Vanguard
Variable Insurance Funds
Small
Company Growth Portfolio
April
28, 2023
Prospectus
This prospectus contains financial data for the Portfolio through the fiscal year ended December 31, 2022.
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
(Expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
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12b-1
Distribution Fee |
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Other
Expenses |
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Total Annual
Portfolio Operating Expenses |
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
1
2
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Total
Return |
Quarter |
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- |
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1
Year |
5
Years |
10
Years |
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Small
Company Growth Portfolio |
- |
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Russell
2500 Growth Index
(reflects no
deduction for fees, expenses, or taxes) |
- |
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Dow
Jones U.S. Total Stock Market Float Adjusted Index
(reflects no
deduction for fees, expenses, or taxes) |
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Investment
Advisors
ArrowMark Colorado
Holdings, LLC (ArrowMark Partners)
The Vanguard Group, Inc. (Vanguard)
The Vanguard Group, Inc. (Vanguard)
Portfolio
Managers
Chad Meade, Partner
and Portfolio Manager of ArrowMark Partners. He has co-managed a portion of the
Portfolio since 2016.
Brian Schaub, CFA,
Partner and Portfolio Manager of ArrowMark Partners. He has co-managed a portion
of the Portfolio since 2016.
Cesar Orosco, CFA,
Ph.D., Head of Alpha Equity Investments at Vanguard. He has co-managed a portion
of the Portfolio since 2021.
Tax
Information
The Portfolio
normally distributes its net investment income and net realized capital gains,
if any, to its shareholders, which are the insurance company separate accounts
that sponsor your variable annuity or variable life insurance contract. The tax
consequences to you of your investment in the Portfolio depend on the provisions
of the annuity or life insurance contract through which you invest. For more
information on taxes, please refer to the prospectus of the annuity or life
insurance contract through which Portfolio shares are offered.
Payments
to Financial Intermediaries
The Portfolio and
its investment advisors do not pay financial intermediaries for sales of
Portfolio shares.
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More
on the Portfolio
This prospectus
describes the principal risks you would face as an investor in this Portfolio.
It is important to keep in mind one of the main principles of investing:
generally, the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this
symbol throughout
the prospectus. It is used to mark detailed information about the more
significant risks that you would confront as a Portfolio investor. To highlight
terms and concepts important to mutual fund investors, we have provided Plain
Talk® explanations along
the way. Reading the prospectus will help you decide whether the Portfolio is
the right investment for you. We suggest that you keep this prospectus for
future reference.
symbol throughout
the prospectus. It is used to mark detailed information about the more
significant risks that you would confront as a Portfolio investor. To highlight
terms and concepts important to mutual fund investors, we have provided Plain
Talk® explanations along
the way. Reading the prospectus will help you decide whether the Portfolio is
the right investment for you. We suggest that you keep this prospectus for
future reference.A
Note About Vanguard Variable Insurance Funds
The Small Company
Growth Portfolio of Vanguard Variable Insurance Funds is a mutual fund used
solely as an investment option for annuity or life insurance contracts offered
by insurance companies. This means that you cannot purchase shares of the
Portfolio directly, but only through a contract offered by an insurance
company.
The Small Company
Growth Portfolio is separate from other Vanguard mutual funds, even when the
Portfolio and a fund have the same investment objective and advisor. The
Portfolio’s investment performance will differ from the performance of other
Vanguard funds because of differences in the securities held and because of
administrative and insurance costs associated with the annuity or life insurance
program through which you invest.
|
Plain
Talk About Costs of Investing |
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Costs
are an important consideration in choosing a mutual fund. That is
because
you, as a contract owner, pay a proportionate share of the costs of
operating
a fund and any transaction costs incurred when the fund buys or
sells
securities. These costs can erode a substantial portion of the gross
income
or the capital appreciation a fund achieves. Even seemingly small
differences
in expenses can, over time, have a dramatic effect on a
fund’s
performance. |
The following
sections explain the principal investment strategies and policies that the
Portfolio uses in pursuit of its investment objective. The board of trustees of
Vanguard Variable Insurance Funds (the Board), which oversees the Portfolio's
management, may change investment strategies or policies in the
5
interest of
shareholders without a shareholder vote, unless those strategies or policies are
designated as fundamental. The Portfolio may change its 80% policy only upon 60
days' notice to shareholders.
Market
Exposure
The Portfolio’s investment in small
company stocks generally will be within the capitalization range of the
companies included in the Russell 2500 Growth Index ($6 million to $20 billion,
as of December 31, 2022). In the future, the Index’s market capitalization range
may be higher or lower, and the Portfolio may use a different small-cap index as
a benchmark. Such changes may occur at any time and without notice to Portfolio
shareholders. The Portfolio’s stocks are expected to provide little or no
dividend income.
The
Portfolio is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices.
