UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-03916
| Name of Registrant: | Vanguard Specialized Funds |
| Address of Registrant: | P.O. Box 2600 |
| Valley Forge, PA 19482 |
| Name and address of agent for service: | Anne E. Robinson, Esquire |
| P.O. Box 876 | |
| Valley Forge, PA 19482 |
Registrant’s telephone number, including area code: (610) 669-1000
Date of fiscal year end: January 31
Date of reporting period: February 1, 2021—July 31, 2021
Item 1: Reports to Shareholders
Semiannual Report | July 31, 2021
Vanguard Energy
Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 16 |
Liquidity Risk Management | 18 |
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.
1
| Six Months Ended July 31, 2021 | |||
| Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Energy Fund | |||
| Investor Shares | $1,000.00 | $1,132.80 | $2.01 |
| Admiral™ Shares | 1,000.00 | 1,133.20 | 1.59 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,022.91 | $1.91 |
| Admiral Shares | 1,000.00 | 1,023.31 | 1.51 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.38% for Investor Shares and 0.30% for Admiral Shares. The dollar amounts shown
as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by
the number of days in the most recent 12-month period (181/365).
2
Energy Fund
Fund Allocation
As of July 31, 2021
| United States | 49.8% |
| United Kingdom | 15.5 |
| France | 8.3 |
| Canada | 5.5 |
| Italy | 4.7 |
| Spain | 3.1 |
| Norway | 3.0 |
| Russia | 2.9 |
| China | 2.3 |
| India | 1.9 |
| Germany | 1.5 |
| Brazil | 1.3 |
| Other | 0.2 |
The table reflects the fund’s
investments, except for short-term investments.
3
Energy Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Energy Fund
| Face Amount ($000) | Market Value• ($000) | ||
| Repurchase Agreement (0.4%) | |||
| RBS Securities Inc., 0.050%, 8/2/21 (Dated 7/30/21, Repurchase Value $18,400,000, collateralized by U.S. Treasury Note/Bond 2.875%–3.375%, 5/15/44–11/15/46, with a value of $18,768,000) | 18,400 | 18,400 | |
| Total Temporary Cash Investments (Cost $18,486) | 18,486 | ||
| Total Investments (99.9%) (Cost $4,025,661) | 4,595,690 | ||
| Other Assets and Liabilities—Net (0.1%) | 2,523 | ||
| Net Assets (100%) | 4,598,213 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | 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 July 31, 2021, the aggregate value was $40,367,000, representing 0.9% 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. |
| ADR—American Depositary Receipt. | |
| GDR—Global Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
5
Energy Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $4,025,575) | 4,595,604 |
| Affiliated Issuers (Cost $86) | 86 |
| Total Investments in Securities | 4,595,690 |
| Investment in Vanguard | 163 |
| Cash | 582 |
| Foreign Currency, at Value (Cost $170) | 170 |
| Receivables for Accrued Income | 9,382 |
| Receivables for Capital Shares Issued | 1,810 |
| Total Assets | 4,607,797 |
| Liabilities | |
| Payables to Investment Advisor | 1,778 |
| Payables for Capital Shares Redeemed | 5,073 |
| Payables to Vanguard | 375 |
| Deferred Foreign Capital Gains Taxes | 2,358 |
| Total Liabilities | 9,584 |
| Net Assets | 4,598,213 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 4,700,457 |
| Total Distributable Earnings (Loss) | (102,244) |
| Net Assets | 4,598,213 |
| Investor Shares—Net Assets | |
| Applicable to 43,163,741 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,544,638 |
| Net Asset Value Per Share—Investor Shares | $35.79 |
| Admiral Shares—Net Assets | |
| Applicable to 45,470,261 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 3,053,575 |
| Net Asset Value Per Share—Admiral Shares | $67.16 |
See accompanying
Notes, which are an integral part of the Financial Statements.
6
Energy Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 92,532 |
| Interest2 | 4 |
| Securities Lending—Net | 292 |
| Total Income | 92,828 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 3,507 |
| Performance Adjustment | (216) |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 1,701 |
| Management and Administrative—Admiral Shares | 2,244 |
| Marketing and Distribution—Investor Shares | 80 |
| Marketing and Distribution—Admiral Shares | 104 |
| Custodian Fees | 81 |
| Shareholders’ Reports—Investor Shares | 36 |
| Shareholders’ Reports—Admiral Shares | 20 |
| Trustees’ Fees and Expenses | 6 |
| Total Expenses | 7,563 |
| Net Investment Income | 85,265 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 54,538 |
| Foreign Currencies | (12) |
| Realized Net Gain (Loss) | 54,526 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2,3 | 402,295 |
| Foreign Currencies | (78) |
| Change in Unrealized Appreciation (Depreciation) | 402,217 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 542,008 |
| 1 | Dividends are net of foreign withholding taxes of $6,586,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $10,000, and ($10,000), respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of $2,124,000. |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Energy Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 85,265 | 206,416 | |
| Realized Net Gain (Loss) | 54,526 | (760,369) | |
| Change in Unrealized Appreciation (Depreciation) | 402,217 | (860,242) | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 542,008 | (1,414,195) | |
| Distributions | |||
| Investor Shares | (3,204) | (58,294) | |
| Admiral Shares | (6,399) | (124,849) | |
| Total Distributions | (9,603) | (183,143) | |
| Capital Share Transactions | |||
| Investor Shares | 4,247 | 29,241 | |
| Admiral Shares | (51,879) | (498,823) | |
| Net Increase (Decrease) from Capital Share Transactions | (47,632) | (469,582) | |
| Total Increase (Decrease) | 484,773 | (2,066,920) | |
| Net Assets | |||
| Beginning of Period | 4,113,440 | 6,180,360 | |
| End of Period | 4,598,213 | 4,113,440 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Energy Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $31.66 | $43.28 | $47.85 | $55.62 | $52.70 | $40.43 |
| Investment Operations | ||||||
| Net Investment Income | .6481 | 1.4491 | 1.5191 | 1.3001 | 1.4771,2 | .982 |
| Net Realized and Unrealized Gain (Loss) on Investments | 3.555 | (11.669) | (4.524) | (7.788) | 3.035 | 12.275 |
| Total from Investment Operations | 4.203 | (10.220) | (3.005) | (6.488) | 4.512 | 13.257 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.073) | (1.400) | (1.565) | (1.282) | (1.592) | (.987) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.073) | (1.400) | (1.565) | (1.282) | (1.592) | (.987) |
| Net Asset Value, End of Period | $35.79 | $31.66 | $43.28 | $47.85 | $55.62 | $52.70 |
| Total Return3 | 13.28% | -23.55% | -6.55% | -11.48% | 8.75% | 32.73% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $1,545 | $1,363 | $1,793 | $2,265 | $2,968 | $3,452 |
| Ratio of Total Expenses to Average Net Assets4 | 0.38% | 0.37% | 0.32% | 0.37% | 0.38% | 0.41% |
| Ratio of Net Investment Income to Average Net Assets | 3.54% | 4.49% | 3.20% | 2.42% | 2.86%2 | 1.97% |
| Portfolio Turnover Rate | 6% | 55% | 48% | 31% | 24% | 29% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Net investment income per share and the ratio of net investment income to average net assets include $.342 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017. |
| 3 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.02%), (0.06%), (0.01%), 0.00%, and 0.03%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Energy Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $59.39 | $81.18 | $89.77 | $104.35 | $98.88 | $75.85 |
| Investment Operations | ||||||
| Net Investment Income | 1.2401 | 2.7871 | 2.9261 | 2.5111 | 2.8151,2 | 1.918 |
| Net Realized and Unrealized Gain (Loss) on Investments | 6.668 | (21.903) | (8.512) | (14.600) | 5.730 | 23.035 |
| Total from Investment Operations | 7.908 | (19.116) | (5.586) | (12.089) | 8.545 | 24.953 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.138) | (2.674) | (3.004) | (2.491) | (3.075) | (1.923) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.138) | (2.674) | (3.004) | (2.491) | (3.075) | (1.923) |
| Net Asset Value, End of Period | $67.16 | $59.39 | $81.18 | $89.77 | $104.35 | $98.88 |
| Total Return3 | 13.32% | -23.47% | -6.50% | -11.40% | 8.84% | 32.83% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $3,054 | $2,751 | $4,388 | $5,606 | $6,796 | $7,231 |
| Ratio of Total Expenses to Average Net Assets4 | 0.30% | 0.29% | 0.24% | 0.29% | 0.30% | 0.33% |
| Ratio of Net Investment Income to Average Net Assets | 3.62% | 4.60% | 3.28% | 2.50% | 2.94%2 | 2.05% |
| Portfolio Turnover Rate | 6% | 55% | 48% | 31% | 24% | 29% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Net investment income per share and the ratio of net investment income to average net assets include $.643 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017. |
| 3 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 4 | Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.02%), (0.06%), (0.01%), 0.00%, and 0.03%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Energy Fund
Notes to Financial Statements
Vanguard Energy Fund is
registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different
eligibility and minimum purchase requirements, and is designed for different types of investors.
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. Market disruptions associated with the COVID-19 pandemic have had a global
impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at
their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market-
or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the
fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund
are valued at that fund's net asset value.
Temporary cash investments are valued using
the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency:
Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the
valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the
effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or
liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Repurchase
Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements
mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and
principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into
master repurchase agreements with its counterparties. The master repurchase agreements provide that,
11
Energy Fund
in the event of a counterparty's default
(including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may
be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds
12
Energy Fund
effective rate, or overnight bank funding
rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. 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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon
net unrealized gains. 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.
Each class of shares has equal
rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and
shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on
investments are allocated to each class of shares based on its relative net assets.
| B. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the MSCI ACWI Energy Index for periods prior to October 21, 2020, and to the fund’s current benchmark MSCI ACWI Energy + Utilities Index, beginning October 21, 2020, for the preceding three years. The benchmark change will be fully phased in by October 2023. For the six months ended July 31, 2021, the investment advisory fee paid represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net decrease of $216,000 (0.01%) based on performance. |
13
Energy Fund
| C. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $163,000, representing less than 0.01% of the fund’s net
assets and 0.07% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| D. | Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund’s investments as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 2,590,796 | — | — | 2,590,796 |
| Common Stocks—Other | 316,048 | 1,670,360 | — | 1,986,408 |
| Temporary Cash Investments | 86 | 18,400 | — | 18,486 |
| Total | 2,906,930 | 1,688,760 | — | 4,595,690 |
| E. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 4,025,661 |
| Gross Unrealized Appreciation | 757,726 |
| Gross Unrealized Depreciation | (187,697) |
| Net Unrealized Appreciation (Depreciation) | 570,029 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2021, the fund had available capital losses totaling $807,259,000 that
14
Energy Fund
may be carried forward indefinitely to offset
future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2022; should the fund realize net capital losses for the year,
the losses will be added to the loss carryforward balance above.
| F. | During the six months ended July 31, 2021, the fund purchased $343,888,000 of investment securities and sold $275,761,000 of investment securities, other than temporary cash investments. |
| G. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 219,736 | 6,240 | 535,390 | 17,354 | |
| Issued in Lieu of Cash Distributions | 2,971 | 85 | 54,076 | 1,741 | |
| Redeemed | (218,460) | (6,203) | (560,225) | (17,474) | |
| Net Increase (Decrease)—Investor Shares | 4,247 | 122 | 29,241 | 1,621 | |
| Admiral Shares | |||||
| Issued | 387,104 | 5,846 | 1,087,853 | 18,878 | |
| Issued in Lieu of Cash Distributions | 5,671 | 86 | 110,803 | 1,906 | |
| Redeemed | (444,654) | (6,775) | (1,697,479) | (28,520) | |
| Net Increase (Decrease)—Admiral Shares | (51,879) | (843) | (498,823) | (7,736) | |
| H. | Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements. |
15
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Energy Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that
directed the board’s focus to relevant information and topics.
The board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For the 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 decisions.
Nature, extent, and quality of
services
The board reviewed the quality of the
fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in
1928, is among the nation’s oldest and most respected institutional investment managers. The investment team uses a bottom-up approach in which stocks are selected based on the advisor’s estimates of
fundamental investment value. Fundamental research focuses on the quality of a company’s assets, the company’s internal reinvestment opportunities, and management quality. The firm has advised the fund
since its inception in 1984.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted the continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory
arrangement should continue.
16
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 expense rate was also well below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length
negotiations.
The benefit of economies of
scale
The board concluded that the fund’s
shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets
managed by Wellington Management increase.
The board will consider
whether to renew Wellington Management’s advisory arrangement again after a one-year period.
17
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Energy Fund's Program and for carrying out the specific responsibilities
set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the
“Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review Period”). The Program
Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
18
This page intentionally left blank.
Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2021
Vanguard Global
Capital Cycles Fund
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.
1
| Six Months Ended July 31, 2021 | |||
| Global Capital Cycles Fund | Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period |
| Based on Actual Fund Return | $1,000.00 | $1,132.00 | $1.85 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.06 | 1.76 |
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 0.35%. 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 (181/365).
