. 37,000 39
  Zijin Mining Group Co. Ltd. 122,000 39
  Shanghai Industrial Holdings    
  Ltd. 12,000 37
  Shenzhen International    
  Holdings Ltd. 23,500 36
  COSCO SHIPPING Ports    
  Ltd. 36,000 36
  Zhejiang Expressway Co.    
  Ltd. 34,000 36
  China Communications    
  Services Corp. Ltd. 56,000 33
  Jiangsu Expressway Co. Ltd. 24,000 33

 

34

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  China Power International    
  Development Ltd. 87,000 32
  China Jinmao Holdings    
  Group Ltd. 114,000 31
2 Fuyao Glass Industry    
  Group Co. Ltd. 10,800 31
  GOME Electrical Appliances    
  Holding Ltd. 243,000 31
  China Everbright Bank Co.    
  Ltd. 66,000 30
  Lee & Man Paper    
  Manufacturing Ltd. 39,000 29
  Guangzhou R&F Properties    
  Co. Ltd. 20,400 29
  Sunac China Holdings Ltd. 41,000 28
  Shenzhen Investment Ltd. 62,000 27
  Yuexiu Property Co. Ltd. 182,000 27
  Sino-Ocean Group Holding    
  Ltd. 62,500 26
2 Sinopec Engineering Group    
  Co. Ltd. 29,000 26
  Kingboard Laminates    
  Holdings Ltd. 27,500 25
  Sinotrans Ltd. 52,000 24
  Chongqing Changan    
  Automobile Co. Ltd.    
  Class B 16,000 24
  Huadian Power International    
  Corp. Ltd. 52,000 22
  KWG Property Holding Ltd. 37,000 21
  China Resources Cement    
  Holdings Ltd. 52,000 21
  Agile Group Holdings Ltd. 36,000 20
  Datang International Power    
  Generation Co. Ltd. 74,000 20
  China Machinery    
  Engineering Corp. 33,000 20
  SOHO China Ltd. 38,000 20
  China Hongqiao Group Ltd. 21,000 19
  Huishang Bank Corp. Ltd. 39,000 19
2 Red Star Macalline Group    
  Corp. Ltd. 17,400 19
  Beijing Jingneng Clean    
  Energy Co. Ltd. 60,000 18
* Greentown China Holdings    
  Ltd. 19,000 15
  Huadian Fuxin Energy Corp.    
  Ltd. 64,000 15
  Shenzhen Expressway Co.    
  Ltd. 14,000 14
  Guangdong Electric Power    
  Development Co. Ltd.    
  Class B 31,400 14
  Lao Feng Xiang Co. Ltd.    
  Class B 4,100 14

 

  China Dongxiang Group Co.    
  Ltd. 67,000 13
  Weifu High-Technology    
  Group Co. Ltd. Class B 5,500 13
  China South City Holdings    
  Ltd. 58,000 13
  CSG Holding Co. Ltd.    
  Class B 13,300 11
  China BlueChemical Ltd. 50,000 10
  Xinjiang Goldwind Science    
  & Technology Co. Ltd. 7,000 10
  China International Marine    
  Containers Group Co. Ltd. 7,500 9
  China Zhongwang Holdings    
  Ltd. 18,000 8
  Sichuan Expressway Co. Ltd. 16,000 6
  Anhui Expressway Co. Ltd. 6,000 5
* Qinqin Foodstuffs Group    
  Cayman Co. Ltd. 300 —
  Inner Mongolia Yitai Coal Co.    
  Ltd. Class B 100 —
      9,582
Colombia (0.1%)    
  Bancolombia SA ADR 2,537 97
* Ecopetrol SA ADR 4,434 39
  Grupo Aval Acciones y    
  Valores SA ADR 3,552 29
  Interconexion Electrica SA    
  ESP 7,974 27
  Almacenes Exito SA 3,859 19
  Grupo Aval Acciones y    
  Valores Preference Shares 24,557 10
  Corp Financiera Colombiana    
  SA 794 10
* Ecopetrol SA 19,170 8
  Bancolombia SA Preference    
  Shares 306 3
      242
Czech Republic (0.1%)    
  CEZ AS 3,722 70
  Komercni banka as 1,659 61
      131
Denmark (0.3%)    
  Danske Bank A/S 17,468 539
* TDC A/S 19,087 105
  Tryg A/S 2,782 54
      698
Egypt (0.1%)    
  Commercial International    
  Bank Egypt SAE 24,667 143
  Talaat Moustafa Group 24,117 15
* Orascom Construction Ltd. 1,679 9
  Telecom Egypt Co. 7,807 8

 

35

 

International High Dividend Yield Index Fund

    Market
    Value•
  Shares ($000)
ElSewedy Electric Co. 1,042 7
Sidi Kerir Petrochemicals Co. 1,624 3
    185
Finland (1.1%)    
Sampo Oyj Class A 10,897 499
Kone Oyj Class B 8,838 407
UPM-Kymmene Oyj 12,349 287
Fortum Oyj 10,102 168
Wartsila OYJ Abp 3,690 160
Neste Oyj 2,968 128
Stora Enso Oyj 13,528 128
Elisa Oyj 3,771 127
Nokian Renkaat Oyj 3,229 108
Orion Oyj Class B 2,382 101
Metso Oyj 3,235 85
Kesko Oyj Class B 1,642 82
    2,280
France (6.4%)    
TOTAL SA 50,157 2,403
Sanofi 25,985 2,022
BNP Paribas SA 22,777 1,321
AXA SA 44,905 1,013
Schneider Electric SE 12,663 852
Orange SA 44,381 698
Societe Generale SA 17,115 668
Vivendi SA 25,597 518
Cie de Saint-Gobain 11,135 494
Engie SA 33,461 483
Cie Generale des    
Etablissements Michelin 4,136 448
Credit Agricole SA 26,322 284
Veolia Environnement SA 11,355 248
SES SA Class A 7,902 182
Technip SA 2,734 181
Bouygues SA 4,461 145
STMicroelectronics NV 14,609 139
Suez 7,733 122
SCOR SE 3,686 119
Edenred 4,909 114
Natixis SA 22,038 111
Rexel SA 7,521 104
Eutelsat Communications SA 4,359 91
Electricite de France SA 7,003 79
Lagardere SCA 2,813 72
Casino Guichard Perrachon    
SA 1,405 70
CNP Assurances 3,786 66
Euler Hermes Group 339 29
    13,076
Germany (6.3%)    
Siemens AG 17,706 2,012
BASF SE 21,507 1,899
Allianz SE 10,613 1,657
Daimler AG 22,328 1,593

 