Stocks of publicly traded companies
are often classified according to market capitalization, which is the market
value of a company’s outstanding shares. These classifications typically include
small-cap, mid-cap, and large-cap. It is important to understand that there are
no “official” definitions of small-, mid-, and large-cap, even among Vanguard
fund advisors, and that market capitalization ranges can change over time. The
asset-weighted median market capitalization of the Portfolio's stock holdings as
of December 31, 2022, was $4 billion.
Stock funds can
also be categorized according to whether the stocks they hold are value or
growth stocks or a blend of both. The Small Company Growth Portfolio generally
fits into the small-cap growth category.
The
Portfolio is subject to investment style risk, which is the chance that returns
from small-capitalization growth stocks will trail returns from the overall
stock market. Historically, small-cap stocks have been more volatile in price
than the large-cap stocks that dominate the overall market, and they often
perform quite differently. The stock prices of small companies tend to
experience greater volatility because, among other things, these companies tend
to be more sensitive to changing economic conditions.
Small-cap stocks in
particular tend to be more volatile in price. This volatility is the result of
several factors, which may include (but are not limited to) less certain growth
and dividend prospects for smaller companies, fewer financial reserves during
adverse market conditions, less access to capital funding, and generally greater
sensitivity to changes within the company.
6
|
Plain
Talk About Growth Funds and Value Funds |
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Growth
investing and value investing are two styles employed by stock-fund
managers.
Growth funds generally invest in stocks of companies believed to
have
above-average potential for growth in revenue, earnings, cash flow, or
other
similar criteria. These stocks typically have low dividend yields, if any,
and
above-average prices in relation to measures such as earnings and book
value.
Value funds typically invest in stocks whose prices are below average
in
relation to those measures; these stocks often have above-average
dividend
yields. Value stocks also may remain undervalued by the market for
long
periods of time. Growth and value stocks have historically produced
similar
long-term returns, though each category has periods when it
outperforms
the other. |
Market disruptions
can adversely affect local and global markets as well as normal market
conditions and operations. Any such disruptions could have an adverse impact on
the value of the Portfolio's investments and Portfolio performance.
Security
Selection
The Portfolio uses
multiple investment advisors. Each advisor independently selects and maintains a
portfolio of common stocks for the Portfolio. Each advisor employs active
investment management methods, which means that securities are bought and sold
according to the advisor’s evaluations of companies and their financial
prospects, the prices of the securities, and the stock market and the economy in
general. Each advisor will sell a security when, in the view of the advisor, it
is no longer as attractive as an alternative investment or if the advisor deems
it to be in the best interest of the Portfolio. Different advisors may reach
different conclusions on the same security. Each advisor uses a different
process to select securities for its portion of the Portfolio’s assets; however,
each is committed to buying stocks of small companies that, in the advisor’s
opinion, have strong growth potential.
ArrowMark
Partners uses in-depth,
fundamental research to uncover companies that, in its opinion, can control
their own economic destiny. The advisor starts by identifying businesses with
strong competitive advantages in industries with high barriers to entry.
ArrowMark Partners then narrows its focus to companies with large potential
markets and high-quality business models focused on the future. Finally, the
advisor minimizes potential downside risk, resulting in a
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diversified
portfolio of stable growth companies, cyclical share gainers, and to a lesser
extent, game-changing growth businesses that it believes will deliver returns
beyond those of the benchmark index over time.
Vanguard constructs a
broadly diversified portfolio of small-cap domestic growth stocks based on its
assessment of the relative return potential of the securities. Vanguard selects
securities of companies that it believes offer an appropriate balance between
strong growth prospects and reasonable valuations relative to their industry
peers. Vanguard manages the portfolio through the use of a quantitative process
to evaluate all of the securities in the Portfolio’s benchmark, the Russell 2500
Growth Index, while seeking to maintain a risk profile similar to that of the
Index. This process was developed and is managed by Vanguard’s Quantitative
Equity Group and is reviewed and enhanced on an ongoing basis. All potential
enhancements to the process go through rigorous peer vetting and validation
before being implemented.
The Portfolio
is subject to manager risk, which is the chance that poor security selection
will cause the Portfolio to underperform relevant benchmarks or other funds with
a similar investment objective. In addition, significant investments in the
health care,
industrials,
and information technology sectors subject the Portfolio to proportionately
higher exposure to the risks of these sectors.
The ability of an advisor to
purchase or dispose of certain Portfolio investments is or may be restricted or
impaired because of limitations imposed by law, regulation, or by certain
regulators or issuers. As a result, an advisor may be required to limit
purchases or sell existing investments. If the Portfolio is required to limit
its investment in a particular issuer, then the Portfolio may seek to obtain
regulatory relief or ownership waivers. Other options the Portfolio may pursue
include seeking to obtain economic exposure to that issuer through alternative
means, such as through a derivative or through investment in a wholly owned
subsidiary, both of which may be more costly than owning securities of the
issuer directly. Ownership restrictions and limitations could result in
unanticipated tax consequences to the Portfolio that may affect the amount,
timing, and character of distributions to shareholders. See Other
Investment Policies and Risks for further information related
to derivatives.