2
Global Capital Cycles Fund
Fund Allocation
As of July 31, 2021
| United States | 27.3% |
| Australia | 14.7 |
| Canada | 14.0 |
| South Africa | 9.1 |
| France | 8.3 |
| India | 7.2 |
| Switzerland | 3.8 |
| United Kingdom | 3.5 |
| Germany | 3.2 |
| Kazakhstan | 2.3 |
| Netherlands | 2.2 |
| Norway | 1.9 |
| South Korea | 1.1 |
| Other | 1.4 |
The table reflects the fund's
investments, except for short-term investments.
3
Global Capital Cycles Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Global Capital Cycles Fund
| Shares | Market Value• ($000) | |||||
| * | Metals Acquisition Corp. | 990,900 | 9,750 | |||
| Pioneer Natural Resources Co. | 64,005 | 9,304 | ||||
| 354,809 | ||||||
| Total Common Stocks (Cost $1,075,417) | 1,302,152 | |||||
| Temporary Cash Investments (3.4%) | ||||||
| Money Market Fund (3.4%) | ||||||
| 2 | Vanguard Market Liquidity Fund, 0.064% (Cost $45,290) | 452,912 | 45,292 | |||
| Total Investments (102.1%) (Cost $1,120,707) | 1,347,444 | |||||
| Other Assets and Liabilities—Net (-2.1%) | (27,980) | |||||
| Net Assets (100%) | 1,319,464 | |||||
| Cost is in $000. | |
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | 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 July 31, 2021, the aggregate value was $12,004,000, representing 0.9% 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. |
| ADR—American Depositary Receipt. | |
| GDR—Global Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
5
Global Capital Cycles Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $1,075,417) | 1,302,152 |
| Affiliated Issuers (Cost $45,290) | 45,292 |
| Total Investments in Securities | 1,347,444 |
| Investment in Vanguard | 45 |
| Foreign Currency, at Value (Cost $2,272) | 2,279 |
| Receivables for Accrued Income | 721 |
| Receivables for Capital Shares Issued | 399 |
| Total Assets | 1,350,888 |
| Liabilities | |
| Due to Custodian | 2 |
| Payables for Investment Securities Purchased | 29,683 |
| Payables for Capital Shares Redeemed | 499 |
| Payables to Investment Advisor | 381 |
| Payables to Vanguard | 131 |
| Deferred Foreign Capital Gains Taxes | 728 |
| Total Liabilities | 31,424 |
| Net Assets | 1,319,464 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 3,344,040 |
| Total Distributable Earnings (Loss) | (2,024,576) |
| Net Assets | 1,319,464 |
| Net Assets | |
| Applicable to 121,982,199 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,319,464 |
| Net Asset Value Per Share | $10.82 |
See accompanying Notes, which are an
integral part of the Financial Statements.
6
Global Capital Cycles Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 24,872 |
| Interest2 | 13 |
| Securities Lending—Net | 27 |
| Total Income | 24,912 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 960 |
| Performance Adjustment | (166) |
| The Vanguard Group—Note C | |
| Management and Administrative | 1,417 |
| Marketing and Distribution | 48 |
| Custodian Fees | 35 |
| Shareholders’ Reports | 24 |
| Trustees’ Fees and Expenses | 2 |
| Total Expenses | 2,320 |
| Net Investment Income | 22,592 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 87,797 |
| Foreign Currencies | (200) |
| Realized Net Gain (Loss) | 87,597 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2,3 | 44,973 |
| Foreign Currencies | 2 |
| Change in Unrealized Appreciation (Depreciation) | 44,975 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 155,164 |
| 1 | Dividends are net of foreign withholding taxes of $2,041,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $13,000, less than $1,000, and $2,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of $728,000. |
See accompanying Notes, which are an
integral part of the Financial Statements.
7
Global Capital Cycles Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 22,592 | 26,031 | |
| Realized Net Gain (Loss) | 87,597 | 39,168 | |
| Change in Unrealized Appreciation (Depreciation) | 44,975 | 140,251 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 155,164 | 205,450 | |
| Distributions | |||
| Total Distributions | (1,557) | (23,982) | |
| Capital Share Transactions | |||
| Issued | 139,777 | 177,189 | |
| Issued in Lieu of Cash Distributions | 1,373 | 21,201 | |
| Redeemed | (157,456) | (410,113) | |
| Net Increase (Decrease) from Capital Share Transactions | (16,306) | (211,723) | |
| Total Increase (Decrease) | 137,301 | (30,255) | |
| Net Assets | |||
| Beginning of Period | 1,182,163 | 1,212,418 | |
| End of Period | 1,319,464 | 1,182,163 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
8
Global Capital Cycles Fund
Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $9.57 | $7.97 | $7.62 | $10.57 | $10.74 | $6.22 |
| Investment Operations | ||||||
| Net Investment Income1 | .183 | .197 | .212 | .122 | .049 | .0662 |
| Net Realized and Unrealized Gain (Loss) on Investments | 1.080 | 1.597 | .337 | (2.858) | (.217) | 4.615 |
| Total from Investment Operations | 1.263 | 1.794 | .549 | (2.736) | (.168) | 4.681 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.013) | (.194) | (.199) | (.214) | (.002) | (.161) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.013) | (.194) | (.199) | (.214) | (.002) | (.161) |
| Net Asset Value, End of Period | $10.82 | $9.57 | $7.97 | $7.62 | $10.57 | $10.74 |
| Total Return3 | 13.20% | 22.63% | 7.11% | -26.17% | -1.56% | 75.99% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $1,319 | $1,182 | $1,212 | $1,399 | $2,568 | $2,612 |
| Ratio of Total Expenses to Average Net Assets4 | 0.35% | 0.35% | 0.38% | 0.33% | 0.36% | 0.43% |
| Ratio of Net Investment Income to Average Net Assets | 3.35% | 2.43% | 2.68% | 1.38% | 0.47% | 0.65%2 |
| Portfolio Turnover Rate | 41% | 70% | 56% | 110% | 35% | 29% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Net investment income per share and the ratio of net investment income to average net assets include $.012 and 0.12%, respectively, resulting from a special dividend from Lucara Diamond Corp. in September 2016. |
| 3 | 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 (0.03%), (0.03%), 0.00%, (0.04%), 0.00% and 0.06%. |
See accompanying Notes, which are an
integral part of the Financial Statements.
9
Global Capital Cycles Fund
Notes to Financial Statements
Vanguard Global Capital Cycles
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. Market disruptions associated with the COVID-19 pandemic have had a global impact, and uncertainty exists as to the long-term implications. Such
disruptions can adversely affect assets of the fund and thus fund performance.
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. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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
10
Global Capital Cycles Fund
or less than the value of the collateral
received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending
transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending
agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up
to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in
recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternative rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
7. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes
11
Global Capital Cycles Fund
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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon
applicable net unrealized gains. 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. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee of Wellington Management Company llp is subject to quarterly adjustments based on the performance relative to the Custom Global Capital Cycles Index since January 31, 2019. For the period ended July 31, 2021, the investment
advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net decrease of $166,000 (0.03%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund 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 and are generally settled twice a month.
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $45,000, representing less than 0.01% of the fund’s net
assets and 0.02% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or
methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
12
Global Capital Cycles Fund
The following table summarizes
the market value of the fund's investments as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 537,733 | — | — | 537,733 |
| Common Stocks—Other | 144,563 | 619,856 | — | 764,419 |
| Temporary Cash Investments | 45,292 | — | — | 45,292 |
| Total | 727,588 | 619,856 | — | 1,347,444 |
E. As of July 31, 2021, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 1,120,707 |
| Gross Unrealized Appreciation | 279,477 |
| Gross Unrealized Depreciation | (52,740) |
| Net Unrealized Appreciation (Depreciation) | 226,737 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2021, the fund had available capital losses totaling $2,360,718,000 that may be carried forward
indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2022; should the fund realize net
capital losses for the year, the losses will be added to the loss carryforward balance above.
F. During the six months ended July 31, 2021, the fund purchased $513,704,000 of investment securities and sold $523,965,000 of investment securities, other than temporary cash
investments.
G. Capital shares issued and redeemed were:
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| Shares (000) | Shares (000) | ||
| Issued | 13,090 | 21,854 | |
| Issued in Lieu of Cash Distributions | 132 | 2,335 | |
| Redeemed | (14,764) | (52,703) | |
| Net Increase (Decrease) in Shares Outstanding | (1,542) | (28,514) |
H. Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements.
13
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Global
Capital Cycles Fund (formerly known as Vanguard Precious Metals and Mining Fund) has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s investment advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that
directed the board’s focus to relevant information and topics.
The board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information
about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board
received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the
trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor
determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of
services
The board reviewed the quality of the
investment management services provided to the fund since Wellington Management began managing the fund in September 2018; it also took into account the organizational depth and stability of the advisor. The board
considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. The advisor follows a global equity strategy that seeks to provide
investors with uncorrelated returns to other asset classes through a blend of capital cycle and enduring assets. Identification of potential investments begins with the capital cycles framework, which seeks companies
that are positioned to succeed through unique and superior business models and healthy balance sheets in sectors and industries where there is capital destruction, consolidation, or retrenchment of investment.
Valuation and quality factors such as discount to intrinsic value, cash generation, capital expenditure, and future capital deployment opportunities are considered.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the performance of
Wellington Management since it began managing the fund in 2018, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the
performance was such that the advisory arrangement should continue.
14
Cost
The board concluded that the fund’s
expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length
negotiations.
The benefit of economies of
scale
The board concluded that the fund’s
shareholders benefit from economies of scale because of breakpoints in the advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
15
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global Capital Cycles Fund’s Program and for carrying out the
specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for
the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review
Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
16
Semiannual Report | July 31, 2021
Vanguard Health
Care Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 20 |
Liquidity Risk Management | 22 |
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.
1
| Six Months Ended July 31, 2021 | |||
| Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Health Care Fund | |||
| Investor Shares | $1,000.00 | $1,096.70 | $1.56 |
| Admiral™ Shares | 1,000.00 | 1,097.00 | 1.30 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,023.31 | $1.51 |
| Admiral Shares | 1,000.00 | 1,023.56 | 1.25 |
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 0.30% for Investor Shares and 0.25% 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 (181/365).
2
Health Care Fund
Fund Allocation
As of July 31, 2021
| United States | 72.5% |
| Japan | 8.6 |
| United Kingdom | 5.9 |
| Switzerland | 4.2 |
| Belgium | 3.2 |
| China | 2.3 |
| Denmark | 2.2 |
| Other | 1.1 |
The table reflects the fund’s
investments, except for short-term investments.