  Deutsche Telekom AG 74,998 1,224
  Deutsche Post AG 22,024 683
  Bayerische Motoren Werke    
  AG 7,712 673
  Muenchener    
  Rueckversicherungs-    
  Gesellschaft AG in    
  Muenchen 3,322 645
  Vonovia SE 10,893 384
  E.ON SE 34,633 254
  ProSiebenSat.1 Media SE 5,023 217
  Porsche Automobil Holding    
  SE Preference Shares 3,675 199
  Commerzbank AG 24,780 169
  Hannover Rueck SE 1,401 156
  Evonik Industries AG 3,705 116
  METRO AG 3,847 115
  RWE AG Preference Shares 8,501 98
  HUGO BOSS AG 1,531 96
* RWE AG 5,856 93
  K&S AG 4,549 92
  Bayerische Motoren Werke    
  AG Preference Shares 1,161 88
  Deutsche Lufthansa AG 5,948 76
  MAN SE 731 75
  RTL Group SA 922 72
* Uniper SE 4,735 63
  Telefonica Deutschland    
  Holding AG 15,255 59
  Axel Springer SE 1,101 55
  Talanx AG 1,138 35
      12,898
Greece (0.0%)    
  OPAP SA 4,326 37
* Hellenic Petroleum SA 805 4
      41
Hong Kong (2.7%)    
  Hong Kong Exchanges &    
  Clearing Ltd. 28,400 751
  Sun Hung Kai Properties Ltd. 33,000 491
  Cheung Kong Property    
  Holdings Ltd. 65,500 484
  CLP Holdings Ltd. 35,500 361
  Hang Seng Bank Ltd. 17,500 316
  BOC Hong Kong Holdings    
  Ltd. 84,000 299
  Power Assets Holdings Ltd. 30,497 286
  Sands China Ltd. 56,400 245
  Wharf Holdings Ltd. 28,000 210
  MTR Corp. Ltd. 32,000 177
  New World Development    
  Co. Ltd. 122,000 152
  Swire Pacific Ltd. Class A 12,000 125
  Wheelock & Co. Ltd. 20,000 123

 

36

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  Sino Land Co. Ltd. 72,000 122
  Bank of East Asia Ltd. 28,000 113
  Hang Lung Properties Ltd. 46,000 101
  Want Want China Holdings    
  Ltd. 141,997 86
  Hang Lung Group Ltd. 19,000 73
  Li & Fung Ltd. 144,000 71
  Yue Yuen Industrial    
  Holdings Ltd. 17,500 67
  Hysan Development Co. Ltd. 14,000 65
  PCCW Ltd. 103,000 61
  ASM Pacific Technology Ltd. 5,800 56
  NWS Holdings Ltd. 31,000 55
  Hopewell Holdings Ltd. 15,500 54
  Tingyi Cayman Islands    
  Holding Corp. 46,000 50
  Kerry Properties Ltd. 14,500 46
  VTech Holdings Ltd. 3,700 45
  First Pacific Co. Ltd. 54,000 41
  Haitong International    
  Securities Group Ltd. 58,000 37
  Xinyi Glass Holdings Ltd. 40,000 34
  SJM Holdings Ltd. 39,000 27
  Cathay Pacific Airways Ltd. 20,000 26
  Xinyi Solar Holdings Ltd. 66,000 24
  Dah Sing Financial Holdings    
  Ltd. 3,600 24
  Chow Tai Fook Jewellery    
  Group Ltd. 33,600 24
  Guotai Junan International    
  Holdings Ltd. 59,000 22
  Cafe de Coral Holdings Ltd. 6,000 21
  Television Broadcasts Ltd. 5,600 20
  Shun Tak Holdings Ltd. 56,000 19
  Orient Overseas    
  International Ltd. 5,000 19
* Huabao International    
  Holdings Ltd. 40,000 15
  Lifestyle International    
  Holdings Ltd. 11,000 15
  SA Sa International Holdings    
  Ltd. 30,000 14
  Hutchison    
  Telecommunications Hong    
  Kong Holdings Ltd. 32,000 10
  Texwinca Holdings Ltd. 14,000 10
  Hopewell Highway    
  Infrastructure Ltd. 10,500 6
  Kowloon Development Co.    
  Ltd. 5,000 5
* Lifestyle China Group Ltd. 4,500 1
      5,499

 

Hungary (0.1%)    
  OTP Bank plc 4,461 125
  MOL Hungarian Oil & Gas plc 1,152 74
  Magyar Telekom    
  Telecommunications plc 6,658 11
      210
India (0.6%)    
  Oil & Natural Gas Corp. Ltd. 47,620 204
  Coal India Ltd. 30,474 148
  Indian Oil Corp. Ltd. 25,862 125
  Hero MotoCorp Ltd. 2,278 114
  NTPC Ltd. 44,897 102
  Indiabulls Housing Finance    
  Ltd. 7,742 99
* Vedanta Ltd. 26,712 81
  Hindustan Petroleum Corp.    
  Ltd. 9,991 70
  NMDC Ltd. 16,357 32
  Cairn India Ltd. 8,992 30
  Rural Electrification Corp.    
  Ltd. 13,423 27
  Power Finance Corp. Ltd. 13,494 25
* Bank of Baroda 9,631 23
  Sun TV Network Ltd. 2,559 21
* Steel Authority of India Ltd. 26,383 21
  Mphasis Ltd. 2,442 19
* Punjab National Bank 8,475 18
  NHPC Ltd. 44,288 18
  Oil India Ltd. 2,806 18
  Oriental Bank of Commerce 5,154 10
  Union Bank of India 4,110 9
* Bank of India 5,292 9
  Great Eastern Shipping Co.    
  Ltd. 1,629 9
* Canara Bank 1,825 9
* IDFC Ltd. 8,139 9
2 InterGlobe Aviation Ltd. 590 8
      1,258
Indonesia (0.3%)    
  Telekomunikasi Indonesia    
  Persero Tbk PT 1,174,400 379
  United Tractors Tbk PT 33,000 55
  Perusahaan Gas Negara    
  Persero Tbk 262,600 51
  Indocement Tunggal    
  Prakarsa Tbk PT 30,399 38
  Tambang Batubara Bukit    
  Asam Persero Tbk PT 16,000 15
* Vale Indonesia Tbk PT 52,300 11
* Bank CIMB Niaga Tbk PT 14,376 1
      550

 

37

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
Ireland (0.1%)    
* Bank of Ireland 418,123 90
 
Israel (0.1%)    
  Bezeq The Israeli    
  Telecommunication Corp.    
  Ltd. 47,178 86
  Israel Chemicals Ltd. 10,567 38
  Gazit-Globe Ltd. 1,894 17
  Harel Insurance    
  Investments & Financial    
  Services Ltd. 3,682 14
  Paz Oil Co. Ltd. 87 14
  Shikun & Binui Ltd. 7,642 13
* Israel Corp. Ltd. 85 13
  Amot Investments Ltd. 2,945 12
* Migdal Insurance &    
  Financial Holding Ltd. 2,097 1
      208
Italy (2.1%)    
  Eni SPA 57,659 837
  Enel SPA 177,111 762
  Intesa Sanpaolo SPA    
  (Registered) 267,997 621
  Assicurazioni Generali SPA 29,516 381
  UniCredit SPA 124,543 309
  Snam SPA 57,003 300
  Atlantia SPA 11,128 273
  Terna Rete Elettrica    
  Nazionale SPA 33,118 162
  Tenaris SA 11,045 156
  Telecom Italia SPA (Bearer) 143,800 102
  Mediobanca SPA 13,254 97
  Intesa Sanpaolo SPA 36,547 79
  FinecoBank Banca Fineco    
  SPA 9,559 56
  Unione di Banche Italiane    
  SPA 19,293 53
  Banca Mediolanum SPA 6,470 45
  UnipolSai SPA 23,358 45
      4,278
Japan (7.7%)    
  Toyota Motor Corp. 63,600 3,689
  Mitsubishi UFJ Financial    
  Group Inc. 317,000 1,636
  Honda Motor Co. Ltd. 41,700 1,248
  Sumitomo Mitsui Financial    
  Group Inc. 30,300 1,051
  Mizuho Financial Group Inc. 583,100 982
  Takeda Pharmaceutical Co.    
  Ltd. 18,000 805
  Canon Inc. 24,100 692
  Fuji Heavy Industries Ltd. 14,300 559
  Mitsui & Co. Ltd. 39,500 547