Other Investment
Policies and Risks
In addition to
investing in common stocks of small companies with growth potential, the
Portfolio may make other kinds of investments to achieve its investment
objective.
8
Although the
Portfolio typically does not make significant investments in foreign securities,
it reserves the right to invest up to 25% of its assets in foreign securities,
which may include depositary receipts. Foreign securities may be traded on U.S.
or foreign markets. To the extent that it owns foreign securities, the Portfolio
is subject to country risk and currency risk. Country
risk
is the chance that world events—such as political upheaval, financial troubles,
or natural disasters—will adversely affect the value of securities issued by
companies in foreign countries. In addition, the prices of foreign stocks and
the prices of U.S. stocks have, at times, moved in opposite
directions.
Currency risk
is the
chance that the value of a foreign investment, measured in U.S. dollars, will
decrease because of unfavorable changes in currency exchange rates.
The Portfolio may invest, to a
limited extent, in derivatives. Generally speaking, a derivative is a financial
contract whose value is based on the value of a financial asset (such as a
stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), a
market index, or a reference rate. Investments in derivatives may subject the
Portfolio to risks different from, and possibly greater than, those of
investments directly in the underlying securities or assets. The Portfolio may
use derivatives such as total return swaps to obtain exposure to a stock, a
basket of stocks, or an index. The Portfolio will not use derivatives for
speculation or for the purpose of leveraging (magnifying) investment
returns.
The Portfolio may
enter into foreign currency exchange forward contracts, which are a type of
derivative. A foreign currency exchange forward contract is an agreement to buy
or sell a currency at a specific price on a specific date, usually 30, 60, or 90
days in the future. In other words, the contract guarantees an exchange rate on
a given date. Advisors of portfolios that invest in foreign securities can use
these contracts to guard against unfavorable changes in currency exchange rates.
These contracts, however, would not prevent the Portfolio's securities from
falling in value as a result of risks other than unfavorable currency exchange
movements.
The Portfolio may
invest a small portion of its assets in equity futures, which are a type of
derivative, and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock funds. These equity futures and ETFs typically provide
returns similar to those of common stocks. The Portfolio may purchase futures or
ETFs when doing so will reduce the Portfolio’s transaction costs or have the
potential to add value because the instruments are favorably priced. Vanguard
receives no additional revenue from Portfolio assets invested in ETF Shares of
other Vanguard funds. Portfolio assets invested in ETF Shares are excluded when
allocating to the Portfolio its share of the costs of Vanguard
operations.
9
Cash
Management
The Portfolio's
daily cash balance may be invested in Vanguard Market Liquidity Fund and/or
Vanguard Municipal Cash Management Fund (each, a CMT Fund), which are low-cost
money market funds. When investing in a CMT Fund, the Portfolio bears its
proportionate share of the expenses of the CMT Fund in which it invests.
Vanguard receives no additional revenue from Portfolio assets invested in a CMT
Fund.
Temporary
Investment Measures
The Portfolio may
temporarily depart from its normal investment policies and strategies when an
advisor believes that doing so is in the Portfolio's best interest, so long as
the strategy or policy employed is consistent with the Portfolio's investment
objective. For instance, the Portfolio may invest beyond its normal limits in
derivatives or exchange-traded funds that are consistent with the Portfolio's
investment objective when those instruments are more favorably priced or provide
needed liquidity, as might be the case if the Portfolio is transitioning assets
from one advisor to another or receives large cash flows that it cannot
prudently invest immediately.
In addition, the
Portfolio may take temporary defensive positions that are inconsistent with its
normal investment policies and strategies—for instance, by allocating
substantial assets to cash equivalent investments or other less volatile
instruments—in response to adverse or unusual market, economic, political, or
other conditions. In doing so, the Portfolio may succeed in avoiding losses but
may otherwise fail to achieve its investment objective.
Frequent
Trading or Market-Timing
Background.
Some
investors try to profit from strategies involving frequent trading of mutual
fund shares, such as market-timing. For funds holding foreign securities,
investors may try to take advantage of an anticipated difference between the
price of the fund’s shares and price movements in overseas markets, a practice
also known as time-zone arbitrage. Investors also may try to engage in frequent
trading of funds holding investments such as small-cap stocks and high-yield
bonds. As money is shifted into and out of a fund by an investor engaging in
frequent trading, the fund incurs costs for buying and selling securities,
resulting in increased brokerage and administrative costs. These costs are borne
by all fund investors,
including the long-term investors who do not generate the costs. In addition,
frequent trading may interfere with an advisor’s ability to efficiently manage
the fund.
Policies
to address frequent trading. The Vanguard funds
(other than money market funds and short-term bond funds, but including Vanguard
Short-Term Inflation-Protected Securities Index Fund) do not knowingly
accommodate
10
frequent trading.