3
Health Care Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Health Care Fund
5
Health Care Fund
6
Health Care Fund
| Face Amount ($000) | Market Value• ($000) | ||
| U.S. Government and Agency Obligations (0.3%) | |||
| U.S. Treasury Bill, 0.015%, 8/26/21 | 150,000 | 149,996 | |
| Total Temporary Cash Investments (Cost $949,930) | 949,928 | ||
| Total Investments (99.9%) (Cost $29,120,539) | 51,795,686 | ||
| Other Assets and Liabilities— Net (0.1%) | 76,394 | ||
| Net Assets (100%) | 51,872,080 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. |
| 2 | 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 July 31, 2021, the aggregate value was $515,780,000, representing 1.0% of net assets. |
| 3 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $5,685,000. |
| 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 | Collateral of $6,036,000 was received for securities on loan. |
| ADR—American Depositary Receipt. |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Health Care Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $25,467,675) | 46,761,193 |
| Affiliated Issuers (Cost $3,652,864) | 5,034,493 |
| Total Investments in Securities | 51,795,686 |
| Investment in Vanguard | 1,767 |
| Receivables for Investment Securities Sold | 308 |
| Receivables for Accrued Income | 113,397 |
| Receivables for Capital Shares Issued | 5,550 |
| Total Assets | 51,916,708 |
| Liabilities | |
| Foreign Currency Due to Custodian, at Value (Proceeds $0) | 5 |
| Due to Custodian | 285 |
| Payables for Investment Securities Purchased | 6,279 |
| Collateral for Securities on Loan | 6,036 |
| Payables to Investment Advisor | 12,720 |
| Payables for Capital Shares Redeemed | 15,940 |
| Payables to Vanguard | 3,363 |
| Total Liabilities | 44,628 |
| Net Assets | 51,872,080 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 26,998,333 |
| Total Distributable Earnings (Loss) | 24,873,747 |
| Net Assets | 51,872,080 |
| Investor Shares—Net Assets | |
| Applicable to 37,038,161 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 8,742,785 |
| Net Asset Value Per Share—Investor Shares | $236.05 |
| Admiral Shares—Net Assets | |
| Applicable to 433,234,728 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 43,129,295 |
| Net Asset Value Per Share—Admiral Shares | $99.55 |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Health Care Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends—Unaffiliated Issuers1 | 316,583 |
| Dividends—Affiliated Issuers2 | 22,609 |
| Interest—Unaffiliated Issuers | 120 |
| Securities Lending—Net | 1,262 |
| Total Income | 340,574 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 35,629 |
| Performance Adjustment | (7,565) |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 7,368 |
| Management and Administrative—Admiral Shares | 27,545 |
| Marketing and Distribution—Investor Shares | 358 |
| Marketing and Distribution—Admiral Shares | 607 |
| Custodian Fees | 408 |
| Shareholders’ Reports—Investor Shares | 88 |
| Shareholders’ Reports—Admiral Shares | 64 |
| Trustees’ Fees and Expenses | 38 |
| Total Expenses | 64,540 |
| Net Investment Income | 276,034 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold—Unaffiliated Issuers | 2,180,277 |
| Investment Securities Sold—Affiliated Issuers | (117,739) |
| Forward Currency Contracts | (35) |
| Foreign Currencies | (1,779) |
| Realized Net Gain (Loss) | 2,060,724 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Unaffiliated Issuers | 1,780,110 |
| Investment Securities—Affiliated Issuers | 504,966 |
| Foreign Currencies | (607) |
| Change in Unrealized Appreciation (Depreciation) | 2,284,469 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,621,227 |
| 1 | Dividends are net of foreign withholding taxes of $14,208,000. |
| 2 | Dividends are net of foreign withholding taxes of $3,643,000. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Health Care Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 276,034 | 468,625 | |
| Realized Net Gain (Loss) | 2,060,724 | 3,076,612 | |
| Change in Unrealized Appreciation (Depreciation) | 2,284,469 | 3,557,011 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,621,227 | 7,102,248 | |
| Distributions | |||
| Investor Shares | (125,171) | (659,397) | |
| Admiral Shares | (614,729) | (3,142,312) | |
| Total Distributions | (739,900) | (3,801,709) | |
| Capital Share Transactions | |||
| Investor Shares | (253,463) | (1,001,082) | |
| Admiral Shares | (866,457) | (44,287) | |
| Net Increase (Decrease) from Capital Share Transactions | (1,119,920) | (1,045,369) | |
| Total Increase (Decrease) | 2,761,407 | 2,255,170 | |
| Net Assets | |||
| Beginning of Period | 49,110,673 | 46,855,503 | |
| End of Period | 51,872,080 | 49,110,673 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Health Care Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $218.60 | $204.57 | $203.34 | $215.96 | $189.88 | $200.67 |
| Investment Operations | ||||||
| Net Investment Income | 1.1961 | 2.0051 | 2.5061 | 2.3751 | 2.1621 | 2.039 |
| Net Realized and Unrealized Gain (Loss) on Investments | 19.583 | 29.203 | 23.326 | 2.489 | 38.929 | 2.951 |
| Total from Investment Operations | 20.779 | 31.208 | 25.832 | 4.864 | 41.091 | 4.990 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.368) | (1.886) | (2.428) | (2.323) | (2.059) | (1.854) |
| Distributions from Realized Capital Gains | (2.961) | (15.292) | (22.174) | (15.161) | (12.952) | (13.926) |
| Total Distributions | (3.329) | (17.178) | (24.602) | (17.484) | (15.011) | (15.780) |
| Net Asset Value, End of Period | $236.05 | $218.60 | $204.57 | $203.34 | $215.96 | $189.88 |
| Total Return2 | 9.67% | 16.16% | 13.16% | 2.76% | 22.29% | 2.71% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $8,743 | $8,342 | $8,729 | $8,850 | $9,853 | $9,636 |
| Ratio of Total Expenses to Average Net Assets3 | 0.30% | 0.32% | 0.32% | 0.34% | 0.38% | 0.37% |
| Ratio of Net Investment Income to Average Net Assets | 1.08% | 0.95% | 1.25% | 1.12% | 1.02% | 0.98% |
| Portfolio Turnover Rate | 9% | 18% | 18% | 16% | 11% | 12% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 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 (0.03%), (0.01%), (0.02%), 0.00%, 0.04%, and 0.04%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
11
Health Care Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $92.17 | $86.27 | $85.75 | $91.08 | $80.09 | $84.64 |
| Investment Operations | ||||||
| Net Investment Income | .5281 | .8831 | 1.0971 | 1.0361 | .9381 | .908 |
| Net Realized and Unrealized Gain (Loss) on Investments | 8.259 | 12.316 | 9.844 | 1.057 | 16.436 | 1.244 |
| Total from Investment Operations | 8.787 | 13.199 | 10.941 | 2.093 | 17.374 | 2.152 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.158) | (.849) | (1.068) | (1.027) | (.920) | (.828) |
| Distributions from Realized Capital Gains | (1.249) | (6.450) | (9.353) | (6.396) | (5.464) | (5.874) |
| Total Distributions | (1.407) | (7.299) | (10.421) | (7.423) | (6.384) | (6.702) |
| Net Asset Value, End of Period | $99.55 | $92.17 | $86.27 | $85.75 | $91.08 | $80.09 |
| Total Return2 | 9.70% | 16.21% | 13.22% | 2.81% | 22.35% | 2.76% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $43,129 | $40,769 | $38,126 | $37,888 | $39,214 | $33,715 |
| Ratio of Total Expenses to Average Net Assets3 | 0.25% | 0.27% | 0.27% | 0.28% | 0.33% | 0.32% |
| Ratio of Net Investment Income to Average Net Assets | 1.13% | 0.99% | 1.30% | 1.18% | 1.07% | 1.03% |
| Portfolio Turnover Rate | 9% | 18% | 18% | 16% | 11% | 12% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 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 (0.03%), (0.01%), (0.02%), 0.00%, 0.04%, and 0.04%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
12
Health Care Fund
Notes to Financial Statements
Vanguard Health Care Fund is
registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different
eligibility and minimum purchase requirements, and is designed for different types of investors.
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. Market disruptions associated with the COVID-19 pandemic have had a global
impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at
their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market-
or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the
fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund
are valued at that fund's net asset value.
Temporary cash investments are valued using
the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency:
Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the
valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the
effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or
liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Forward Currency
Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using
these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its
counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its
counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default,
13
Health Care Fund
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 securities pledged as collateral for open contracts are noted in the
Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified
minimum transfer amount, is adjusted and settled within two business days.
Forward currency contracts are
valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The notional amounts of the contracts are not recorded in the
Statement of 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 forward currency contracts.
During the six months ended
July 31, 2021, the fund’s average investment in forward currency contracts represented 0% of net assets, based on the average of the notional amounts at each quarter-end during the period.
The fund had no open forward
currency contracts at July 31, 2021.
4. Repurchase
Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements
mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and
principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into
master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any repurchase agreements
with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition
of collateral.
5. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s financial statements.
14
Health Care Fund
6. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
15
Health Care Fund
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
9. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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.
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. Deferred foreign capital gains tax, if any, is accrued daily based upon
net unrealized gains. 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.
Each class of shares has equal
rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and
shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on
investments are allocated to each class of shares based on its relative net assets.
| B. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the MSCI All Country World Health Care Index for the preceding three years. For the six months ended July 31, 2021, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets, before a net decrease of $7,565,000 (0.03%) based on performance. |
| C. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $1,767,000, representing less than 0.01% of the fund’s
net assets and 0.71% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
16
Health Care Fund
| D. | Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund’s investments as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 36,905,624 | — | — | 36,905,624 |
| Common Stocks—Other | 768,931 | 13,171,203 | — | 13,940,134 |
| Temporary Cash Investments | 6,132 | 943,796 | — | 949,928 |
| Total | 37,680,687 | 14,114,999 | — | 51,795,686 |
| E. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 29,259,970 |
| Gross Unrealized Appreciation | 23,927,114 |
| Gross Unrealized Depreciation | (1,391,398) |
| Net Unrealized Appreciation (Depreciation) | 22,535,716 |
| F. | During the six months ended July 31, 2021, the fund purchased $4,267,888,000 of investment securities and sold $5,518,181,000 of investment securities, other than temporary cash investments. |
17
Health Care Fund
| G. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 324,816 | 1,467 | 973,375 | 4,703 | |
| Issued in Lieu of Cash Distributions | 117,864 | 554 | 619,156 | 3,096 | |
| Redeemed | (696,143) | (3,144) | (2,593,613) | (12,311) | |
| Net Increase (Decrease)—Investor Shares | (253,463) | (1,123) | (1,001,082) | (4,512) | |
| Admiral Shares | |||||
| Issued | 663,971 | 7,084 | 2,668,213 | 30,075 | |
| Issued in Lieu of Cash Distributions | 543,250 | 6,058 | 2,766,485 | 32,638 | |
| Redeemed | (2,073,678) | (22,219) | (5,478,985) | (62,362) | |
| Net Increase (Decrease)—Admiral Shares | (866,457) | (9,077) | (44,287) | 351 | |
| H. | Certain of the fund investments were in companies that were considered to be affiliated companies of the fund because the fund owned more than 5% of the outstanding voting securities of the company or the issuer was another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows: |
| Current Period Transactions | ||||||||
| Jan. 31, 2021 Market Value ($000) | Purchases at Cost ($000) | Proceeds from Securities Sold ($000) | Realized Net Gain (Loss) ($000) | Change in Unrealized App. (Dep.) ($000) | Income ($000) | Capital Gain Distributions Received ($000) | Jul. 31, 2021 Market Value ($000) | |
| Agios Pharmaceuticals Inc. | 302,276 | — | 67,189 | (67,299) | 79,799 | — | — | 247,587 |
| Alkermes plc | 285,577 | — | — | — | 66,395 | — | — | 351,972 |
| Allscripts Healthcare Solutions Inc. | 162,446 | — | 156,920 | 41,976 | (47,502) | — | — | — |
| Alnylam Pharmaceuticals Inc. | 1,178,188 | — | 24,255 | 11,091 | 207,291 | — | — | 1,372,315 |
| Bluebird Bio Inc. | 237,840 | 24,819 | — | — | (106,642) | — | — | 156,017 |
| Eisai Co. Ltd. | 1,303,206 | — | — | — | 165,515 | 11,652 | — | 1,468,721 |
| Ironwood Pharmaceuticals Inc. Class A | 111,419 | — | — | — | 33,251 | — | — | 144,670 |
| Nektar Therapeutics Class A | 257,000 | — | 33,455 | (103,507) | 59,711 | — | — | 179,749 |
| UCB SA | 1,060,182 | — | — | — | 47,148 | 10,957 | — | 1,107,330 |
| Vanguard Market Liquidity Fund | 96 | NA1 | NA1 | — | — | — | — | 6,132 |
| Total | 4,898,230 | (117,739) | 504,966 | 22,609 | — | 5,034,493 | ||
| 1 | Not applicable—purchases and sales are for temporary cash investment purposes. |
18
Health Care Fund
| I. | Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements. |
19
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Health Care Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that
directed the board’s focus to relevant information and topics.
The board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information
about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board
received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the
trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor
determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of
services
The board reviewed the quality of the
fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in
1928, is among the nation’s oldest and most respected institutional investment managers. The portfolio manager is aided by a team of experienced Global Industry Analysts who cover health care industries. This
health care team uses intensive fundamental analysis and deep knowledge of health care science and technology to identify companies with high-quality balance sheets, strong management, and the potential for new
products that will lead to above-average growth in revenue and earnings. The advisor invests in stocks broadly representing the health care industry, seeking to maintain exposure across five primary subsectors:
large-cap biotech/pharmaceuticals, mid-cap biotech/pharmaceuticals, small-cap biotech/pharmaceuticals, health care services, and medical technology. Wellington Management has advised the fund since its inception in
1984.
The board concluded that the
advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
20
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory
arrangement should continue.
Cost
The board concluded that the fund’s
expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average.
The board did not consider the
profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length
negotiations.
The benefit of economies of
scale
The board concluded that the fund’s
shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets
increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
21
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Health Care Fund's Program and for carrying out the specific
responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past
year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review Period”). The
Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
22
This page intentionally left blank.
Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2021
Vanguard Real
Estate Index Funds
| Vanguard Real Estate Index Fund |
| Vanguard Real Estate II Index Fund |
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.
1
| Six Months Ended July 31, 2021 | |||
| Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Real Estate Index Fund | |||
| Investor Shares | $1,000.00 | $1,266.60 | $1.46 |
| ETF Shares | 1,000.00 | 1,267.50 | 0.67 |
| AdmiralTM Shares | 1,000.00 | 1,267.70 | 0.67 |
| Institutional Shares | 1,000.00 | 1,267.50 | 0.56 |
| Real Estate II Index Fund | $1,000.00 | $1,268.10 | $0.45 |
| Based on Hypothetical 5% Yearly Return | |||
| Real Estate Index Fund | |||
| Investor Shares | $1,000.00 | $1,023.51 | $1.30 |
| ETF Shares | 1,000.00 | 1,024.20 | 0.60 |
| Admiral Shares | 1,000.00 | 1,024.20 | 0.60 |
| Institutional Shares | 1,000.00 | 1,024.30 | 0.50 |
| Real Estate II Index Fund | $1,000.00 | $1,024.40 | $0.40 |
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 Real Estate Index Fund, 0.26% for Investor Shares, 0.12% for ETF
Shares, 0.12% for Admiral Shares, and 0.10% for Institutional Shares; and for the Real Estate II Index Fund, 0.08%. 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 (181/365).