 

  Nissan Motor Co. Ltd. 46,600 474
  ITOCHU Corp. 33,400 422
  Nomura Holdings Inc. 79,800 400
  Sumitomo Mitsui Trust    
  Holdings Inc. 8,900 300
  Sumitomo Corp. 26,100 300
  Daiwa Securities Group Inc. 39,000 233
  Sekisui House Ltd. 13,797 228
  Resona Holdings Inc. 51,100 227
  JX Holdings Inc. 56,000 221
  Marubeni Corp. 36,400 191
  Yamaha Motor Co. Ltd. 6,500 144
  Dai Nippon Printing Co. Ltd. 14,000 140
  Japan Post Bank Co. Ltd. 9,800 116
  Kawasaki Heavy Industries    
  Ltd. 34,000 99
  Aozora Bank Ltd. 27,000 89
  Chugoku Electric Power    
  Co. Inc. 7,297 85
  Sojitz Corp. 29,200 77
  Hino Motors Ltd. 6,600 72
  TonenGeneral Sekiyu KK 7,000 69
* Kobe Steel Ltd. 7,200 59
  DIC Corp. 1,800 55
  Sony Financial Holdings Inc. 3,800 53
  Hitachi Construction    
  Machinery Co. Ltd. 2,300 48
  Aoyama Trading Co. Ltd. 1,200 42
  Sankyo Co. Ltd. 1,100 39
  Showa Shell Sekiyu KK 4,000 37
  Japan Airlines Co. Ltd. 1,200 35
  NTN Corp. 9,000 34
  Tokai Tokyo Financial    
  Holdings Inc. 5,700 29
  Sanrio Co. Ltd. 1,500 28
  Senshu Ikeda Holdings Inc. 5,400 25
  North Pacific Bank Ltd. 6,100 23
  Hitachi Capital Corp. 1,000 22
  Matsui Securities Co. Ltd. 1,900 15
  Okasan Securities Group Inc. 2,000 11
  Mitsui Mining & Smelting    
  Co. Ltd. 3,000 7
      15,658
Malaysia (0.6%)    
  Malayan Banking Bhd. 126,600 238
  CIMB Group Holdings Bhd. 128,700 154
  Sime Darby Bhd. 75,700 148
  Axiata Group Bhd. 108,800 127
  DiGi.Com Bhd. 85,600 103
  Maxis Bhd. 61,700 88
  AMMB Holdings Bhd. 46,700 47
  YTL Corp. Bhd. 112,500 43
  British American Tobacco    
  Malaysia Bhd. 3,000 35

 

38

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
2 Astro Malaysia Holdings    
  Bhd. 50,800 34
  Telekom Malaysia Bhd. 21,700 34
  UMW Holdings Bhd. 19,500 27
  KLCCP Stapled Group 14,000 27
  Alliance Financial Group Bhd. 26,600 25
  YTL Power International Bhd. 65,500 24
  Lafarge Malaysia Bhd. 11,400 22
  Westports Holdings Bhd. 17,000 18
  Berjaya Sports Toto Bhd. 17,000 13
  SP Setia Bhd Group 9,200 8
      1,215
Mexico (0.1%)    
  Grupo Aeroportuario del    
  Pacifico SAB de CV Class B 7,800 75
  Grupo Financiero Santander    
  Mexico SAB de CV Class B 35,500 64
  Kimberly-Clark de Mexico    
  SAB de CV Class A 22,400 48
  Infraestructura Energetica    
  Nova SAB de CV 7,400 33
  Grupo Sanborns SAB de CV 1,200 2
      222
Netherlands (2.4%)    
  Unilever NV 36,271 1,517
  ING Groep NV 90,072 1,182
  Koninklijke Philips NV 21,265 641
* ArcelorMittal 42,914 290
  Koninklijke DSM NV 4,084 263
  Koninklijke KPN NV 72,859 238
  NN Group NV 7,575 228
  Aegon NV 45,140 195
  Randstad Holding NV 2,580 133
2 ABN AMRO Group NV 5,126 118
  Boskalis Westminster 2,085 67
* OCI NV 2,412 33
      4,905
New Zealand (0.2%)    
  Fletcher Building Ltd. 16,002 119
  Spark New Zealand Ltd. 42,580 111
  Contact Energy Ltd. 17,869 61
  Meridian Energy Ltd. 28,237 52
  SKYCITY Entertainment    
  Group Ltd. 15,170 42
  Mercury NZ Ltd. 18,840 41
  SKY Network Television Ltd. 8,810 29
  Air New Zealand Ltd. 15,450 21
  Vector Ltd. 6,960 16
  Warehouse Group Ltd. 713 2
      494
Norway (0.7%)    
  Statoil ASA 22,376 365
  DNB ASA 22,506 325
  Telenor ASA 16,216 258

 

  Orkla ASA 17,995 170
  Marine Harvest ASA 8,694 158
  Yara International ASA 4,161 147
  Gjensidige Forsikring ASA 3,625 65
      1,488
Pakistan (0.0%)    
  Oil & Gas Development    
  Co. Ltd. 16,700 22
  Pakistan Petroleum Ltd. 9,900 14
  Fauji Fertilizer Co. Ltd. 13,000 13
  National Bank of Pakistan 10,500 7
      56
Philippines (0.1%)    
  Manila Electric Co. 9,010 52
  Aboitiz Power Corp. 53,100 50
  Globe Telecom Inc. 80 3
      105
Poland (0.4%)    
  Polski Koncern Naftowy    
  ORLEN SA 7,449 147
  Powszechna Kasa    
  Oszczednosci Bank Polski    
  SA 20,144 141
  Bank Pekao SA 3,664 113
  Powszechny Zaklad    
  Ubezpieczen SA 13,199 92
  KGHM Polska Miedz SA 3,465 63
  Polskie Gornictwo Naftowe i    
  Gazownictwo SA 44,412 57
  Bank Zachodni WBK SA 612 49
  PGE Polska Grupa    
  Energetyczna SA 16,132 42
* mBank SA 304 27
  Orange Polska SA 18,821 27
  Bank Handlowy w    
  Warszawie SA 1,111 22
* Tauron Polska Energia SA 32,472 22
  Asseco Poland SA 1,615 22
* Enea SA 5,514 14
* Synthos SA 9,040 11
  Budimex SA 185 10
      859
Portugal (0.2%)    
  Galp Energia SGPS SA 12,124 165
  EDP - Energias de Portugal    
  SA 44,832 148
      313
Russia (1.1%)    
  Gazprom PJSC ADR 78,306 338
  Lukoil PJSC ADR 6,326 308
  Gazprom PJSC 98,520 216
  Lukoil PJSC 4,234 207
  Tatneft PJSC ADR 5,444 182

 

39

 