The board of trustees of each Vanguard fund (other than money market funds and
short-term bond funds, but including Vanguard Short-Term Inflation-Protected
Securities Index Fund) has adopted policies and procedures reasonably designed
to detect and discourage frequent trading and, in some cases, to compensate the
fund for the costs associated with it. These policies and procedures do not
apply to ETF Shares because frequent trading in ETF Shares generally does not
disrupt portfolio management or otherwise harm fund investors. Although there is
no assurance that Vanguard will be able to detect or prevent frequent trading or
market-timing in all circumstances, the following policies have been adopted to
address these issues:
• Each Vanguard
fund reserves the right to reject any purchase request—including exchanges from
other Vanguard funds—without notice and regardless of size. For example, a
purchase request could be rejected because the investor has a history of
frequent trading or if Vanguard determines that such purchase may negatively
affect a fund’s operation or performance.
• Certain Vanguard
funds charge investors purchase and/or redemption fees on
transactions.
You may purchase or
sell Portfolio shares through a contract offered by an insurance company. When
insurance companies establish omnibus accounts in the Portfolio for their
clients, we cannot monitor the individual clients’ trading activity. However, we
review trading activity at the omnibus account level, and we look for activity
that may indicate potential frequent trading or market-timing. If we detect
suspicious trading activity, we will seek the assistance of the insurance
company to investigate that trading activity and take appropriate action,
including prohibiting additional purchases of Portfolio shares by a client.
Insurance companies may apply frequent-trading policies that differ from one
another. Please read the insurance company contract and program materials
carefully to learn of any rules or fees that may apply.
See
the accompanying prospectus for the annuity or insurance program through which
Portfolio shares are offered for further details on transaction
policies.
The Portfolio, in
determining its net asset value, will use fair-value pricing when appropriate,
as described in the Share
Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
Do
not invest with Vanguard if you are a market-timer.
A precautionary
note to investment companies: The Portfolio's shares are issued
by a registered investment company, and therefore the acquisition of such shares
by other investment companies and private funds is subject to the
11
restrictions of Section 12(d)(1) of
the Investment Company Act of 1940 (the 1940 Act). SEC Rule 12d1-4 under the
1940 Act permits registered investment companies to invest in other registered
investment companies beyond the limits in Section 12(d)(1), subject to certain
conditions, including that funds with different investment advisors must enter
into a fund of funds investment agreement.
Turnover
Rate
A mutual fund’s
turnover rate is a measure of its trading activity. The Portfolio may sell
securities regardless of how long they have been held. The historical turnover
rates for the Portfolio can be found in the Financial
Highlights section of this
prospectus. A turnover rate of 100%, for example, would mean that the Portfolio
had sold and replaced securities valued at 100% of its net assets within a
one-year period. In general, the greater the turnover rate, the greater the
impact transaction costs will have on a fund’s return. Also, funds with high
turnover rates may be more likely to generate capital gains, including
short-term capital gains, that must be distributed to shareholders and will be
taxable to shareholders investing through a taxable account.
The
Portfolio and Vanguard
The Portfolio is a
member of The Vanguard Group, Inc. (Vanguard), a family of over 200 funds. All
of the funds that are members of Vanguard (other than funds of funds) share in
the expenses associated with administrative services and business operations,
such as personnel, office space, and equipment.
Vanguard Marketing
Corporation provides marketing services to the funds. Although fund shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund (other than a
fund of funds) or each share class of a fund (in the case of a fund with
multiple share classes) pays its allocated share of the Vanguard funds’
marketing costs.
|
Plain
Talk About Vanguard’s Unique Corporate Structure |
|
Vanguard
is owned jointly by the funds it oversees and thus indirectly by the
shareholders
in those funds. Most other mutual funds are operated by
management
companies that are owned by third parties—either public or
private
stockholders—and not by the funds they
serve. |
12
Investment
Advisors
The Portfolio uses
a multimanager approach. Each advisor independently manages its assigned portion
of the Portfolio’s assets subject to the supervision and oversight of Vanguard
and the Board. The Board designates the proportion of Portfolio assets to be
managed by each advisor and may change these proportions at any
time.
• ArrowMark Colorado Holdings, LLC,
100 Fillmore Street, Suite 325, Denver, CO 80206, is an investment advisory firm
founded in 2007. As of December 31, 2022, ArrowMark Partners managed
approximately $21.2 billion in assets.
• The Vanguard Group, Inc., P.O.
Box 2600, Valley Forge, PA 19482, which began operations in 1975, provides
investment advisory services to the Portfolio through its Quantitative Equity
Group. As of December 31, 2022, Vanguard served as advisor for approximately $6
trillion in assets.
The Portfolio pays
ArrowMark Partners a base fee plus or minus a performance adjustment. The base
fee, which is paid quarterly, is a percentage of average daily net assets
managed by the advisor during the most recent fiscal quarter. The performance
adjustment, also paid quarterly, is based on the cumulative total return of the
advisor’s portion of the Portfolio relative to that of the Russell 2500 Growth
Index over the preceding 60-month period. When the performance adjustment is
positive, the Portfolio’s expenses increase; when it is negative, expenses
decrease.