2
Real Estate Index Fund
Fund Allocation
As of July 31, 2021
| Diversified Real Estate Activities | 0.2% |
| Diversified REITs | 3.9 |
| Health Care REITs | 8.4 |
| Hotel & Resort REITs | 2.9 |
| Industrial REITs | 11.0 |
| Office REITs | 7.1 |
| Real Estate Development | 0.3 |
| Real Estate Operating Companies | 0.2 |
| Real Estate Services | 4.0 |
| Residential REITs | 14.9 |
| Retail REITs | 9.6 |
| Specialized REITs | 37.5 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if
applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in
derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
3
Real Estate Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Real Estate Index Fund
| Shares | Market Value• ($000) | |||||
| Temporary Cash Investments (0.5%) | ||||||
| Money Market Fund (0.5%) | ||||||
| 6,7 | Vanguard Market Liquidity Fund, 0.064% (Cost $372,969) | 3,730,140 | 373,013 | |||
| Total Investments (100.2%) (Cost $61,742,295) | 81,327,477 | |||||
| Other Assets and Liabilities—Net (-0.2%) | (167,955) | |||||
| Net Assets (100%) | 81,159,522 | |||||
| Cost is in $000. | |
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $157,112,000. |
| 2 | Security value determined using significant unobservable inputs. |
| 3 | “Other” represents securities that are not classified by the fund’s benchmark index. |
| 4 | Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group. |
| 5 | Represents a wholly owned subsidiary of the fund. See accompanying financial statements for Vanguard Real Estate II Index Fund's Schedule of Investments. |
| 6 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
| 7 | Collateral of $167,448,000 was received for securities on loan. |
| REIT—Real Estate Investment Trust. |
7
Real Estate Index Fund
Derivative Financial
Instruments Outstanding as of Period End
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination Date | Counterparty | Notional Amount ($000) | Floating Interest Rate Received (Paid)1 (%) | Value and Unrealized Appreciation ($000) | Value and Unrealized (Depreciation) ($000) |
| Crown Castle International Corp. | 1/31/22 | GSI | 50,543 | (0.139) | — | (2,272) |
| Digital Realty Trust Inc. | 1/31/22 | GSI | 39,273 | (0.139) | — | (734) |
| Equinix Inc. | 1/31/22 | GSI | 20,851 | (0.139) | — | (342) |
| Equity Residential | 1/31/22 | GSI | 24,966 | (0.139) | 272 | — |
| Redfin Corp. | 1/31/22 | GSI | 19,390 | (0.089) | 1,109 | — |
| Seritage Growth Properties Class A | 1/31/22 | GSI | 6,486 | (0.089) | — | (202) |
| Simon Property Group Inc. | 1/31/22 | GSI | 50,616 | (0.139) | 550 | — |
| 1,931 | (3,550) | |||||
| 1 | Based on 1M USD London Interbank Offered Rate (LIBOR) as of the most recent payment date. Floating interest payment received/paid monthly. |
| 1M—1-month. | |
| GSI—Goldman Sachs International. |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Real Estate Index Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $54,361,781) | 71,572,721 |
| Affiliated Issuers (Cost $372,969) | 373,013 |
| Vanguard Real Estate II Index Fund (Cost $7,007,545) | 9,381,743 |
| Total Investments in Securities | 81,327,477 |
| Investment in Vanguard | 2,339 |
| Cash | 8,339 |
| Cash Collateral Pledged—Over-the-Counter Swap Contracts | 3,380 |
| Receivables for Accrued Income | 33,806 |
| Receivables for Capital Shares Issued | 18,405 |
| Unrealized Appreciation—Over-the-Counter Swap Contracts | 1,931 |
| Total Assets | 81,395,677 |
| Liabilities | |
| Payables for Investment Securities Purchased | 39,670 |
| Collateral for Securities on Loan | 167,448 |
| Payables for Capital Shares Redeemed | 21,518 |
| Payables to Vanguard | 3,969 |
| Unrealized Depreciation—Over-the-Counter Swap Contracts | 3,550 |
| Total Liabilities | 236,155 |
| Net Assets | 81,159,522 |
9
Real Estate Index Fund
| Statement of Assets and Liabilities (continued) | |
| At July 31, 2021, net assets consisted of: | |
| ($000s, except shares and per-share amounts) | Amount |
| Paid-in Capital | 63,378,439 |
| Total Distributable Earnings (Loss) | 17,781,083 |
| Net Assets | 81,159,522 |
| Investor Shares—Net Assets | |
| Applicable to 6,051,720 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 213,767 |
| Net Asset Value Per Share—Investor Shares | $35.32 |
| ETF Shares—Net Assets | |
| Applicable to 412,146,444 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 43,816,072 |
| Net Asset Value Per Share—ETF Shares | $106.31 |
| Admiral Shares—Net Assets | |
| Applicable to 167,483,061 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 25,234,941 |
| Net Asset Value Per Share—Admiral Shares | $150.67 |
| Institutional Shares—Net Assets | |
| Applicable to 510,061,733 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 11,894,742 |
| Net Asset Value Per Share—Institutional Shares | $23.32 |
See accompanying Notes, which are an
integral part of the Financial Statements.
10
Real Estate Index Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends—Unaffiliated Issuers | 807,193 |
| Dividends—Vanguard Real Estate II Index Fund | 106,864 |
| Interest—Affiliated Issuers | 34 |
| Securities Lending—Net | 1,127 |
| Total Income | 915,218 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 1,325 |
| Management and Administrative—Investor Shares | 232 |
| Management and Administrative—ETF Shares | 20,016 |
| Management and Administrative—Admiral Shares | 11,880 |
| Management and Administrative—Institutional Shares | 4,739 |
| Marketing and Distribution—Investor Shares | 14 |
| Marketing and Distribution—ETF Shares | 711 |
| Marketing and Distribution—Admiral Shares | 540 |
| Marketing and Distribution—Institutional Shares | 136 |
| Custodian Fees | 103 |
| Shareholders’ Reports—Investor Shares | 1 |
| Shareholders’ Reports—ETF Shares | 587 |
| Shareholders’ Reports—Admiral Shares | 154 |
| Shareholders’ Reports—Institutional Shares | 45 |
| Trustees’ Fees and Expenses | 20 |
| Total Expenses | 40,503 |
| Net Investment Income | 874,715 |
| Realized Net Gain (Loss) | |
| Capital Gain Distributions Received—Unaffiliated Issuers | 28,694 |
| Capital Gain Distributions Received—Vanguard Real Estate II Index Fund | — |
| Investment Securities Sold—Unaffiliated Issuers1 | 743,283 |
| Investment Securities Sold—Affiliated Issuers1 | 30 |
| Investment Securities Sold—Vanguard Real Estate II Index Fund | — |
| Swap Contracts | 25,929 |
| Realized Net Gain (Loss) | 797,936 |
11
Real Estate Index Fund
| Statement of Operations (continued) | |
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Unaffiliated Issuers | 13,214,089 |
| Investment Securities—Affiliated Issuers | (31) |
| Investment Securities—Vanguard Real Estate II Index Fund | 1,877,266 |
| Swap Contracts | (1,619) |
| Change in Unrealized Appreciation (Depreciation) | 15,089,705 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 16,762,356 |
| 1 | Includes $1,014,170,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying Notes, which are an
integral part of the Financial Statements.
12
Real Estate Index Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 874,715 | 1,355,272 | |
| Realized Net Gain (Loss) | 797,936 | 1,060,800 | |
| Change in Unrealized Appreciation (Depreciation) | 15,089,705 | (7,797,964) | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 16,762,356 | (5,381,892) | |
| Distributions | |||
| Investor Shares | (2,460) | (4,393) | |
| ETF Shares | (502,309) | (714,428) | |
| Admiral Shares | (293,799) | (458,678) | |
| Institutional Shares | (140,314) | (213,294) | |
| Return of Capital | |||
| Investor Shares | — | (3,129) | |
| ETF Shares | — | (508,885) | |
| Admiral Shares | — | (326,715) | |
| Institutional Shares | — | (151,929) | |
| Total Distributions | (938,882) | (2,381,451) | |
| Capital Share Transactions | |||
| Investor Shares | (17,279) | (29,761) | |
| ETF Shares | 3,351,265 | (1,176,383) | |
| Admiral Shares | 538,926 | (1,182,290) | |
| Institutional Shares | 31,963 | 356,671 | |
| Net Increase (Decrease) from Capital Share Transactions | 3,904,875 | (2,031,763) | |
| Total Increase (Decrease) | 19,728,349 | (9,795,106) | |
| Net Assets | |||
| Beginning of Period | 61,431,173 | 71,226,279 | |
| End of Period | 81,159,522 | 61,431,173 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
13
Real Estate Index Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $28.23 | $31.21 | $27.69 | $26.40 | $27.38 | $25.59 |
| Investment Operations | ||||||
| Net Investment Income | .3741 | .5861 | .7191 | .7871 | .7611 | .746 |
| Net Realized and Unrealized Gain (Loss) on Investments | 7.111 | (2.498) | 3.801 | 1.639 | (.614) | 2.324 |
| Total from Investment Operations | 7.485 | (1.912) | 4.520 | 2.426 | .147 | 3.070 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.395) | (.624) | (.752) | (.851) | (.788) | (.752) |
| Distributions from Realized Capital Gains | — | — | — | — | (.011) | (.187) |
| Return of Capital | — | (.444) | (.248) | (.285) | (.328) | (.341) |
| Total Distributions | (.395) | (1.068) | (1.000) | (1.136) | (1.127) | (1.280) |
| Net Asset Value, End of Period | $35.32 | $28.23 | $31.21 | $27.69 | $26.40 | $27.38 |
| Total Return2 | 26.66% | -5.88% | 16.59% | 9.53% | 0.45% | 12.07% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $214 | $188 | $243 | $1,871 | $2,143 | $2,603 |
| Ratio of Total Expenses to Average Net Assets | 0.26% | 0.26% | 0.26% | 0.25% | 0.26% | 0.26% |
| Ratio of Net Investment Income to Average Net Assets | 2.35% | 2.18% | 2.48% | 3.02% | 2.87% | 2.60% |
| Portfolio Turnover Rate3 | 3% | 8% | 6% | 24% | 6% | 7% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
14
Real Estate Index Fund
Financial Highlights
| ETF Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $84.96 | $93.93 | $83.36 | $79.47 | $82.43 | $77.05 |
| Investment Operations | ||||||
| Net Investment Income | 1.1791 | 1.8891 | 2.3351 | 2.4871 | 2.4991 | 2.334 |
| Net Realized and Unrealized Gain (Loss) on Investments | 21.427 | (7.525) | 11.379 | 4.934 | (1.945) | 7.022 |
| Total from Investment Operations | 22.606 | (5.636) | 13.714 | 7.421 | .554 | 9.356 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.256) | (1.947) | (2.364) | (2.646) | (2.458) | (2.353) |
| Distributions from Realized Capital Gains | — | — | — | — | (.034) | (.563) |
| Return of Capital | — | (1.387) | (.780) | (.885) | (1.022) | (1.060) |
| Total Distributions | (1.256) | (3.334) | (3.144) | (3.531) | (3.514) | (3.976) |
| Net Asset Value, End of Period | $106.31 | $84.96 | $93.93 | $83.36 | $79.47 | $82.43 |
| Total Return | 26.75% | -5.80% | 16.70% | 9.70% | 0.59% | 12.25% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $43,816 | $32,064 | $37,682 | $30,857 | $32,377 | $33,527 |
| Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.12% | 0.12% | 0.12% |
| Ratio of Net Investment Income to Average Net Assets | 2.45% | 2.33% | 2.60% | 3.15% | 3.01% | 2.74% |
| Portfolio Turnover Rate2 | 3% | 8% | 6% | 24% | 6% | 7% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
15
Real Estate Index Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $120.40 | $133.12 | $118.14 | $112.63 | $116.83 | $109.19 |
| Investment Operations | ||||||
| Net Investment Income | 1.6631 | 2.6771 | 3.3151 | 3.5071 | 3.5381 | 3.306 |
| Net Realized and Unrealized Gain (Loss) on Investments | 30.385 | (10.672) | 16.121 | 7.008 | (2.761) | 9.966 |
| Total from Investment Operations | 32.048 | (7.995) | 19.436 | 10.515 | .777 | 13.272 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.778) | (2.759) | (3.350) | (3.751) | (3.483) | (3.333) |
| Distributions from Realized Capital Gains | — | — | — | — | (.048) | (.798) |
| Return of Capital | — | (1.966) | (1.106) | (1.254) | (1.447) | (1.501) |
| Total Distributions | (1.778) | (4.725) | (4.456) | (5.005) | (4.978) | (5.632) |
| Net Asset Value, End of Period | $150.67 | $120.40 | $133.12 | $118.14 | $112.63 | $116.83 |
| Total Return2 | 26.77% | -5.74% | 16.73% | 9.69% | 0.58% | 12.23% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $25,235 | $19,702 | $23,274 | $18,223 | $17,757 | $18,337 |
| Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.11% | 0.12% | 0.12% |
| Ratio of Net Investment Income to Average Net Assets | 2.44% | 2.33% | 2.60% | 3.16% | 3.01% | 2.74% |
| Portfolio Turnover Rate3 | 3% | 8% | 6% | 24% | 6% | 7% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
16
Real Estate Index Fund
Financial Highlights
| Institutional Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $18.64 | $20.60 | $18.28 | $17.43 | $18.08 | $16.90 |
| Investment Operations | ||||||
| Net Investment Income | .2591 | .4211 | .5181 | .5431 | .5681 | .515 |
| Net Realized and Unrealized Gain (Loss) on Investments | 4.698 | (1.646) | 2.496 | 1.085 | (.444) | 1.540 |
| Total from Investment Operations | 4.957 | (1.225) | 3.014 | 1.628 | .124 | 2.055 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.277) | (.429) | (.522) | (.583) | (.542) | (.519) |
| Distributions from Realized Capital Gains | — | — | — | — | (.007) | (.123) |
| Return of Capital | — | (.306) | (.172) | (.195) | (.225) | (.233) |
| Total Distributions | (.277) | (.735) | (.694) | (.778) | (.774) | (.875) |
| Net Asset Value, End of Period | $23.32 | $18.64 | $20.60 | $18.28 | $17.43 | $18.08 |
| Total Return | 26.75% | -5.68% | 16.77% | 9.70% | 0.60% | 12.23% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $11,895 | $9,478 | $10,027 | $8,206 | $8,176 | $7,799 |
| Ratio of Total Expenses to Average Net Assets | 0.10% | 0.10% | 0.10% | 0.09% | 0.10% | 0.10% |
| Ratio of Net Investment Income to Average Net Assets | 2.46% | 2.37% | 2.63% | 3.18% | 3.03% | 2.76% |
| Portfolio Turnover Rate2 | 3% | 8% | 6% | 24% | 6% | 7% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
17
Real Estate Index Fund
Notes to Financial Statements
Vanguard Real Estate Index
Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, ETF Shares, Admiral Shares, and Institutional
Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca; they can be purchased
and sold through a broker.