International High Dividend Yield Index Fund

    Market
    Value•
  Shares ($000)
MMC Norilsk Nickel PJSC    
ADR 10,891 164
Rosneft PJSC GDR 26,837 146
Mobile TeleSystems PJSC    
ADR 11,903 92
Alrosa PJSC 59,600 83
Surgutneftegas OAO    
Preference Shares 178,841 81
Moscow Exchange    
MICEX-RTS PJSC 29,389 54
Severstal PJSC GDR 3,831 54
Novolipetsk Steel PJSC 21,830 35
Sistema PJSC FC GDR 3,801 28
Bashneft PJSC 509 27
Rostelecom PJSC ADR 3,569 26
Inter RAO UES PJSC 414,000 22
Magnitogorsk Iron & Steel    
OJSC 42,500 21
* Aeroflot PJSC 10,400 21
PhosAgro PJSC GDR 1,693 21
MegaFon PJSC GDR 2,160 21
LSR Group PJSC GDR 6,084 17
E.ON Russia JSC 321,000 15
Tatneft PAO Preference    
Shares 4,340 14
Bashneft PAO Preference    
Shares 430 10
Rostelecom PJSC 2,810 4
    2,207
Singapore (1.3%)    
Singapore    
Telecommunications Ltd. 170,900 476
Oversea-Chinese Banking    
Corp. Ltd. 76,700 467
DBS Group Holdings Ltd. 41,400 446
United Overseas Bank Ltd. 27,800 375
Keppel Corp. Ltd. 33,900 128
Singapore Press Holdings    
Ltd. 36,600 98
Singapore Exchange Ltd. 18,497 94
ComfortDelGro Corp. Ltd. 49,500 90
Singapore Airlines Ltd. 11,900 87
Singapore Technologies    
Engineering Ltd. 38,100 86
Hutchison Port Holdings    
Trust 123,300 55
SATS Ltd. 14,200 49
Singapore Post Ltd. 36,000 41
Golden Agri-Resources Ltd. 141,400 39
StarHub Ltd. 15,300 37
Venture Corp. Ltd. 5,100 35
Sembcorp Industries Ltd. 19,100 35
Yangzijiang Shipbuilding    
Holdings Ltd. 56,100 30

 

Sembcorp Marine Ltd. 21,700 20
SIA Engineering Co. Ltd. 7,500 20
* Noble Group Ltd. 122,600 15
Frasers Centrepoint Ltd. 1,700 2
    2,725
South Africa (1.4%)    
Sasol Ltd. 12,893 356
MTN Group Ltd. 41,069 355
Standard Bank Group Ltd. 28,277 300
FirstRand Ltd. 70,619 253
Sanlam Ltd. 40,433 196
Woolworths Holdings Ltd. 22,236 129
Vodacom Group Ltd. 11,744 127
Barclays Africa Group Ltd. 10,043 117
Tiger Brands Ltd. 3,741 106
Nedbank Group Ltd. 5,230 86
Life Healthcare Group    
Holdings Ltd. 25,153 67
Mr Price Group Ltd. 5,375 61
SPAR Group Ltd. 4,304 61
RMB Holdings Ltd. 13,828 61
Imperial Holdings Ltd. 4,487 57
Truworths International Ltd. 10,579 56
AVI Ltd. 6,774 48
Investec Ltd. 7,159 44
MMI Holdings Ltd. 22,445 38
Telkom SA SOC Ltd. 7,380 34
Coronation Fund Managers    
Ltd. 5,337 29
Barloworld Ltd. 4,408 28
JSE Ltd. 2,374 28
Liberty Holdings Ltd. 2,949 25
Nampak Ltd. 17,413 24
Tsogo Sun Holdings Ltd. 9,353 21
Tongaat Hulett Ltd. 2,237 20
Massmart Holdings Ltd. 2,113 18
Santam Ltd. 943 17
AECI Ltd. 2,149 16
Sun International Ltd. 2,486 15
Omnia Holdings Ltd. 1,221 15
Oceana Group Ltd. 956 8
DataTec Ltd. 472 2
Alexander Forbes Group    
Holdings Ltd. 2,484 1
    2,819
South Korea (0.8%)    
KB Financial Group Inc. 9,676 358
POSCO 1,583 329
KT&G Corp. 2,591 256
SK Telecom Co. Ltd. ADR 4,885 107
Hyundai Motor Co. 2nd    
Preference Shares 1,061 93
Industrial Bank of Korea 6,489 75
Woori Bank 6,514 71

 

40

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
  Hyundai Marine & Fire    
  Insurance Co. Ltd. 1,328 41
  Doosan Heavy Industries &    
  Construction Co. Ltd. 1,577 36
  Mirae Asset Daewoo Co. Ltd.  4,803  32
  DGB Financial Group Inc. 3,611 30
  NH Investment & Securities    
  Co. Ltd. 3,227 28
  Samsung Card Co. Ltd. 665 28
  Hyundai Motor Co.    
  Preference Shares 328 27
  Hanwha Life Insurance Co.    
  Ltd. 4,523 25
  Doosan Corp. 243 22
  Hite Jinro Co. Ltd. 602 12
      1,570
Spain (3.5%)    
  Banco Santander SA 336,773 1,650
  Banco Bilbao Vizcaya    
  Argentaria SA 150,807 1,086
  Telefonica SA 100,384 1,020
  Iberdrola SA 131,380 894
* Repsol SA 25,939 362
  Abertis Infraestructuras SA 15,028 223
* Ferrovial SA 11,368 221
  Red Electrica Corp. SA 10,163 212
  CaixaBank SA 61,778 186
  Enagas SA 5,445 156
  Endesa SA 7,248 154
  Gas Natural SDG SA 7,422 146
  Bankinter SA 16,981 130
* ACS Actividades de    
  Construccion y Servicios    
  SA 4,201 129
* Banco de Sabadell SA 76,368 102
  Bankia SA 110,572 97
  Distribuidora Internacional    
  de Alimentacion SA 14,813 79
  Mapfre SA 24,404 72
  Mediaset Espana    
  Comunicacion SA 4,521 51
* Acerinox SA 3,720 46
  Zardoya Otis SA 5,391 45
* Banco Popular Espanol SA 37,825 41
* Ferrovial SA Rights Expire    
  11/14/2016 11,368 5
      7,107
Sweden (2.6%)    
  Nordea Bank AB 73,998 778
  Hennes & Mauritz AB    
  Class B 22,176 624
  Swedbank AB Class A 24,540 574
  Svenska Handelsbanken AB    
  Class A 32,914 449

 

  Volvo AB Class B 36,181 388
  Investor AB Class B 10,358 368
  Telefonaktiebolaget LM    
  Ericsson Class B 69,842 339
  Skandinaviska Enskilda    
  Banken AB Class A 33,565 339
  Sandvik AB 25,221 286
^ Telia Co. AB 60,338 241
  Skanska AB Class B 8,270 180
  Swedish Match AB 4,182 145
  Industrivarden AB Class A 6,787 129
  SKF AB 7,545 128
* Kinnevik AB 4,675 118
  Husqvarna AB 9,578 72
^ Tele2 AB 7,816 64
  SKF AB Class A 2,018 34
  Svenska Handelsbanken AB    
  Class B 2,289 31
  Industrivarden AB 1,361 24
* Tele2 AB Rights 6,659 2
      5,313
Switzerland (9.5%)    
  Nestle SA 71,780 5,205
  Novartis AG 55,046 3,906
  Roche Holding AG 16,360 3,758
  UBS Group AG 81,283 1,149
  ABB Ltd. 44,323 914
  Zurich Insurance Group AG 3,467 908
  Swiss Re AG 7,606 706
  Credit Suisse Group AG 48,651 679
  LafargeHolcim Ltd. 11,331 604
  Swisscom AG 525 240
  SGS SA 117 237
  Adecco Group AG 3,711 220
  Swiss Life Holding AG 739 196
  Kuehne & Nagel    
  International AG 1,094 148
  Baloise Holding AG 1,053 130
  Swiss Prime Site AG 1,466 122
  PSP Swiss Property AG 901 81
  Helvetia Holding AG 136 71
  Pargesa Holding SA 899 60
  Banque Cantonale Vaudoise 66 41
      19,375
Taiwan (4.9%)    
  Taiwan Semiconductor    
  Manufacturing Co. Ltd. 557,400 3,345
  Hon Hai Precision Industry    
  Co. Ltd. 348,000 940
  Formosa Plastics Corp. 113,000 305
  Formosa Chemicals &    
  Fibre Corp. 102,000 303
  Nan Ya Plastics Corp. 132,000 274
  Delta Electronics Inc. 51,200 270