Vanguard provides
investment advisory services to the Portfolio pursuant to the Funds’ Service
Agreement and subject to the supervision and oversight of the trustees and
officers of Vanguard Variable Insurance Funds.
For the fiscal year ended December
31, 2022, the aggregate advisory fees and expenses represented an effective
annual rate of 0.12% of the Portfolio’s average net assets before a
performance-based decrease of 0.02%.
Under the terms of
an SEC exemption, the board of trustees of Vanguard Variable Insurance Funds
may, without prior approval from shareholders, change the terms of an advisory
agreement with a third-party investment advisor or hire a new third-party
investment advisor—either as a replacement for an existing advisor or as an
additional advisor. Any significant change in the Portfolio’s advisory
arrangements will be communicated to shareholders in writing. As the Portfolio’s
sponsor and overall manager, Vanguard may provide investment advisory services
to the Portfolio at any time. Vanguard may also recommend to the board of
trustees that an advisor be hired, terminated, or replaced or that the
13
terms of an
existing advisory agreement be revised. Vanguard Variable Insurance Funds has
filed an application seeking a similar SEC exemption with respect to investment
advisors that are wholly owned subsidiaries of Vanguard. If the exemption is
granted, the Portfolio may rely on the new SEC relief.
For a discussion of
why the Board approved the Portfolio's investment advisory arrangements, see the
most recent semiannual report to shareholders covering the fiscal period ended
June 30.
The managers
primarily responsible for the day-to-day management of the Portfolio
are:
Chad
Meade,
Partner and Portfolio Manager of ArrowMark Partners. He has worked in investment
management since 1998, has managed investment portfolios since 2006, has been
with ArrowMark Partners since 2013, and has co-managed a portion of the
Portfolio since 2016. Education: B.S., Virginia Tech.
Brian
Schaub, CFA, Partner and
Portfolio Manager of ArrowMark Partners. He has worked in investment management
since 2000, has managed investment portfolios since 2006, has been with
ArrowMark Partners since 2013, and has co-managed a portion of the Portfolio
since 2016. Education: B.A., Williams College.
Cesar
Orosco, CFA, Ph.D., Head
of Alpha Equity Investments at Vanguard. He has been with Vanguard since 2020,
has worked in investment management since 2004, has managed investment
portfolios since 2004, and has co-managed a portion of the Portfolio since 2021.
Education: B.S., Universidad de Lima; Ph.D., University of
Pennsylvania.
The Portfolio's
Statement
of Additional Information provides
information about each portfolio manager’s compensation, other accounts under
management, and ownership of shares of the Portfolio.
Taxes
The Portfolio
normally distributes its net investment income and net realized short-term or
long-term capital gains, if any, to its shareholders, which are the insurance
company separate accounts that fund your variable annuity or variable life
insurance contract. From time to time, the Portfolio may also make distributions
that are treated as a return of capital. The tax consequences to you
14
of your investment
in the Portfolio depend on the provisions of the annuity or life insurance
contract through which you invest; please refer to the prospectus of such
contract for more information.
The Portfolio
intends to operate in such a manner that a separate account investing only in
Portfolio shares will result in the variable annuity and variable life insurance
contracts supported by that account receiving favorable tax treatment. This
favorable treatment means that you generally will not be taxed on Portfolio
distributions or proceeds on dispositions of Portfolio shares received by the
separate account funding your contract. In order to qualify for this favorable
treatment, the insurance company separate accounts that invest in the Portfolio
must satisfy certain requirements. If a Portfolio funding your contract does not
meet such requirements, your contract could lose its favorable tax treatment and
income and gain allocable to your contract could be taxable to you. Also, if the
IRS were to determine that contract holders have an impermissible level of
control over the investments funding their contracts, your contract could lose
its favorable tax treatment and income and gain allocable to your contract could
be taxable currently to you. Please see the Portfolio’s Statement
of Additional Information for more
information.
Share
Price
Share price, also
known as net
asset value (NAV), is
calculated as of the close of regular trading on the New York Stock Exchange
(NYSE), generally 4 p.m., Eastern time, on each day that the NYSE is open for
business (a business day). In the rare event the NYSE experiences unanticipated
disruptions and is unavailable at the close of the trading day, NAVs will be
calculated as of the close of regular trading on the Nasdaq (or another
alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s
discretion), generally 4 p.m., Eastern time. The NAV per share is computed by
dividing the total assets, minus liabilities, of the Portfolio by the number of
Portfolio shares outstanding. On U.S. holidays or other days when the NYSE is
closed, the NAV is not calculated, and the Portfolio does not sell or redeem
shares. However, on those days the value of the Portfolio’s assets may be
affected to the extent that the Portfolio holds securities that change in value
on those days (such as foreign securities that trade on foreign markets that are
open).