As a part of its principal
investment strategy, the fund attempts to replicate its benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through a wholly owned subsidiary—in the stocks
that make up the index. Vanguard Real Estate II Index Fund is the wholly owned subsidiary in which the fund has invested a portion of its assets. For additional financial information about the Real Estate II Index
Fund, refer to the accompanying financial statements.
Market disruptions associated
with the COVID-19 pandemic have had a global impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by
methods deemed by the board of trustees to represent fair value. Investments in affiliated Vanguard funds are valued at that fund's net asset value.
2. Swap Contracts: The
fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced
stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of
time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is
based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all
types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on
the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting
arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be
repledged, resold, or rehypothecated. In the event of a counterparty’s default (including
18
Real Estate Index Fund
bankruptcy), the fund may terminate any swap
contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under
the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund'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 securities pledged as collateral for open contracts are noted in
the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum
transfer amount, is adjusted and settled within two business days.
The notional amounts of swap
contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is
recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap,
at which time realized gain (loss) is recorded.
During the six months ended
July 31, 2021, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable
return of capital. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in
19
Real Estate Index Fund
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. Collateral investments in Vanguard Market Liquidity Fund are subject to market
appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternative rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions
received from investment securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports
annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of
capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Income, capital gain, and
return of capital distributions received from affiliated Vanguard funds are recorded on ex-dividend date. 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.
20
Real Estate Index Fund
Each class of shares has equal
rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and
shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on
investments are allocated to each class of shares based on its relative net assets.
| B. | 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $2,339,000, representing less than 0.01% of the fund’s
net assets and 0.94% of Vanguard’s capital received pursuant to the FSA. 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 and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund's investments and derivatives as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 80,953,896 | — | 568 | 80,954,464 |
| Temporary Cash Investments | 373,013 | — | — | 373,013 |
| Total | 81,326,909 | — | 568 | 81,327,477 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Swap Contracts | — | 1,931 | — | 1,931 |
| Liabilities | ||||
| Swap Contracts | — | 3,550 | — | 3,550 |
21
Real Estate Index Fund
| D. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 61,909,529 |
| Gross Unrealized Appreciation | 22,534,033 |
| Gross Unrealized Depreciation | (3,117,704) |
| Net Unrealized Appreciation (Depreciation) | 19,416,329 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2021, the fund had available capital losses totaling $2,472,556,000 that may be carried forward
indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2022; should the fund realize net
capital losses for the year, the losses will be added to the loss carryforward balance above.
| E. | During the six months ended July 31, 2021, the fund purchased $8,361,766,000 of investment securities and sold $4,572,194,000 of investment securities, other than temporary cash investments. Purchases and sales include $5,772,757,000 and $2,536,331,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares. |
| F. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 26,465 | 794 | 16,000 | 586 | |
| Issued in Lieu of Cash Distributions | 2,460 | 77 | 7,522 | 282 | |
| Redeemed | (46,204) | (1,468) | (53,283) | (2,013) | |
| Net Increase (Decrease)—Investor Shares | (17,279) | (597) | (29,761) | (1,145) | |
| ETF Shares | |||||
| Issued | 5,888,466 | 60,628 | 8,299,471 | 100,643 | |
| Issued in Lieu of Cash Distributions | — | — | — | — | |
| Redeemed | (2,537,201) | (25,900) | (9,475,854) | (124,400) | |
| Net Increase (Decrease)—ETF Shares | 3,351,265 | 34,728 | (1,176,383) | (23,757) | |
| Admiral Shares | |||||
| Issued | 2,100,630 | 15,314 | 3,229,939 | 28,465 | |
| Issued in Lieu of Cash Distributions | 257,944 | 1,879 | 688,666 | 6,053 | |
| Redeemed | (1,819,648) | (13,341) | (5,100,895) | (45,719) | |
| Net Increase (Decrease)—Admiral Shares | 538,926 | 3,852 | (1,182,290) | (11,201) | |
22
Real Estate Index Fund
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Institutional Shares | |||||
| Issued | 991,262 | 46,898 | 1,959,562 | 112,493 | |
| Issued in Lieu of Cash Distributions | 130,864 | 6,163 | 343,567 | 19,520 | |
| Redeemed | (1,090,163) | (51,579) | (1,946,458) | (110,090) | |
| Net Increase (Decrease)—Institutional Shares | 31,963 | 1,482 | 356,671 | 21,923 | |
| G. | Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows: |
| Current Period Transactions | ||||||||
| Jan. 31, 2021 Market Value ($000) | Purchases at Cost ($000) | Proceeds from Securities Sold ($000) | Realized Net Gain (Loss) ($000) | Change in Unrealized App. (Dep.) ($000) | Income ($000) | Capital Gain Distributions Received ($000) | Jul. 31, 2021 Market Value ($000) | |
| Vanguard Market Liquidity Fund | 353,714 | NA1 | NA1 | 30 | (31) | 34 | — | 373,013 |
| Vanguard Real Estate II Index Fund | 7,399,530 | 106,864 | — | — | 1,877,266 | 106,864 | — | 9,381,743 |
| Total | 7,753,244 | 106,864 | — | 30 | 1,877,235 | 106,898 | — | 9,754,756 |
| 1 | Not applicable—purchases and sales are for temporary cash investment purposes. |
| H. | Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements. |
23
Real Estate II Index Fund
Fund Allocation
As of July 31, 2021
| Diversified Real Estate Activities | 0.2% |
| Diversified REITs | 3.9 |
| Health Care REITs | 8.4 |
| Hotel & Resort REITs | 2.8 |
| Industrial REITs | 10.9 |
| Office REITs | 7.1 |
| Real Estate Development | 0.3 |
| Real Estate Operating Companies | 0.2 |
| Real Estate Services | 4.0 |
| Residential REITs | 14.9 |
| Retail REITs | 9.7 |
| Specialized REITs | 37.6 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if
applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in
derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
24
Real Estate II Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
25
Real Estate II Index Fund
Derivative Financial
Instruments Outstanding as of Period End
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination Date | Counterparty | Notional Amount ($000) | Floating Interest Rate Received (Paid)1 (%) | Value and Unrealized Appreciation ($000) | Value and Unrealized (Depreciation) ($000) |
| Americold Realty Trust | 1/31/22 | GSI | 9,840 | (0.089) | — | (128) |
| Park Hotels & Resorts Inc. | 1/31/22 | GSI | 7,532 | (0.089) | — | (132) |
| — | (260) | |||||
| 1 | Based on 1M USD London Interbank Offered Rate (LIBOR) as of the most recent payment date. Floating interest payment received/paid monthly. |
| 1M—1-month. | |
| GSI—Goldman Sachs International. |
See accompanying
Notes, which are an integral part of the Financial Statements.
28
Real Estate II Index Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $6,925,128) | 9,361,066 |
| Affiliated Issuers (Cost $33,004) | 33,006 |
| Total Investments in Securities | 9,394,072 |
| Investment in Vanguard | 307 |
| Cash | 450 |
| Receivables for Accrued Income | 4,421 |
| Total Assets | 9,399,250 |
| Liabilities | |
| Payables for Investment Securities Purchased | 450 |
| Collateral for Securities on Loan | 16,470 |
| Payables to Vanguard | 327 |
| Unrealized Depreciation—Over-the-Counter Swap Contracts | 260 |
| Total Liabilities | 17,507 |
| Net Assets | 9,381,743 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 7,009,289 |
| Total Distributable Earnings (Loss) | 2,372,454 |
| Net Assets | 9,381,743 |
| Net Assets | |
| Applicable to 365,543,416 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 9,381,743 |
| Net Asset Value Per Share | $25.67 |
See accompanying Notes, which are an
integral part of the Financial Statements.
29
Real Estate II Index Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 100,221 |
| Interest1 | 2 |
| Securities Lending—Net | 128 |
| Total Income | 100,351 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 503 |
| Management and Administrative | 2,850 |
| Marketing and Distribution | 21 |
| Custodian Fees | 21 |
| Shareholders’ Reports | — |
| Trustees’ Fees and Expenses | 2 |
| Total Expenses | 3,397 |
| Net Investment Income | 96,954 |
| Realized Net Gain (Loss) | |
| Capital Gain Distributions Received | 11,444 |
| Investment Securities Sold1 | (17,372) |
| Swap Contracts | 397 |
| Realized Net Gain (Loss) | (5,531) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | 1,891,050 |
| Swap Contracts | (260) |
| Change in Unrealized Appreciation (Depreciation) | 1,890,790 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,982,213 |
| 1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $2,000, $3,000, and ($3,000), respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an
integral part of the Financial Statements.
30
Real Estate II Index Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 96,954 | 165,977 | |
| Realized Net Gain (Loss) | (5,531) | (9,691) | |
| Change in Unrealized Appreciation (Depreciation) | 1,890,790 | (604,377) | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,982,213 | (448,091) | |
| Distributions | |||
| Net Investment Income | (106,864) | (163,444) | |
| Return of Capital | — | (119,057) | |
| Total Distributions | (106,864) | (282,501) | |
| Capital Share Transactions | |||
| Issued | — | — | |
| Issued in Lieu of Cash Distributions | 106,864 | 282,501 | |
| Redeemed | — | — | |
| Net Increase (Decrease) from Capital Share Transactions | 106,864 | 282,501 | |
| Total Increase (Decrease) | 1,982,213 | (448,091) | |
| Net Assets | |||
| Beginning of Period | 7,399,530 | 7,847,621 | |
| End of Period | 9,381,743 | 7,399,530 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
31
Real Estate II Index Fund
Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | September 26, 20171 to January 31, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $20.50 | $22.64 | $20.10 | $19.17 | $20.00 |
| Investment Operations | |||||
| Net Investment Income2 | .267 | .471 | .571 | .611 | .268 |
| Net Realized and Unrealized Gain (Loss) on Investments | 5.198 | (1.808) | 2.752 | 1.176 | (.834) |
| Total from Investment Operations | 5.465 | (1.337) | 3.323 | 1.787 | (.566) |
| Distributions | |||||
| Dividends from Net Investment Income | (.295) | (.465) | (.590) | (.626) | (.225) |
| Distributions from Realized Capital Gains | — | — | — | — | (.030) |
| Return of Capital | — | (.338) | (.193) | (.231) | (.009) |
| Total Distributions | (.295) | (.803) | (.783) | (.857) | (.264) |
| Net Asset Value, End of Period | $25.67 | $20.50 | $22.64 | $20.10 | $19.17 |
| Total Return | 26.81% | -5.70% | 16.78% | 9.68% | -2.89% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $9,382 | $7,400 | $7,848 | $6,719 | $6,126 |
| Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.08% | 0.08% | 0.08%3 |
| Ratio of Net Investment Income to Average Net Assets | 2.30% | 2.41% | 2.63% | 3.22% | 3.84%3 |
| Portfolio Turnover Rate | 2% | 4% | 3% | 23% | 1% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | Annualized. |
See accompanying
Notes, which are an integral part of the Financial Statements.