 

41

 

International High Dividend Yield Index Fund

    Market
    Value•
  Shares ($000)
MediaTek Inc. 34,000 258
Fubon Financial Holding Co.    
Ltd. 170,000 241
Cathay Financial Holding Co.    
Ltd. 185,000 239
CTBC Financial Holding Co.    
Ltd. 425,120 229
Chunghwa Telecom Co.    
Ltd. ADR 6,049 207
Mega Financial Holding Co.    
Ltd. 254,000 174
Catcher Technology Co. Ltd. 18,000 141
Asustek Computer Inc. 15,999 140
Taiwan Mobile Co. Ltd. 39,000 136
Quanta Computer Inc. 62,000 125
Pegatron Corp. 45,000 121
Hotai Motor Co. Ltd. 10,000 116
First Financial Holding Co.    
Ltd. 213,424 112
Formosa Petrochemical    
Corp. 33,000 110
Advanced Semiconductor    
Engineering Inc. ADR 17,501 102
Yuanta Financial Holding    
Co. Ltd. 272,000 102
Taiwan Cement Corp. 75,000 90
Cheng Shin Rubber Industry    
Co. Ltd. 43,999 90
Chunghwa Telecom Co. Ltd. 26,000 89
Hua Nan Financial Holdings    
Co. Ltd. 170,928 87
Pou Chen Corp. 63,000 85
China Development    
Financial Holding Corp. 338,000 85
Far EasTone    
Telecommunications Co.    
Ltd. 35,000 83
Taishin Financial Holding    
Co. Ltd. 210,275 77
Foxconn Technology Co.    
Ltd. 26,190 76
Lite-On Technology Corp. 52,194 75
Advanced Semiconductor    
Engineering Inc. 62,000 73
Far Eastern New Century    
Corp. 92,000 71
Innolux Corp. 211,000 71
SinoPac Financial Holdings    
Co. Ltd. 238,400 69
United Microelectronics    
Corp. ADR 34,557 66
Compal Electronics Inc. 106,000 63
Siliconware Precision    
Industries Co. Ltd. ADR 8,044 60

 

  Novatek Microelectronics    
  Corp. 14,000 52
  Inventec Corp. 66,999 52
  Wistron Corp. 69,256 52
  Vanguard International    
  Semiconductor Corp. 23,000 47
  Asia Cement Corp. 50,000 44
  Realtek Semiconductor Corp. 11,000 37
  United Microelectronics    
  Corp. 91,000 34
  Chicony Electronics Co. Ltd. 13,019 33
  Synnex Technology    
  International Corp. 30,000 32
  Teco Electric and Machinery    
  Co. Ltd. 36,000 32
  Nanya Technology Corp. 18,000 23
  Eternal Materials Co. Ltd. 19,320 20
  Far Eastern International    
  Bank 64,260 18
  Wan Hai Lines Ltd. 36,000 18
  Formosa Taffeta Co. Ltd. 19,000 17
  U-Ming Marine Transport    
  Corp. 22,000 15
  Transcend Information Inc. 5,000 14
  Cheng Uei Precision    
  Industry Co. Ltd. 11,000 14
  Cathay Real Estate    
  Development Co. Ltd. 25,900 13
  Siliconware Precision    
  Industries Co. Ltd. 8,000 12
  Taiwan Secom Co. Ltd. 4,000 12
  China Motor Corp. 14,000 11
  Ton Yi Industrial Corp. 22,000 9
  Capital Securities Corp. 33,000 8
  Feng Hsin Steel Co. Ltd. 6,000 8
  Oriental Union Chemical    
  Corp. 11,000 7
  YFY Inc. 15,000 4
  President Securities Corp. 9,280 3
      9,941
Thailand (0.8%)    
* PTT PCL 32,800 323
  Siam Cement PCL NVDR 11,800 168
* Siam Commercial Bank PCL    
  (Local) 31,900 131
* Advanced Info Service PCL    
  (Local) 28,036 123
  Siam Cement PCL (Foreign) 7,550 109
  Siam Commercial Bank PCL 24,200 99
* Charoen Pokphand Foods    
  PCL 99,800 90
* PTT Global Chemical PCL 46,799 80
* Krung Thai Bank PCL 148,100 73
  Bangkok Bank PCL (Foreign) 12,200 56
* Thai Oil PCL 24,500 49

 

42

 

International High Dividend Yield Index Fund

      Market
      Value•
    Shares ($000)
* Banpu PCL (Local) 90,200 47
* Land & Houses PCL 157,000 41
* Intouch Holdings PCL 27,000 41
* Thai Union Group PCL 58,100 36
* IRPC PCL 254,200 35
* Electricity Generating PCL 6,197 34
  Intouch Holdings NVDR 18,400 28
* Ratchaburi Electricity    
  Generating Holding PCL    
  (Local) 19,200 27
* Glow Energy PCL 11,600 25
* Delta Electronics Thailand    
  PCL 9,800 22
* Siam City Cement PCL    
  (Local) 1,800 15
* Total Access Communication    
  PCL (Local) 14,100 13
* BEC World PCL 19,200 11
  Banpu PCL 8,550 4
      1,680
Turkey (0.1%)    
  Tupras Turkiye Petrol    
  Rafinerileri AS 2,742 56
* Turkcell Iletisim Hizmetleri    
  AS 16,477 53
  Eregli Demir ve Celik    
  Fabrikalari TAS 34,155 46
  Arcelik AS 3,827 25
  Turk Telekomunikasyon AS 11,692 22
  Ford Otomotiv Sanayi AS 2,035 21
  TAV Havalimanlari Holding    
  AS 4,675 19
  Tofas Turk Otomobil    
  Fabrikasi AS 2,363 18
  Turk Traktor ve Ziraat    
  Makineleri AS 511 13
* Koza Altin Isletmeleri AS 1,578 9
  Aygaz AS 2,512 9
      291
United Arab Emirates (0.3%)    
  Emirates    
  Telecommunications    
  Group Co. PJSC 39,120 201
  First Gulf Bank PJSC 27,597 86
  Abu Dhabi Commercial    
  Bank PJSC 42,950 72
  Dubai Islamic Bank PJSC 28,885 41
  Emaar Malls PJSC 50,875 35
  Union National Bank PJSC 31,483 34
  DAMAC Properties Dubai    
  Co. PJSC 46,902 28
  Air Arabia PJSC 47,462 17
  Dubai Investments PJSC 22,690 12

 