Stocks held by a
Vanguard portfolio are valued at their market
value
when reliable market quotations are readily available from the principal
exchange or market on which they are traded. Such securities are generally
valued at their official closing price, the last reported sales price, or if
there were no sales that day, the mean
15
between the closing
bid and asking prices. When a portfolio determines that pricing-service
information or market quotations either are not readily available or do not
accurately reflect the value of a security, the security is priced at its
fair
value
(the amount that the owner might reasonably expect to receive upon the current
sale of the security).
The values of any
foreign securities held by a portfolio are converted into U.S. dollars using an
exchange rate obtained from an independent third party as of the close of
regular trading on the NYSE. The values of any mutual fund shares, including
institutional money market fund shares, held by a portfolio are based on the
NAVs of the shares. The values of any ETF shares or closed-end fund shares held
by a portfolio are based on the market value of the shares.
A portfolio also will use
fair-value pricing if the value of a security it holds has been materially
affected by events occurring before the portfolio's pricing time but after the
close of the principal exchange or market on which the security is traded. This
most commonly occurs with foreign securities, which may trade on foreign
exchanges that close many hours before the portfolio's pricing time. Intervening
events might be company-specific (e.g., earnings report, merger announcement) or
country-specific or regional/global (e.g., natural disaster, economic or
political news, interest rate change, act of terrorism). Intervening events
include price movements in U.S. markets that exceed a specified threshold or
that are otherwise deemed to affect the value of foreign securities.
Fair-value pricing
may be used for domestic securities—for example, if (1) trading in a security is
halted and does not resume before the portfolio's pricing time or a security
does not trade in the course of a day and (2) the portfolio holds enough of the
security that its price could affect the portfolio's NAV.
Fair-value prices
are determined by Vanguard according to procedures adopted by the board of
trustees. When fair-value pricing is employed, the prices of securities used by
a portfolio to calculate the NAV may differ from quoted or published prices for
the same securities.
The Portfolio has authorized
certain financial intermediaries and their designees, and may, from time to
time, authorize certain fund of funds for which Vanguard serves as the
investment advisor (Vanguard Funds of Funds), to accept orders to buy or sell
fund shares on its behalf. The Portfolio will be deemed to receive an order when
accepted by the financial intermediary, its designee, or one of the Vanguard
Funds of Funds, and the order will receive the NAV next computed by the
Portfolio after such acceptance.
16
The Portfolio’s NAV
is used to determine the unit value for the annuity or life insurance program
through which you invest. For more information on unit values, please refer to
the accompanying prospectus of the insurance company that offers your annuity or
life insurance program.
17
Financial
Highlights
Financial
highlights information is intended to help you understand a fund’s performance
for the past five years (or, if shorter, its period of operations). Certain
information reflects financial results for a single fund share. Total return
represents the rate that an investor would have earned or lost each period on an
investment in a fund or share class (assuming reinvestment of all
distributions). This information has been obtained from the financial statements
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, whose report, along with fund financial statements, is included
in a fund’s most recent annual report to shareholders. You may obtain a free
copy of a fund’s latest annual or semiannual report, which is available upon
request.
Yields and total
returns presented for the Portfolio are net of the Portfolio's operating
expenses, but they do not take into account charges and expenses attributable to
the annuity or life insurance program through which you invest. The expenses of
the annuity or life insurance program reduce the returns and yields you
ultimately receive, so you should bear those expenses in mind when evaluating
the performance of the Portfolio and when comparing the yields and returns of
the Portfolio with those of other mutual funds.
|
Vanguard
Small Company Growth Portfolio |
Year Ended December
31, | ||||
|
For a
Share Outstanding Throughout Each Period |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Net
Asset Value, Beginning of Period |
$26.50 |
$24.49 |
$23.08 |
$20.30 |
$24.62 |
|
Investment
Operations |
|
|
|
|
|
|
Net
Investment Income1 |
.073 |
.056 |
.102 |
.128 |
.123 |
|
Net
Realized and Unrealized Gain (Loss) on Investments |
(5.677) |
3.343 |
3.521 |
5.323 |
(1.563) |
|
Total from
Investment Operations |
(5.604) |
3.399 |
3.623 |
5.451 |
(1.440) |
|
Distributions |
|
|
|
|
|
|
Dividends
from Net Investment Income |
(.057) |
(.101) |
(.143) |
(.118) |
(.103) |
|
Distributions
from Realized Capital Gains |
(6.059) |
(1.288) |
(2.070) |
(2.553) |
(2.777) |
|
Total
Distributions |
(6.116) |
(1.389) |
(2.213) |
(2.671) |
(2.880) |
|
Net
Asset Value, End of Period |
$14.78 |
$26.50 |
$24.49 |
$23.08 |
$20.30 |
|
Total
Return |
-25.35% |
14.22% |
23.18% |
28.05% |
-7.22% |
|
Ratios/Supplemental
Data |
|
|
|
|
|
|
Net
Assets, End of Period (Millions) |
$1,328 |
$1,944 |
$2,130 |
$2,111 |
$1,827 |
|
Ratio of
Total Expenses to Average Net Assets2 |
0.29% |
0.30% |
0.30% |
0.32% |
0.32% |
|
Ratio of
Net Investment Income to Average Net Assets |
0.43% |
0.21% |
0.52% |
0.59% |
0.52% |
|
Portfolio
Turnover Rate |
64% |
57%3 |
53% |
58% |
66% |
|
|
|
|
1 |
Calculated
based on average shares outstanding. |
|
2 |
Includes
performance-based investment advisory fee increases (decreases) of
(0.02%), (0.02%), (0.02%), 0.01%,
and
0.01%. |
|
3 |
Excludes
the value of portfolio securities received or delivered as a result of
in-kind purchases or redemptions of
the
portfolio’s capital shares. |
18
General
Information
This Portfolio of
Vanguard Variable Insurance Funds offers its shares to insurance companies to
fund both annuity and life insurance contracts. Because of differences in tax
treatment or other considerations, the best interests of various contract owners
participating in the Portfolio might at some time be in conflict. The Board will
monitor for any material conflicts and determine what action, if any, should be
taken.