32
Real Estate II Index Fund
Notes to Financial Statements
Vanguard Real Estate II Index
Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund is a wholly owned subsidiary of Vanguard Real Estate Index Fund (“Real Estate Index
Fund”), and at July 31, 2021, the Real Estate Index Fund was the record and beneficial owner of 100% of the fund’s net assets. As part of the Real Estate Index Fund’s principal investment strategy,
it attempts to replicate the benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through the fund—in the stocks that make up the index.
Market disruptions associated
with the COVID-19 pandemic have had a global impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| 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.
2. Swap Contracts: The
fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced
stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of
time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is
based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all
types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on
the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting
arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be
repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either
party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions
whereby a counterparty may terminate open contracts if the fund's net assets decline below a certain level, triggering a payment by the fund if
33
Real Estate II Index Fund
the fund is in a net liability position at
the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of
collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled
within two business days.
The notional amounts of swap
contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is
recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap,
at which time realized gain (loss) is recorded.
During the six months ended
July 31, 2021, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable
return of capital. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities
34
Real Estate II Index Fund
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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternative rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions
received from investment securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports
annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of
capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Interest income includes income
distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on
the sale of investment securities are those of the specific securities sold.
| B. | 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 and are generally settled twice a month. |
35
Real Estate II Index Fund
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $307,000, representing less than 0.01% of the fund’s net
assets and 0.12% of Vanguard’s capital received pursuant to the FSA. 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 and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund's investments and derivatives as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 9,360,997 | — | 69 | 9,361,066 |
| Temporary Cash Investments | 33,006 | — | — | 33,006 |
| Total | 9,394,003 | — | 69 | 9,394,072 |
| Derivative Financial Instruments | ||||
| Liabilities | ||||
| Swap Contracts | — | 260 | — | 260 |
| D. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 6,975,609 |
| Gross Unrealized Appreciation | 2,879,939 |
| Gross Unrealized Depreciation | (461,736) |
| Net Unrealized Appreciation (Depreciation) | 2,418,203 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2021, the fund had available capital losses totaling $39,799,000 that may be carried forward indefinitely
to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2022; should the fund realize net capital losses for
the year, the losses will be added to the loss carryforward balance above.
36
Real Estate II Index Fund
| E. | During the six months ended July 31, 2021, the fund purchased $245,871,000 of investment securities and sold $148,409,000 of investment securities, other than temporary cash investments. |
| F. | Capital shares issued and redeemed were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| Shares (000) | Shares (000) | ||
| Issued | — | — | |
| Issued in Lieu of Cash Distributions | 4,598 | 14,371 | |
| Redeemed | — | — | |
| Net Increase (Decrease) in Shares Outstanding | 4,598 | 14,371 |
| G. | Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements. |
37
Trustees Approve Advisory Arrangements
The board of trustees of Vanguard Real Estate
Index Fund and the board of trustees of Vanguard Real Estate II Index Fund have renewed their respective fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index
Group. Each board determined that continuing the respective fund’s internalized management structure was in the best interests of the fund and its shareholders.
Each board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that
directed the board’s focus to relevant information and topics.
Each board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information
about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, each 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 of each board 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 either board approved its respective fund’s arrangement. Rather, it was the totality of the circumstances that drove each board’s decision.
Nature, extent, and quality of
services
The board of the Real Estate Index Fund
reviewed the quality of that fund’s investment management services over both the short and long term, while the board of the Real Estate II Index Fund reviewed the quality of that fund’s investment
management services since its inception in 2017; they each took into account the organizational depth and stability of the advisor. Each board considered that Vanguard has been managing investments for more than four
decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
Each board concluded that
Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement with its respective fund.
Investment performance
The board of the Real Estate Index Fund
considered the short- and long-term performance of that fund, including any periods of outperformance or underperformance compared with its target index and peer group, while the board of the Real Estate II Index Fund
considered the short-term and since-inception performance of that fund compared with its target index and peer group. Each board concluded that the performance of its respective fund was such that its advisory
arrangement should continue.
Cost
Each board concluded that the respective
fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the respective fund’s advisory expenses were also well below the peer-group average.
38
Neither board conducts a
profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of
scale
Each board concluded that its respective
fund’s arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
Each board will consider
whether to renew its respective advisory arrangement again after a one-year period.
39
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Real Estate Index Funds approved the appointment of liquidity risk management program administrators responsible for administering the Program for Vanguard Real Estate Index Fund and Vanguard Real Estate II
Index Fund, and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program's operation, its adequacy, and the
effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through
December 31, 2020 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the funds' liquidity risk.
40
Semiannual Report | July 31, 2021
Vanguard Dividend
Growth Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Liquidity Risk Management | 14 |
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.
1
| Six Months Ended July 31, 2021 | |||
| Dividend Growth Fund | Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period |
| Based on Actual Fund Return | $1,000.00 | $1,202.30 | $1.47 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.46 | 1.35 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.27%. The dollar amounts shown as “Expenses Paid” are equal to the
annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month
period (181/365).
2
Dividend Growth Fund
Fund Allocation
As of July 31, 2021
| Communication Services | 1.9% |
| Consumer Discretionary | 11.8 |
| Consumer Staples | 16.3 |
| Financials | 9.8 |
| Health Care | 21.1 |
| Industrials | 21.1 |
| Information Technology | 9.4 |
| Materials | 5.1 |
| Real Estate | 3.5 |
The table reflects the fund’s
investments, except for short-term investments. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which
includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
3
Dividend Growth Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Dividend Growth Fund
See
accompanying Notes, which are an integral part of the Financial Statements.
5
Dividend Growth Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $27,694,781) | 52,889,171 |
| Affiliated Issuers (Cost $26) | 26 |
| Total Investments in Securities | 52,889,197 |
| Investment in Vanguard | 1,750 |
| Cash | 25 |
| Receivables for Investment Securities Sold | 123,443 |
| Receivables for Accrued Income | 58,819 |
| Receivables for Capital Shares Issued | 15,329 |
| Total Assets | 53,088,563 |
| Liabilities | |
| Payables for Investment Securities Purchased | 100,160 |
| Payables to Investment Advisor | 17,234 |
| Payables for Capital Shares Redeemed | 15,087 |
| Payables to Vanguard | 3,226 |
| Total Liabilities | 135,707 |
| Net Assets | 52,952,856 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 26,442,090 |
| Total Distributable Earnings (Loss) | 26,510,766 |
| Net Assets | 52,952,856 |
| Net Assets | |
| Applicable to 1,402,140,810 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 52,952,856 |
| Net Asset Value Per Share | $37.77 |
See accompanying
Notes, which are an integral part of the Financial Statements.
6
Dividend Growth Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 465,844 |
| Interest2 | 51 |
| Securities Lending—Net | 14 |
| Total Income | 465,909 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 32,368 |
| Performance Adjustment | (1,269) |
| The Vanguard Group—Note C | |
| Management and Administrative | 32,252 |
| Marketing and Distribution | 1,905 |
| Custodian Fees | 98 |
| Shareholders’ Reports | 166 |
| Trustees’ Fees and Expenses | 33 |
| Total Expenses | 65,553 |
| Net Investment Income | 400,356 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 1,245,583 |
| Foreign Currencies | (398) |
| Realized Net Gain (Loss) | 1,245,185 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | 7,341,960 |
| Foreign Currencies | (28) |
| Change in Unrealized Appreciation (Depreciation) | 7,341,932 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 8,987,473 |
| 1 | Dividends are net of foreign withholding taxes of $1,616,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $0, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Dividend Growth Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 400,356 | 784,821 | |
| Realized Net Gain (Loss) | 1,245,185 | 878,816 | |
| Change in Unrealized Appreciation (Depreciation) | 7,341,932 | 1,268,012 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 8,987,473 | 2,931,649 | |
| Distributions | |||
| Total Distributions | (627,612) | (1,319,788) | |
| Capital Share Transactions | |||
| Issued | 2,646,115 | 8,038,783 | |
| Issued in Lieu of Cash Distributions | 553,734 | 1,167,534 | |
| Redeemed | (3,705,396) | (8,743,894) | |
| Net Increase (Decrease) from Capital Share Transactions | (505,547) | 462,423 | |
| Total Increase (Decrease) | 7,854,314 | 2,074,284 | |
| Net Assets | |||
| Beginning of Period | 45,098,542 | 43,024,258 | |
| End of Period | 52,952,856 | 45,098,542 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Dividend Growth Fund
Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $31.82 | $30.63 | $26.03 | $27.85 | $23.72 | $21.78 |
| Investment Operations | ||||||
| Net Investment Income | .2861 | .5571 | .5361 | .5201 | .5141 | .446 |
| Net Realized and Unrealized Gain (Loss) on Investments | 6.113 | 1.572 | 5.499 | (.178) | 4.985 | 2.165 |
| Total from Investment Operations | 6.399 | 2.129 | 6.035 | .342 | 5.499 | 2.611 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.270) | (.539) | (.525) | (.526) | (.509) | (.450) |
| Distributions from Realized Capital Gains | (.179) | (.400) | (.910) | (1.636) | (.860) | (.221) |
| Total Distributions | (.449) | (.939) | (1.435) | (2.162) | (1.369) | (.671) |
| Net Asset Value, End of Period | $37.77 | $31.82 | $30.63 | $26.03 | $27.85 | $23.72 |
| Total Return2 | 20.23% | 7.03% | 23.33% | 1.63% | 23.65% | 12.06% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $52,953 | $45,099 | $43,024 | $32,856 | $34,706 | $30,633 |
| Ratio of Total Expenses to Average Net Assets3 | 0.27% | 0.26% | 0.27% | 0.22% | 0.26% | 0.30% |
| Ratio of Net Investment Income to Average Net Assets | 1.63% | 1.85% | 1.82% | 1.93% | 2.00% | 1.93% |
| Portfolio Turnover Rate | 6% | 15% | 17% | 23% | 15% | 27% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 3 | Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.01%), 0.00%, (0.05%), (0.01%) and 0.03%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend Growth Fund
is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Market disruptions associated with the COVID-19 pandemic have had a global impact, and uncertainty exists as to
the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at
their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market-
or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the
fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund
are valued at that fund's net asset value.
Temporary cash investments are valued using
the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency:
Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the
valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the
effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or
liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Repurchase
Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements
mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and
principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into
master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any repurchase agreements
with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition
of collateral.
10
Dividend Growth Fund
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow
11
Dividend Growth Fund
money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and
investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific securities sold.
| B. | Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the NASDAQ US Dividend Achievers Select Index for the preceding three years. For the six months ended July 31, 2021, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets, before a net decrease of $1,269,000 (0.01%) based on performance. |
| C. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $1,750,000, representing less than 0.01% of the fund’s
net assets and 0.70% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| D. | Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
12
Dividend Growth Fund
The following table summarizes
the market value of the fund’s investments as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 51,058,109 | 1,369,362 | — | 52,427,471 |
| Temporary Cash Investments | 26 | 461,700 | — | 461,726 |
| Total | 51,058,135 | 1,831,062 | — | 52,889,197 |
| E. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 27,697,666 |
| Gross Unrealized Appreciation | 25,194,390 |
| Gross Unrealized Depreciation | (2,859) |
| Net Unrealized Appreciation (Depreciation) | 25,191,531 |
| F. | During the six months ended July 31, 2021, the fund purchased $3,065,733,000 of investment securities and sold $3,846,750,000 of investment securities, other than temporary cash investments. |
| G. | Capital shares issued and redeemed were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| Shares (000) | Shares (000) | ||
| Issued | 75,250 | 276,842 | |
| Issued in Lieu of Cash Distributions | 15,797 | 37,383 | |
| Redeemed | (106,392) | (301,167) | |
| Net Increase (Decrease) in Shares Outstanding | (15,345) | 13,058 |
| H. | In May 2021, the fund’s board of trustees approved the adoption of a new target benchmark index, S&P US Dividend Growers Index replacing NASDAQ U.S. Dividend Achievers Select Index, which was implemented in September 2021. |
Management has determined that
no other events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements.
13
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Growth Fund's Program and for carrying out the specific
responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past
year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review Period”). The
Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
14
This page intentionally left blank.
Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2021
Vanguard Dividend
Appreciation Index Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 19 |
Liquidity Risk Management | 21 |
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.