  Al Waha Capital PJSC 10,656 5
* Union Properties PJSC 24,088 5
      536
United Kingdom (16.3%)    
  HSBC Holdings plc 462,002 3,479
  BP plc 437,771 2,588
  Royal Dutch Shell plc    
  Class A 103,420 2,576
  British American Tobacco    
  plc 43,465 2,491
  GlaxoSmithKline plc 113,412 2,240
  Royal Dutch Shell plc    
  Class B 84,971 2,192
  Vodafone Group plc 622,086 1,708
  AstraZeneca plc 29,426 1,648
  National Grid plc 88,344 1,149
  Imperial Brands plc 22,553 1,091
  Lloyds Banking Group plc 1,497,105 1,045
  Rio Tinto plc 28,266 983
  Barclays plc 395,862 917
  BT Group plc 196,772 903
  BHP Billiton plc 49,407 743
* Standard Chartered plc 63,079 549
  Aviva plc 95,314 516
  BAE Systems plc 75,071 497
  SSE plc 23,730 461
  Legal & General Group plc 140,121 358
  Centrica plc 128,921 338
  Old Mutual plc 115,548 284
  Sky plc 25,231 252
  Next plc 3,371 198
  Standard Life plc 47,355 195
  United Utilities Group plc 16,086 185
  Pearson plc 19,418 180
  RSA Insurance Group plc 24,370 165
  Smiths Group plc 9,482 164
  Marks & Spencer Group plc 38,547 160
  Severn Trent plc 5,543 158
  St. James’s Place plc 12,521 145
  TUI AG 11,367 144
  Direct Line Insurance    
  Group plc 32,927 139
  Royal Mail plc 22,278 134
  Provident Financial plc 3,592 130
  J Sainsbury plc 41,823 128
  Admiral Group plc 4,872 114
  DS Smith plc 23,301 114
  Weir Group plc 5,184 108
  Tate & Lyle plc 11,219 107
  Meggitt plc 19,079 102
  Pennon Group plc 9,824 100
  G4S plc 37,161 100
  Persimmon plc 4,770 99
  Investec plc 15,899 99

 

43

 

International High Dividend Yield Index Fund

    Market
    Value•
  Shares ($000)
Aberdeen Asset    
Management plc 24,399 95
IMI plc 7,395 90
Bellway plc 2,998 87
John Wood Group plc 9,015 85
Taylor Wimpey plc 48,893 85
Barratt Developments plc 14,941 83
ICAP plc 13,167 78
Henderson Group plc 26,517 75
New Europe Property    
Investments plc 5,526 68
Petrofac Ltd. 6,562 65
easyJet plc 5,326 61
Inmarsat plc 5,571 48
Ashmore Group plc 10,915 47
Berkeley Group Holdings plc 1,568 45
TalkTalk Telecom Group plc 14,290 36
Cobham plc 15,180 26
    33,250
United States (0.0%)    
Enersis Chile SA ADR 5,728 29
Total Common Stocks    
(Cost $196,817)   201,554
Temporary Cash Investment (11.2%)1  
Money Market Fund (11.2%)    
3,4 Vanguard Market    
Liquidity Fund,    
0.718% (Cost $22,774) 227,720 22,774
Total Investments (110.2%)    
(Cost $219,591)   224,328
 
    Amount
    ($000)
Other Assets and Liabilities (-10.2%)  
Other Assets 5   2,273
Liabilities 4   (23,008)
    (20,735)
Net Assets (100%)   203,593

 

Statement of Assets and Liabilities  
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers 201,554
Affiliated Vanguard Funds 22,774
Total Investments in Securities 224,328
Investment in Vanguard 13
Receivables for Investment Securities Sold 89
Receivables for Accrued Income 348
Receivables for Capital Shares Issued 496
Other Assets 1,327
Total Assets 226,601
Liabilities  
Payables for Investment Securities  
Purchased (21,052)
Collateral for Securities on Loan (1,261)
Payables for Capital Shares Redeemed (28)
Payables to Vanguard (317)
Other Liabilities (350)
Total Liabilities (23,008)
Net Assets 203,593

 

At October 31, 2016, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 198,462
Undistributed Net Investment Income 555
Accumulated Net Realized Losses (223)
Unrealized Appreciation (Depreciation)  
Investment Securities 4,737
Futures Contracts (4)
Foreign Currencies 66
Net Assets 203,593
 
 
Investor Shares—Net Assets  
Applicable to 133,111 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 2,960
Net Asset Value Per Share—  
Investor Shares $22.24

 

44

 

International High Dividend Yield Index Fund

  Amount
  ($000)
ETF Shares—Net Assets  
Applicable to 2,100,062 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 116,778
Net Asset Value Per Share—  
ETF Shares $55.61
 
 
Admiral Shares—Net Assets  
Applicable to 3,115,165 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 83,855
Net Asset Value Per Share—  
Admiral Shares $26.92

 

• 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 $1,152,000.
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 10.2%, respectively, of net
assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31, 2016, the aggregate value of these securities was $420,000,
representing 0.2% 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 $1,261,000 of collateral received for securities on loan.
5 Cash of $155,000 has been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
NVDR—Non-Voting Depository Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

45

 

International High Dividend Yield Index Fund  
 
 
Statement of Operations  
 
  February 25, 20161 to
  October 31, 2016
  ($000)
Investment Income  
Income  
Dividends2 2,537
Interest3 8
Securities Lending—Net 5
Total Income 2,550
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 5
Management and Administrative—Investor Shares 2
Management and Administrative—ETF Shares 24
Management and Administrative—Admiral Shares 69
Marketing and Distribution—Investor Shares —
Marketing and Distribution—ETF Shares 2
Marketing and Distribution—Admiral Shares 1
Custodian Fees 376
Auditing Fees 17
Shareholders’ Reports—Investor Shares —
Shareholders’ Reports—ETF Shares 1
Shareholders’ Reports—Admiral Shares 1
Total Expenses 498
Expense Reimbursement—Note B (294)
Net Expenses 204
Net Investment Income 2,346
Realized Net Gain (Loss)  
Investment Securities Sold3 (132)
Futures Contracts (91)
Foreign Currencies and Forward Currency Contracts (4)
Realized Net Gain (Loss) (227)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 4,737
Futures Contracts (4)
Foreign Currencies and Forward Currency Contracts 66
Change in Unrealized Appreciation (Depreciation) 4,799
Net Increase (Decrease) in Net Assets Resulting from Operations 6,918

1 Inception.
2 Dividends are net of foreign withholding taxes of $256,000.
3 Interest income and realized net gain (loss) from an affiliated company of the fund were $8,000 and $0, respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

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International High Dividend Yield Index Fund  
 
 
Statement of Changes in Net Assets  
 
  February 25, 20161 to
  October 31, 2016
  ($000)
Increase (Decrease) in Net Assets  
Operations  
Net Investment Income 2,346
Realized Net Gain (Loss) (227)
Change in Unrealized Appreciation (Depreciation) 4,799
Net Increase (Decrease) in Net Assets Resulting from Operations 6,918
Distributions  
Net Investment Income  
Investor Shares (32)
ETF Shares (1,192)
Admiral Shares (563)
Realized Capital Gain  
Investor Shares —
ETF Shares —
Admiral Shares —
Total Distributions (1,787)
Capital Share Transactions  
Investor Shares 2,884
ETF Shares 112,659
Admiral Shares 82,919
Net Increase (Decrease) from Capital Share Transactions 198,462
Total Increase (Decrease) 203,593
Net Assets  
Beginning of Period —
End of Period2 203,593

1 Inception.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $555,000.

See accompanying Notes, which are an integral part of the Financial Statements.