If the Board
determines that continued offering of shares would be detrimental to the best
interests of the Portfolio’s shareholders, the Portfolio may suspend the
offering of shares for a period of time. If the Board determines that a specific
purchase acceptance would be detrimental to the best interests of the
Portfolio’s shareholders (for example, because of the size of the purchase
request or a history of frequent trading by the investor), the Portfolio may
reject such a purchase request.
If you wish to
redeem money from the Portfolio, please refer to the instructions provided in
the accompanying prospectus for the annuity or life insurance program. Shares of
the Portfolio may be redeemed on any business day that the NYSE is open for
trading. The redemption price of shares will be at the next-determined NAV per
share. Redemption proceeds generally will be wired to the administrator within
one business day following receipt of the redemption request, but no later than
seven business days. Contract owners will receive their redemption checks from
the administrator.
Under normal
circumstances, the Portfolio typically expects to meet redemptions with positive
cash flows. When this is not an option, the Portfolio seeks to first meet
redemptions from a cash or cash equivalent reserve. Alternatively, Vanguard may
instruct the advisors to sell a cross section of the Portfolio’s holdings to
meet redemptions, while also factoring in transaction costs. Additionally, the
Portfolio may work with the insurance companies through which contract owners
participate in the Portfolio to implement redemptions in a manner that is least
disruptive to the portfolio.
Under certain
circumstances, including under stressed market conditions, there are additional
tools that the Portfolio may use in order to meet redemptions, including
advancing the settlement of market trades with counterparties to match investor
redemption payments or delaying settlement of an investor’s transaction to match
trade settlement within regulatory requirements. The Portfolio may also suspend
payment of redemption proceeds for up to seven days. Additionally, under these
unusual circumstances, the Portfolio may borrow money (subject to certain
regulatory conditions and if available under
19
board-approved
procedures) through an interfund lending facility; through a bank
line-of-credit, including a joint committed credit facility; or through an
uncommitted line-of-credit from Vanguard in order to meet redemption
requests.
The Portfolio may
suspend the redemption right or postpone payment at times when the NYSE is
closed or during any emergency circumstances, as determined by the
SEC.
The exchange
privilege (your ability to redeem shares from one Portfolio to purchase shares
of another Portfolio) may be available to you through your contract. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice.
The Portfolio may pay redemption proceeds, in
whole or in part, by an in-kind distribution of readily marketable securities if
Vanguard determines that it would be detrimental to the best interests of the
Portfolio's remaining shareholders to pay redemption proceeds in cash.
For certain
categories of investors, the Portfolio has authorized one or more brokers to
accept on its behalf purchase and redemption orders. The brokers are authorized
to designate other intermediaries to accept purchase and redemption orders on
the Portfolio’s behalf. The Portfolio will be deemed to have received a purchase
or redemption order when an authorized broker, or a broker’s authorized
designee, accepts the order in accordance with the Portfolio’s instructions. In
most cases, for these categories of investors, a contract owner’s properly
transmitted order will be priced at the Portfolio’s next-determined NAV after
the order is accepted by the authorized broker or the broker’s designee. The
contract owner should review the authorized broker’s policies relating to
trading in the Vanguard funds.
Please consult the
Portfolio’s Statement
of Additional Information or our website for
a description of the policies and procedures that govern disclosure of the
Portfolio's portfolio holdings.
The Portfolio's
Bylaws require, unless the Trust otherwise consents in writing, that the U.S.
Federal District Courts be the sole and exclusive forum for the resolution of
complaints under the Securities Act of 1933. This provision may limit a
shareholder’s ability to bring a claim in a different forum and may result in
increased shareholder costs in pursuing such a claim.