1
| Six Months Ended July 31, 2021 | |||
| Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Dividend Appreciation Index Fund | |||
| ETF Shares | $1,000.00 | $1,173.90 | $0.32 |
| Admiral™ Shares | 1,000.00 | 1,173.80 | 0.43 |
| Based on Hypothetical 5% Yearly Return | |||
| ETF Shares | $1,000.00 | $1,024.50 | $0.30 |
| Admiral Shares | 1,000.00 | 1,024.40 | 0.40 |
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 0.06% for ETF Shares and 0.08% for Admiral Shares. The dollar amounts shown as
“Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the
number of days in the most recent 12-month period (181/365).
2
Dividend Appreciation Index Fund
Fund Allocation
As of July 31, 2021
| Basic Materials | 3.0% |
| Consumer Discretionary | 16.8 |
| Consumer Staples | 10.0 |
| Financials | 13.7 |
| Health Care | 15.1 |
| Industrials | 21.9 |
| Technology | 13.6 |
| Telecommunications | 2.2 |
| Utilities | 3.7 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Industry Classification Benchmark (“ICB”), except for the “Other” category (if applicable),
which includes securities that have not been provided an ICB classification as of the effective reporting period.
The fund may invest in
derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Industry
Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept any liability to any person for any loss or damage arising out of any error or omission in the ICB.
3
Dividend Appreciation Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Dividend Appreciation Index Fund
5
Dividend Appreciation Index Fund
6
Dividend Appreciation Index Fund
Derivative Financial
Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number of Long (Short) Contracts | Notional Amount | Value and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | September 2021 | 617 | 135,416 | 2,876 |
| Over-the-Counter Total Return Swaps | ||||||
| Reference Entity | Termination Date | Counterparty | Notional Amount ($000) | Floating Interest Rate Received (Paid)1 (%) | Value and Unrealized Appreciation ($000) | Value and Unrealized (Depreciation) ($000) |
| Kroger Co. | 1/31/22 | GSI | 38,840 | (0.089) | 1,859 | — |
| Visa Inc. Class A | 8/31/21 | BOANA | 104,050 | (0.001) | 5,594 | — |
| 7,453 | — | |||||
| 1 | Based on 1M USD London Interbank Offered Rate (LIBOR) as of the most recent payment date. Floating interest payment received/paid monthly. |
| 1M—1-month. | |
| BOANA—Bank of America, N.A. | |
| GSI—Goldman Sachs International. |
At July 31, 2021, the
counterparties had deposited in segregated accounts securities with a value of $7,873,000 in connection with open over-the-counter swap contracts.
See accompanying
Notes, which are an integral part of the Financial Statements.
7
Dividend Appreciation Index Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $50,090,483) | 74,517,500 |
| Affiliated Issuers (Cost $187,816) | 187,815 |
| Total Investments in Securities | 74,705,315 |
| Investment in Vanguard | 2,458 |
| Cash | 587 |
| Cash Collateral Pledged—Futures Contracts | 7,180 |
| Receivables for Accrued Income | 81,139 |
| Receivables for Capital Shares Issued | 5,738 |
| Unrealized Appreciation—Over-the-Counter Swap Contracts | 7,453 |
| Total Assets | 74,809,870 |
| Liabilities | |
| Payables for Investment Securities Purchased | 9 |
| Payables for Capital Shares Redeemed | 6,857 |
| Payables to Vanguard | 2,057 |
| Variation Margin Payable—Futures Contracts | 727 |
| Total Liabilities | 9,650 |
| Net Assets | 74,800,220 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 46,273,174 |
| Total Distributable Earnings (Loss) | 28,527,046 |
| Net Assets | 74,800,220 |
| ETF Shares—Net Assets | |
| Applicable to 389,508,462 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 62,192,644 |
| Net Asset Value Per Share—ETF Shares | $159.67 |
| Admiral Shares—Net Assets | |
| Applicable to 290,960,370 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 12,607,576 |
| Net Asset Value Per Share—Admiral Shares | $43.33 |
See accompanying
Notes, which are an integral part of the Financial Statements.
8
Dividend Appreciation Index Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 630,975 |
| Interest1 | 61 |
| Securities Lending—Net | 713 |
| Total Income | 631,749 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 1,262 |
| Management and Administrative—ETF Shares | 14,858 |
| Management and Administrative—Admiral Shares | 4,116 |
| Marketing and Distribution—ETF Shares | 882 |
| Marketing and Distribution—Admiral Shares | 275 |
| Custodian Fees | 50 |
| Shareholders’ Reports—ETF Shares | 404 |
| Shareholders’ Reports—Admiral Shares | 50 |
| Trustees’ Fees and Expenses | 17 |
| Total Expenses | 21,914 |
| Net Investment Income | 609,835 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold1,2 | 5,977,023 |
| Futures Contracts | 9,553 |
| Swap Contracts | 12,474 |
| Realized Net Gain (Loss) | 5,999,050 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | 4,194,661 |
| Futures Contracts | 3,723 |
| Swap Contracts | 17,996 |
| Change in Unrealized Appreciation (Depreciation) | 4,216,380 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 10,825,265 |
| 1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $60,000, $39,000, and ($39,000), respectively. Purchases and sales are for temporary cash investment purposes. |
| 2 | Includes $6,070,498,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 609,835 | 1,011,553 | |
| Realized Net Gain (Loss) | 5,999,050 | 53,156 | |
| Change in Unrealized Appreciation (Depreciation) | 4,216,380 | 5,424,824 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 10,825,265 | 6,489,533 | |
| Distributions | |||
| ETF Shares | (454,931) | (843,074) | |
| Admiral Shares | (91,822) | (175,014) | |
| Total Distributions | (546,753) | (1,018,088) | |
| Capital Share Transactions | |||
| ETF Shares | 1,837,031 | 4,985,503 | |
| Admiral Shares | 158,005 | (101,929) | |
| Net Increase (Decrease) from Capital Share Transactions | 1,995,036 | 4,883,574 | |
| Total Increase (Decrease) | 12,273,548 | 10,355,019 | |
| Net Assets | |||
| Beginning of Period | 62,526,672 | 52,171,653 | |
| End of Period | 74,800,220 | 62,526,672 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Dividend Appreciation Index Fund
Financial Highlights
| ETF Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $137.11 | $125.38 | $104.09 | $107.10 | $86.66 | $75.98 |
| Investment Operations | ||||||
| Net Investment Income | 1.3201 | 2.2991 | 2.2141 | 2.0841 | 1.9511 | 1.810 |
| Net Realized and Unrealized Gain (Loss) on Investments | 22.428 | 11.728 | 21.210 | (3.056) | 20.408 | 10.696 |
| Total from Investment Operations | 23.748 | 14.027 | 23.424 | (.972) | 22.359 | 12.506 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.188) | (2.297) | (2.134) | (2.038) | (1.919) | (1.826) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (1.188) | (2.297) | (2.134) | (2.038) | (1.919) | (1.826) |
| Net Asset Value, End of Period | $159.67 | $137.11 | $125.38 | $104.09 | $107.10 | $86.66 |
| Total Return | 17.39% | 11.44% | 22.68% | -0.87% | 26.10% | 16.59% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $62,193 | $51,842 | $42,217 | $30,969 | $28,717 | $22,698 |
| Ratio of Total Expenses to Average Net Assets | 0.06% | 0.06% | 0.06% | 0.06% | 0.08% | 0.08% |
| Ratio of Net Investment Income to Average Net Assets | 1.75% | 1.84% | 1.90% | 2.01% | 2.06% | 2.20% |
| Portfolio Turnover Rate2 | 21% | 25% | 14% | 16% | 14% | 19% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
11
Dividend Appreciation Index Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $37.21 | $34.03 | $28.25 | $29.07 | $23.52 | $20.62 |
| Investment Operations | ||||||
| Net Investment Income | .3541 | .6171 | .5941 | .5601 | .5281 | .492 |
| Net Realized and Unrealized Gain (Loss) on Investments | 6.085 | 3.179 | 5.757 | (.830) | 5.542 | 2.903 |
| Total from Investment Operations | 6.439 | 3.796 | 6.351 | (.270) | 6.070 | 3.395 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.319) | (.616) | (.571) | (.550) | (.520) | (.495) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.319) | (.616) | (.571) | (.550) | (.520) | (.495) |
| Net Asset Value, End of Period | $43.33 | $37.21 | $34.03 | $28.25 | $29.07 | $23.52 |
| Total Return2 | 17.38% | 11.44% | 22.65% | -0.89% | 26.11% | 16.58% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $12,608 | $10,685 | $9,955 | $6,755 | $6,014 | $4,294 |
| Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.08% | 0.08% | 0.08% | 0.08% |
| Ratio of Net Investment Income to Average Net Assets | 1.73% | 1.82% | 1.87% | 1.99% | 2.06% | 2.20% |
| Portfolio Turnover Rate3 | 21% | 25% | 14% | 16% | 14% | 19% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying
Notes, which are an integral part of the Financial Statements.
12
Dividend Appreciation Index Fund
Notes to Financial Statements
Vanguard Dividend Appreciation
Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: ETF Shares and Admiral Shares. Each of the share classes has
different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca, Inc. they can be purchased and sold through a broker.
Market disruptions associated
with the COVID-19 pandemic have had a global impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are
valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value. Temporary cash investments are valued using the
latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Futures Contracts:
The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures
contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for
liquidity. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades
futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin
requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Any securities pledged as initial margin for open
contracts are noted in the Schedule of Investments.
Futures contracts are valued
at their quoted daily settlement prices. The 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
contracts.
During the six months ended
July 31, 2021, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end
during the period.
13
Dividend Appreciation Index Fund
3. Swap Contracts: The
fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced
stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of
time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is
based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all
types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on
the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting
arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be
repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either
party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions
whereby a counterparty may terminate open contracts if the fund’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 securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral
received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two
business days.
The notional amounts of swap
contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is
recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap,
at which time realized gain (loss) is recorded.
During the six months ended
July 31, 2021, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
14
Dividend Appreciation Index Fund
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. 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 Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
15
Dividend Appreciation Index Fund
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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 and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $2,458,000, representing less than 0.01% of the fund’s
net assets and 0.98% of Vanguard’s capital received pursuant to the FSA. 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 and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
16
Dividend Appreciation Index Fund
The following table summarizes
the market value of the fund’s investments and derivatives as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 74,517,500 | — | — | 74,517,500 |
| Temporary Cash Investments | 187,815 | — | — | 187,815 |
| Total | 74,705,315 | — | — | 74,705,315 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Futures Contracts1 | 2,876 | — | — | 2,876 |
| Swap Contracts | — | 7,453 | — | 7,453 |
| Total | 2,876 | 7,453 | — | 10,329 |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
| D. | As of July 31, 2021, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 50,304,316 |
| Gross Unrealized Appreciation | 24,589,463 |
| Gross Unrealized Depreciation | (185,588) |
| Net Unrealized Appreciation (Depreciation) | 24,403,875 |
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2021, the fund had available capital losses totaling $2,053,327,000 that may be carried forward
indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2022; should the fund realize net
capital losses for the year, the losses will be added to the loss carryforward balance above.
| E. | During the six months ended July 31, 2021, the fund purchased $30,284,807,000 of investment securities and sold $28,258,718,000 of investment securities, other than temporary cash investments. Purchases and sales include $14,558,735,000 and $13,678,795,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
17
Dividend Appreciation Index Fund
| F. | Capital share transactions for each class of shares were: |
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| ETF Shares | |||||
| Issued | 15,572,843 | 106,406 | 8,074,533 | 67,477 | |
| Issued in Lieu of Cash Distributions | — | — | — | — | |
| Redeemed | (13,735,812) | (95,000) | (3,089,030) | (26,075) | |
| Net Increase (Decrease)—ETF Shares | 1,837,031 | 11,406 | 4,985,503 | 41,402 | |
| Admiral Shares | |||||
| Issued | 1,071,289 | 26,442 | 2,460,287 | 73,984 | |
| Issued in Lieu of Cash Distributions | 78,576 | 1,968 | 150,122 | 4,627 | |
| Redeemed | (991,860) | (24,616) | (2,712,338) | (84,013) | |
| Net Increase (Decrease)—Admiral Shares | 158,005 | 3,794 | (101,929) | (5,402) | |
| G. | In May 2021, the fund’s board of trustees approved the adoption of a new target benchmark index, S&P US Dividend Growers Index replacing NASDAQ U.S. Dividend Achievers Select Index, which was implemented in September 2021. |
Management has determined that
no other events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements.
18
Trustees Approve Advisory Arrangement
The board of trustees of
Vanguard Dividend Appreciation Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. The board determined that continuing the
fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that
directed the board’s focus to relevant information and topics.
The board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information
about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board
received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the
trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor
determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of
services
The board reviewed the quality of the
fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing
investments for more than four decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that
Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with its target index and peer group. The board concluded that the performance was such that the advisory arrangement
should continue.
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 expenses were also well below the peer-group average.
19
The board does not conduct a
profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of
scale
The board concluded that the fund’s
arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
20
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Appreciation Index Fund's Program and for carrying out the
specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for
the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review
Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
21
This page intentionally left blank.