47

 

International High Dividend Yield Index Fund  
 
 
Financial Highlights  
 
 
Investor Shares  
  February 25, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $20.00
Investment Operations  
Net Investment Income . 578 2
Net Realized and Unrealized Gain (Loss) on Investments 2.059
Total from Investment Operations 2.637
Distributions  
Dividends from Net Investment Income (.397)
Distributions from Realized Capital Gains —
Total Distributions (. 397)
Net Asset Value, End of Period $22.24
 
Total Return 3 13.26%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $3
Ratio of Expenses to Average Net Assets 0.42%4,5
Ratio of Net Investment Income to Average Net Assets 3.55%4
Portfolio Turnover Rate6 6%

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 The ratio of total expenses to average net assets before an expense reimbursement of 0.31% was 0.73%. See note B in the Notes to
Financial Statements.
6 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.

48

 

International High Dividend Yield Index Fund  
 
 
Financial Highlights  
 
 
ETF Shares  
  February 25, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $50.00
Investment Operations  
Net Investment Income 1.323 2
Net Realized and Unrealized Gain (Loss) on Investments 5.305
Total from Investment Operations 6.628
Distributions  
Dividends from Net Investment Income (1.018)
Distributions from Realized Capital Gains —
Total Distributions (1.018)
Net Asset Value, End of Period $55.61
 
Total Return 13.37%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $117
Ratio of Expenses to Average Net Assets 0.32%3,4
Ratio of Net Investment Income to Average Net Assets 3.65%3
Portfolio Turnover Rate5 6%

1 Inception.
2 Calculated based on average shares outstanding.
3 Annualized.
4 The ratio of total expenses to average net assets before an expense reimbursement of 0.31% was 0.63%. See note B in the Notes to
Financial Statements.
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.

49

 

International High Dividend Yield Index Fund  
 
 
Financial Highlights  
 
 
Admiral Shares  
  March 2, 20161 to
For a Share Outstanding Throughout the Period October 31, 2016
Net Asset Value, Beginning of Period $25.00
Investment Operations  
Net Investment Income . 597 2
Net Realized and Unrealized Gain (Loss) on Investments 1.817
Total from Investment Operations 2.414
Distributions  
Dividends from Net Investment Income (.494)
Distributions from Realized Capital Gains —
Total Distributions (. 494)
Net Asset Value, End of Period $26.92
 
Total Return 3 9.73%
 
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $84
Ratio of Expenses to Average Net Assets 0.32%4,5
Ratio of Net Investment Income to Average Net Assets 3.65%4
Portfolio Turnover Rate6 6%

1 Inception.
2 Calculated based on average shares outstanding.
3 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.
4 Annualized.
5 The ratio of total expenses to average net assets before an expense reimbursement of 0.31% was 0.63%. See note B in the Notes to
Financial Statements.
6 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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International High Dividend Yield Index Fund

Notes to Financial Statements

Vanguard International High Dividend Yield Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund 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 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 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.

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the

51

 

International High Dividend Yield Index Fund

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.

The fund also enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days. The fund had no open forward currency contracts at October 31, 2016.

Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and notional amounts 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 gains (losses) on futures or forward currency contracts.

During the year ended October 31, 2016, 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’s average investment in forward currency contracts 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 qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for its open federal income tax year ended October 31, 2016, 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.

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International High Dividend Yield Index Fund

6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.

8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

53

 

International High Dividend Yield Index Fund

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 October 31, 2016, the fund had contributed to Vanguard capital in the amount of $13,000, representing 0.01% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

The fund incurred higher than anticipated custody costs because of a higher volume of securities transactions, which included transactions from a rebalance of the benchmark index shortly after the fund’s inception. Because of these factors, Vanguard has agreed to reimburse the fund for the unanticipated custody costs, in the amount of $294,000 (an effective annual rate of 0.31% of the fund’s average net assets); the fund is not obligated to repay this amount to Vanguard.

C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks—North and South America 20,847 336 —
Common Stocks—Other 634 179,737 —
Temporary Cash Investments 22,774 — —
Futures Contracts— Liabilities1 (3) — —
Total 44,252 180,073 —
1 Represents variation margin on the last day of the reporting period for recently closed futures contracts.

 

D. At October 31, 2016, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Statement of Assets and Liabilities Caption ($000) ($000) ($000)
Other Liabilities (3) — (3)

 

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International High Dividend Yield Index Fund

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the year ended October 31, 2016, were:

    Foreign  
  Equity Exchange  
  Contracts Contracts Total
Realized Net Gain (Loss) on Derivatives ($000) ($000) ($000)
Futures Contracts (91) — (91)
Forward Currency Contracts — (1) (1)
Realized Net Gain (Loss) on Derivatives (91) (1) (92)
 
Change in Unrealized Appreciation (Depreciation) on Derivatives      
Futures Contracts (4) — (4)
Forward Currency Contracts — — —
Change in Unrealized Appreciation (Depreciation) on Derivatives (4) — (4)

 

E. At October 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

        ($000)
      Aggregate  
    Number of Settlement Unrealized
    Long (Short) Value Appreciation
Futures Contracts Expiration Contracts Long (Short) (Depreciation)
E-mini S&P 500 Index December 2016 20 2,120 (4)

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

F. 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 period ended October 31, 2016, the fund realized net foreign currency losses of $3,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.

For tax purposes, at October 31, 2016, the fund had $587,000 of ordinary income available for distribution. The fund had available capital losses totaling $227,000 that may be carried forward indefinitely to offset future net capital gains.

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International High Dividend Yield Index Fund

At October 31, 2016, the cost of investment securities for tax purposes was $219,618,000. Net unrealized appreciation of investment securities for tax purposes was $4,710,000, consisting of unrealized gains of $9,571,000 on securities that had risen in value since their purchase and $4,861,000 in unrealized losses on securities that had fallen in value since their purchase.

G. During the year ended October 31, 2016, the fund purchased $202,802,000 of investment securities and sold $5,855,000 of investment securities, other than temporary cash investments. Purchases and sales include $104,903,000 and $0, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

H. Capital share transactions for each class of shares were:    
    Year Ended
  October 31, 2016
  Amount Shares
  ($000) (000)
Investor Shares1    
Issued 4,632 214
Issued in Lieu of Cash Distributions 29 1
Redeemed (1,777) (82)
Net Increase (Decrease)—Investor Shares 2,884 133
ETF Shares1    
Issued 112,659 2,100
Issued in Lieu of Cash Distributions — —
Redeemed — —
Net Increase (Decrease)—ETF Shares 112,659 2,100
Admiral Shares2    
Issued 90,853 3,415
Issued in Lieu of Cash Distributions 352 13
Redeemed (8,286) (313)
Net Increase (Decrease) —Admiral Shares 82,919 3,115
1 Inception was February 25, 2016, for Investor Shares and ETF Shares.
2 Inception was March 2, 2016, for Admiral Shares.

 

I. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.

56

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard International Dividend Appreciation Index Fund and Vanguard International High Dividend Yield Index Fund: In our opinion, the accompanying statements of net assets, statements of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard International Dividend Appreciation Index Fund and Vanguard International High Dividend Yield Index Fund (constituting separate portfolios of Vanguard Whitehall Funds, hereafter referred to as the “Funds”) at October 31, 2016, and the results of each of their operations and the changes in each of their net assets for the period from February 25, 2016 (commencement of operations) through October 31, 2016, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016

57

 

Special 2016 tax information (unaudited) for Vanguard International Dividend Appreciation Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $838,000 of qualified dividend income to shareholders during the fiscal year.

The fund designates to shareholders foreign source income of $1,522,000 and foreign taxes paid of $115,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.

 

Special 2016 tax information (unaudited) for Vanguard International High Dividend Yield Index Fund

This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $1,493,000 of qualified dividend income to shareholders during the fiscal year.