20
Shareholder
Rights
The Portfolio's
Agreement and Declaration of Trust, as amended, requires a shareholder bringing
a derivative action on behalf of Vanguard Variable Insurance Funds (the Trust)
that is subject to a pre-suit demand to collectively hold at least 10% of the
outstanding shares of the Trust or at least 10% of the outstanding shares of the
series or class to which the demand relates and to undertake to reimburse the
Trust for the expense of any counsel or advisors used when considering the
merits of the demand in the event that the board of trustees determines not to
bring such action. In each case, these requirements do not apply to claims
arising under the federal securities laws to the extent that any such federal
securities laws, rules, or regulations do not permit such
application.
CFA® is a
registered trademark owned by CFA Institute.
21
Glossary
of Investment Terms
Capital
Gains Distributions. Payments to
portfolio shareholders of gains realized on securities that a portfolio has sold
at a profit, minus any realized losses.
Cash
Equivalent Investments. Cash deposits,
short-term bank deposits, and money market instruments that include U.S.
Treasury bills and notes, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker’s acceptances.
Common
Stock.
A security representing ownership rights in a corporation.
Dividend
Distributions. Payments to
portfolio shareholders of income from interest or dividends generated by a
portfolio's investments.
Dow
Jones U.S. Total Stock Market Float Adjusted Index. An index that
represents the entire U.S. stock market and tracks more than 5,000 stocks,
excluding shares of securities not available for public trading.
Expense
Ratio.
A portfolio's total annual operating expenses expressed as a percentage of the
portfolio's average net assets. The expense ratio includes management and
administrative expenses, but it does not include the transaction costs of buying
and selling portfolio securities.
Inception
Date.
The date on which the assets of a portfolio are first invested in accordance
with the portfolio's investment objective. For portfolios with a subscription
period, the inception date is the day after that period ends. Investment
performance is generally measured from the inception date.
Joint
Committed Credit Facility. The Portfolio
participates, along with other funds managed by Vanguard, in a committed credit
facility provided by a syndicate of lenders pursuant to a credit agreement that
may be renewed annually; each Vanguard fund is individually liable for its
borrowings, if any, under the credit facility. The amount and terms of the
committed credit facility are subject to approval by the Portfolio's board of
trustees and renegotiation with the lender syndicate on an annual
basis.
Median
Market Capitalization. An indicator of
the size of companies in which a portfolio invests; the midpoint of market
capitalization (market price x shares outstanding) of a portfolio's stocks,
weighted by the proportion of the portfolio's assets invested in each stock.
Stocks representing half of the portfolio's assets have market capitalizations
above the median, and the rest are below it.
22
Mutual
Fund.
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over
time.
New
York Stock Exchange (NYSE). A stock exchange
based in New York City that is open for regular trading on business days, Monday
through Friday, from 9:30 a.m. to 4 p.m., Eastern time.
Principal. The face value of
a debt instrument or the amount of money put into an investment.
Quantitative
Process. An assessment of
specific measurable factors, such as cost of capital; value of assets; and
projections of sales, costs, earnings, and profits. The use of a quantitative
process provides a systematic approach to investment decisions and
portfolios.
Return
of Capital. A return of
capital occurs when a portfolio's distributions exceed its earnings in a fiscal
year. A return of capital is a return of all or part of your original investment
or amounts paid in excess of your original investment in a portfolio. In
general, a return of capital reduces your cost basis in a portfolio's shares and
is not taxable to you until your cost basis has been reduced to
zero.
Russell
2500 Growth Index. An index that
measures the performance of those Russell 2500 companies with higher price/book
ratios and higher predicted growth rates.
Securities. Stocks, bonds,
money market instruments, and other investments.
Total
Return. A percentage
change, over a specified time period, in a portfolio's net asset value, assuming
the reinvestment of all distributions of dividends and capital
gains.
Volatility. The fluctuations
in value of a mutual fund or other security. The greater a portfolio's
volatility, the wider the fluctuations in its returns.
Yield. Income (interest
or dividends) earned by an investment, expressed as a percentage of the
investment’s price.
23
Connect
with Vanguard®
˃
vanguard.com
For
More Information
If you would
like more information about Vanguard Variable Insurance Funds Small Company
Growth Portfolio, the following documents are available free upon
request:
Annual/Semiannual
Reports to Shareholders
Additional
information about the Portfolio's investments is available in the Portfolio's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Portfolio's performance during its last fiscal
year.
Statement
of Additional Information (SAI)
The SAI
provides more detailed information about the Portfolio and is incorporated by
reference into (and thus legally a part of) this prospectus.
To receive a
free copy of the latest annual or semiannual reports or the SAI, or to request
additional information about the Portfolio or other Vanguard funds, please visit
vanguard.com or contact us
as follows:
Telephone:
800-522-5555; Text telephone for people with hearing impairment:
800-749-7273
Information
Provided by the SEC
Reports and
other information about the Portfolio are available in the EDGAR database on the
SEC’s website at sec.gov, or you can receive copies of this information, for a
fee, by electronic request at the following email address:
[email protected].
Portfolio's
Investment Company Act file number: 811-05962
© 2023 The
Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P 161 042023
Vanguard Marketing Corporation, Distributor.
P 161 042023