Connect with
Vanguard®>vanguard.com
Semiannual Report | July 31, 2021
Vanguard Global
ESG Select Stock Fund
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.
1
| Six Months Ended July 31, 2021 | |||
| Beginning Account Value 1/31/2021 | Ending Account Value 7/31/2021 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Global ESG Select Stock Fund | |||
| Investor Shares | $1,000.00 | $1,167.40 | $3.01 |
| AdmiralTM Shares | 1,000.00 | 1,168.00 | 2.47 |
| Based on Hypothetical 5% Yearly Return | |||
| Global ESG Select Stock Fund | |||
| Investor Shares | $1,000.00 | $1,022.02 | $2.81 |
| Admiral Shares | 1,000.00 | 1,022.51 | 2.31 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund's annualized six-month expense ratios for that period are 0.56% for Investor Shares and 0.46% 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 (181/365).
2
Global ESG Select Stock Fund
Fund Allocation
As of July 31, 2021
| United States | 46.9% |
| United Kingdom | 8.4 |
| Netherlands | 8.2 |
| France | 5.8 |
| Canada | 5.6 |
| Spain | 5.2 |
| Japan | 4.7 |
| Singapore | 3.5 |
| Hong Kong | 2.6 |
| Switzerland | 2.6 |
| Taiwan | 2.5 |
| Sweden | 1.9 |
| Brazil | 1.1 |
| Denmark | 1.0 |
The table reflects the fund's
investments, except for short-term investments.
3
Global ESG Select Stock Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2021
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Global ESG Select Stock Fund
| Shares | Market Value• ($000) | |||||
| Temporary Cash Investments (2.0%) | ||||||
| Money Market Fund (2.0%) | ||||||
| 1 | Vanguard Market Liquidity Fund, 0.064% (Cost $12,738) | 127,392 | 12,739 | |||
| Total Investments (100.2%) (Cost $538,336) | 633,093 | |||||
| Other Assets and Liabilities—Net (-0.2%) | (1,337) | |||||
| Net Assets (100%) | 631,756 | |||||
| Cost is in $000. | |
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
See accompanying
Notes, which are an integral part of the Financial Statements.
5
Global ESG Select Stock Fund
Statement of Assets and Liabilities
As of July 31, 2021
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $525,598) | 620,354 |
| Affiliated Issuers (Cost $12,738) | 12,739 |
| Total Investments in Securities | 633,093 |
| Investment in Vanguard | 20 |
| Foreign Currency, at Value (Cost $671) | 671 |
| Receivables for Investment Securities Sold | 1 |
| Receivables for Accrued Income | 1,015 |
| Receivables for Capital Shares Issued | 1,360 |
| Total Assets | 636,160 |
| Liabilities | |
| Payables for Investment Securities Purchased | 3,585 |
| Payables for Capital Shares Redeemed | 419 |
| Payables to Investment Advisor | 334 |
| Payables to Vanguard | 66 |
| Total Liabilities | 4,404 |
| Net Assets | 631,756 |
| At July 31, 2021, net assets consisted of: | |
| Paid-in Capital | 528,601 |
| Total Distributable Earnings (Loss) | 103,155 |
| Net Assets | 631,756 |
| Investor Shares—Net Assets | |
| Applicable to 4,852,848 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 148,248 |
| Net Asset Value Per Share—Investor Shares | $30.55 |
| Admiral Shares—Net Assets | |
| Applicable to 12,652,658 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 483,508 |
| Net Asset Value Per Share—Admiral Shares | $38.21 |
See accompanying Notes, which are an
integral part of the Financial Statements.
6
Global ESG Select Stock Fund
Statement of Operations
| Six Months Ended July 31, 2021 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 5,594 |
| Interest2 | 6 |
| Total Income | 5,600 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 553 |
| Performance Adjustment | 27 |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 194 |
| Management and Administrative—Admiral Shares | 409 |
| Marketing and Distribution—Investor Shares | 3 |
| Marketing and Distribution—Admiral Shares | 3 |
| Custodian Fees | 6 |
| Shareholders’ Reports—Investor Shares | 1 |
| Shareholders’ Reports—Admiral Shares | — |
| Trustees’ Fees and Expenses | — |
| Total Expenses | 1,196 |
| Net Investment Income | 4,404 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 4,072 |
| Foreign Currencies | 6 |
| Realized Net Gain (Loss) | 4,078 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | 59,656 |
| Foreign Currencies | (3) |
| Change in Unrealized Appreciation (Depreciation) | 59,653 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 68,135 |
| 1 | Dividends are net of foreign withholding taxes of $561,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $6,000, less than $1,000, and ($1,000), respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an
integral part of the Financial Statements.
7
Global ESG Select Stock Fund
Statement of Changes in Net Assets
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 4,404 | 2,818 | |
| Realized Net Gain (Loss) | 4,078 | 2,670 | |
| Change in Unrealized Appreciation (Depreciation) | 59,653 | 27,824 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 68,135 | 33,312 | |
| Distributions | |||
| Investor Shares | (635) | (677) | |
| Admiral Shares | (1,912) | (2,116) | |
| Total Distributions | (2,547) | (2,793) | |
| Capital Share Transactions | |||
| Investor Shares | 45,853 | 44,278 | |
| Admiral Shares | 187,467 | 150,594 | |
| Net Increase (Decrease) from Capital Share Transactions | 233,320 | 194,872 | |
| Total Increase (Decrease) | 298,908 | 225,391 | |
| Net Assets | |||
| Beginning of Period | 332,848 | 107,457 | |
| End of Period | 631,756 | 332,848 | |
See accompanying Notes, which are an
integral part of the Financial Statements.
8
Global ESG Select Stock Fund
Financial Highlights
| Investor Shares | |||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | May 21, 20191 to January 31, 2020 |
| 2021 | |||
| Net Asset Value, Beginning of Period | $26.32 | $22.34 | $20.00 |
| Investment Operations | |||
| Net Investment Income2 | .251 | .378 | .258 |
| Net Realized and Unrealized Gain (Loss) on Investments | 4.143 | 3.866 | 2.257 |
| Total from Investment Operations | 4.394 | 4.244 | 2.515 |
| Distributions | |||
| Dividends from Net Investment Income | (.031) | (.229) | (.167) |
| Distributions from Realized Capital Gains | (.133) | (.035) | (.008) |
| Total Distributions | (.164) | (.264) | (.175) |
| Net Asset Value, End of Period | $30.55 | $26.32 | $22.34 |
| Total Return3 | 16.74% | 19.06% | 12.57% |
| Ratios/Supplemental Data | |||
| Net Assets, End of Period (Millions) | $148 | $86 | $34 |
| Ratio of Total Expenses to Average Net Assets | 0.56%4 | 0.55%4 | 0.58%5,6 |
| Ratio of Net Investment Income to Average Net Assets | 1.57% | 1.62% | 1.81%5 |
| Portfolio Turnover Rate | 7% | 21% | 15% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||
| 1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $20.00. |
| 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 | Includes performance-based investment advisory fee increases (decreases) of 0.01% and 0.00%. |
| 5 | Annualized. |
| 6 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.55%. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Global ESG Select Stock Fund
Financial Highlights
| Admiral Shares | |||
| For a Share Outstanding Throughout Each Period | Six Months Ended July 31, 2021 | Year Ended January 31, | May 21, 20191 to January 31, 2020 |
| 2021 | |||
| Net Asset Value, Beginning of Period | $32.91 | $27.93 | $25.00 |
| Investment Operations | |||
| Net Investment Income2 | .332 | .504 | .338 |
| Net Realized and Unrealized Gain (Loss) on Investments | 5.181 | 4.830 | 2.823 |
| Total from Investment Operations | 5.513 | 5.334 | 3.161 |
| Distributions | |||
| Dividends from Net Investment Income | (.046) | (.310) | (.221) |
| Distributions from Realized Capital Gains | (.167) | (.044) | (.010) |
| Total Distributions | (.213) | (.354) | (.231) |
| Net Asset Value, End of Period | $38.21 | $32.91 | $27.93 |
| Total Return3 | 16.80% | 19.17% | 12.64% |
| Ratios/Supplemental Data | |||
| Net Assets, End of Period (Millions) | $484 | $247 | $74 |
| Ratio of Total Expenses to Average Net Assets | 0.46%4 | 0.45%4 | 0.48%5,6 |
| Ratio of Net Investment Income to Average Net Assets | 1.67% | 1.71% | 1.89%5 |
| Portfolio Turnover Rate | 7% | 21% | 15% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||
| 1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $25.00. |
| 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 | Includes performance-based investment advisory fee increases (decreases) of 0.01% and 0.00%. |
| 5 | Annualized. |
| 6 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.45%. |
See accompanying Notes, which are an
integral part of the Financial Statements.
10
Global ESG Select Stock Fund
Notes to Financial Statements
Vanguard Global ESG Select
Stock 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 Admiral Shares. Each of the share classes
has different eligibility and minimum purchase requirements, and is designed for different types of investors.
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. Market disruptions associated with the COVID-19 pandemic have had a global
impact, and uncertainty exists as to the long-term implications. Such disruptions can adversely affect assets of the fund and thus fund performance.
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. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
11
Global ESG Select Stock Fund
5. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes, subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed 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 either facility bear interest at a rate based upon the higher of the one-month London Interbank
Offered Rate (or an acceptable alternate rate, if necessary), federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread, except that borrowings under the uncommitted credit facility may
bear interest based upon an alternative rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July
31, 2021, the fund did not utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. 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.
B. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee of Wellington Management Company llp is subject to quarterly adjustments based on the performance relative to the FTSE All-World Index since July 31, 2019. For the six months ended July 31, 2021, the investment advisory fee
represented an effective annual basic rate of 0.23% of the fund’s average net assets, before a net increase of $27,000 (0.01%) based on performance.
12
Global ESG Select Stock Fund
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative,
marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of
trustees and are generally settled twice a month.
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2021, the fund had contributed to Vanguard capital in the amount of $20,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or
methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
The following table summarizes
the market value of the fund's investments as of July 31, 2021, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks—North and South America | 332,382 | — | — | 332,382 |
| Common Stocks—Other | — | 287,972 | — | 287,972 |
| Temporary Cash Investments | 12,739 | — | — | 12,739 |
| Total | 345,121 | 287,972 | — | 633,093 |
E. As of July 31, 2021, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 538,538 |
| Gross Unrealized Appreciation | 100,198 |
| Gross Unrealized Depreciation | (5,643) |
| Net Unrealized Appreciation (Depreciation) | 94,555 |
F. During the six months ended July 31, 2021, the fund purchased $270,183,000 of investment securities and sold $34,873,000 of investment securities, other than temporary cash
investments.
13
Global ESG Select Stock Fund
G. Capital share transactions for each class of shares were:
| Six Months Ended July 31, 2021 | Year Ended January 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 67,944 | 2,344 | 71,159 | 2,932 | |
| Issued in Lieu of Cash Distributions | 553 | 19 | 584 | 23 | |
| Redeemed | (22,644) | (777) | (27,465) | (1,188) | |
| Net Increase (Decrease)—Investor Shares | 45,853 | 1,586 | 44,278 | 1,767 | |
| Admiral Shares | |||||
| Issued | 228,454 | 6,267 | 196,240 | 6,502 | |
| Issued in Lieu of Cash Distributions | 1,655 | 47 | 1,807 | 56 | |
| Redeemed | (42,642) | (1,163) | (47,453) | (1,704) | |
| Net Increase (Decrease)—Admiral Shares | 187,467 | 5,151 | 150,594 | 4,854 | |
H. Management has determined that no events or transactions occurred subsequent to July 31, 2021, that would require recognition or disclosure in these financial statements.
14
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global ESG Select Stock Fund’s Program and for carrying out the
specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for
the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2020, through December 31, 2020 (the “Review
Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
15
Item 2: Code of Ethics.
Not applicable.
Item 3: Audit Committee Financial Expert.
Not applicable.
Item 4: Principal Accountant Fees and Services.
Not applicable.
Item 5: Audit Committee of Listed Registrants.
Not applicable.
Item 6: Investments.
Not applicable. The complete schedule of investments is included as part of the report to shareholders filed under Item 1 of this Form.
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. In 2021, a third-party service provider began performing certain administrative and accounting services for Vanguard Dividend Appreciation Index Fund. There were no other significant changes in the Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13: Exhibits.
| (a)(1) | Not applicable. |
| (a)(2) | Certifications filed herewith. |
| (b) | Certifications field herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VANGUARD SPECIALIZED FUNDS |
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER |
Date: September 22, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| VANGUARD SPECIALIZED FUNDS |
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER |
Date: September 22, 2021
| VANGUARD SPECIALIZED FUNDS |
| BY: | /s/ JOHN BENDL* | |
| JOHN BENDL | ||
| CHIEF FINANCIAL OFFICER |
Date: September 22, 2021
| * By: | /s/ Anne E. Robinson |
Anne E. Robinson, pursuant to a Power of Attorney filed on August 26, 2021 (see file Number 811-02652), Incorporated by Reference.