The fund designates to shareholders foreign source income of $2,658,000 and foreign taxes paid of $208,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.

58

 

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.

59

 

Six Months Ended October 31, 2016      
  Beginning Ending Expenses
  Account Value Account Value Paid During
  4/30/2016 10/31/2016 Period
Based on Actual Fund Return      
International Dividend Appreciation Index Fund      
Investor Shares $1,000.00 $1,003.93 $1.21
ETF Shares 1,000.00 1,004.26 0.86
Admiral Shares 1,000.00 1,004.27 0.86
International High Dividend Yield Index Fund      
Investor Shares $1,000.00 $1,018.75 $1.47
ETF Shares 1,000.00 1,019.73 1.12
Admiral Shares 1,000.00 1,019.33 1.12
Based on Hypothetical 5% Yearly Return      
International Dividend Appreciation Index Fund      
Investor Shares $1,000.00 $1,023.93 $1.22
ETF Shares 1,000.00 1,024.28 0.87
Admiral Shares 1,000.00 1,024.28 0.87
International High Dividend Yield Index Fund      
Investor Shares $1,000.00 $1,023.68 $1.48
ETF Shares 1,000.00 1,024.03 1.12
Admiral Shares 1,000.00 1,024.03 1.12

The calculations are based on expenses incurred in the most recent six-month period. The funds’ annualized six-month expense ratios for that period are: for the International Dividend Appreciation Index Fund, 0.24% for Investor Shares, 0.17% for ETF Shares, and 0.17% for Admiral Shares; and for the International High Dividend Yield Index Fund, 0.29% for Investor Shares, 0.22% for ETF Shares, and 0.22% 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 six-month period, then divided by the number of days in the most recent 12-month period (184/366).

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Glossary

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.

Fair-Value Pricing. Fair-value adjustments, which are required by the Securities and Exchange Commission, address pricing discrepancies that may arise because of time-zone differences among global stock markets. Foreign stocks may trade on exchanges that close many hours before a fund’s closing share price is calculated in the United States, generally at 4 p.m., Eastern time. In the hours between the foreign close and the U.S. close, the value of these foreign securities may change—because of company-specific announcements or market-wide developments, for example. Such price changes are not immediately reflected in international index values. Fair-value pricing takes such changes into account in calculating the fund’s daily net asset value, thus ensuring that the NAV doesn’t include “stale” prices. The result can be a temporary divergence between the return of the fund and that of its benchmark index—a difference that usually corrects itself when the foreign markets reopen.

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.

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.

61

 

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

Interested Trustee1

F. William McNabb III

Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).

Independent Trustees

Emerson U. Fullwood

Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.

Rajiv L. Gupta

Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.

Amy Gutmann

Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.

JoAnn Heffernan Heisen

Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.

 

F. Joseph Loughrey

Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.

Scott C. Malpass

Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).

André F. Perold

Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.

Peter F. Volanakis

Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.

Executive Officers

Glenn Booraem

Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).

Thomas J. Higgins

Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).

Peter Mahoney

Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).

Anne E. Robinson

Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).

Vanguard Senior Management Team

Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings

 

Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

Connect with Vanguard® > vanguard.com

P.O. Box 2600
Valley Forge, PA 19482-2600

Fund Information > 800-662-7447
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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: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, and Peter F. Volanakis.

Item 4: Principal Accountant Fees and Services.

(a) Audit Fees.

Audit Fees of the Registrant

Fiscal Year Ended October 31, 2016: $277,000
Fiscal Year Ended October 31, 2015: $224,000

Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.

Fiscal Year Ended October 31, 2016: $9,629,849
Fiscal Year Ended October 31, 2015: $7,000,200

Includes fees billed in connection with audits of the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc. and Vanguard Marketing Corporation.

(b) Audit-Related Fees.

Fiscal Year Ended October 31, 2016: $2,717,627
Fiscal Year Ended October 31, 2015: $2,899,096

Includes fees billed in connection with assurance and related services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.

(c) Tax Fees.

Fiscal Year Ended October 31, 2016: $254,050
Fiscal Year Ended October 31, 2015: $353,389

Includes fees billed in connection with tax compliance, planning, and advice services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.

 

(d) All Other Fees.

Fiscal Year Ended October 31, 2016: $214,225
Fiscal Year Ended October 31, 2015: $202,313

Includes fees billed for services related to tax reported information provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.

(e) (1) Pre-Approval Policies. The policy of the Registrant’s Audit Committee is to consider and, if appropriate, approve before the principal accountant is engaged for such services, all specific audit and non-audit services provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant. In making a determination, the Audit Committee considers whether the services are consistent with maintaining the principal accountant’s independence.

     In the event of a contingency situation in which the principal accountant is needed to provide services in between scheduled Audit Committee meetings, the Chairman of the Audit Committee would be called on to consider and, if appropriate, pre-approve audit or permitted non-audit services in an amount sufficient to complete services through the next Audit Committee meeting, and to determine if such services would be consistent with maintaining the accountant’s independence. At the next scheduled Audit Committee meeting, services and fees would be presented to the Audit Committee for formal consideration, and, if appropriate, approval by the entire Audit Committee. The Audit Committee would again consider whether such services and fees are consistent with maintaining the principal accountant’s independence.

     The Registrant’s Audit Committee is informed at least annually of all audit and non-audit services provided by the principal accountant to the Vanguard complex, whether such services are provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., or other entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant.

     (2) No percentage of the principal accountant’s fees or services were approved pursuant to the waiver provision of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) For the most recent fiscal year, over 50% of the hours worked under the principal accountant’s engagement were not performed by persons other than full-time, permanent employees of the principal accountant.

(g) Aggregate Non-Audit Fees.

Fiscal Year Ended October 31, 2016: $468,275
Fiscal Year Ended October 31, 2015: $555,702

 

Includes fees billed for non-audit services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.

(h) For the most recent fiscal year, the Audit Committee has determined that the provision of all non-audit services was consistent with maintaining the principal accountant’s independence.

Item 5: Audit Committee of Listed Registrants.

The Registrant is a listed issuer as defined in rule 10A-3 under the Securities Exchange Act of 1934 (“Exchange Act”). The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit committee members are: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, and Peter F. Volanakis.

Item 6: Investments.

Not Applicable.

Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management
Investment Companies.

Not Applicable.

Item 8: Portfolio Managers of Closed-End Management Investment Companies.

Not Applicable.

Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and
Affiliated Purchasers.

Not Applicable.

Item 10: Submission of Matters to a Vote of Security Holders.

Not Applicable.

Item 11: Controls and Procedures.

     (a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

     (b) Internal Control Over Financial Reporting. There were no significant changes in Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Item 12: Exhibits.

(a) Code of Ethics.
(b) Certifications.

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  VANGUARD WHITEHALL FUNDS
 
 
BY: /s/ F. WILLIAM MCNABB III*
  F. WILLIAM MCNABB III
  CHIEF EXECUTIVE OFFICER
 
Date: December 19, 2016

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

  VANGUARD WHITEHALL FUNDS
 
BY: /s/ F. WILLIAM MCNABB III*
  F. WILLIAM MCNABB III
  CHIEF EXECUTIVE OFFICER
Date: December 19, 2016

 

 

 VANGUARD WHITEHALL FUNDS

 

BY: /s/ THOMAS J. HIGGINS*
THOMAS J. HIGGINS 
  CHIEF FINANCIAL OFFICER
Date: December 19, 2016

 

* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on October 4, 2016 see file Number
33-32548, Incorporated by Reference.