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Vanguard Sector Bond ETFs
Prospectus
 
December 23, 2014
 
 
Exchange-traded fund shares that are not individually redeemable and are
listed on Nasdaq
Vanguard Short-Term Government Bond Index Fund ETF Shares (VGSH)
Vanguard Intermediate-Term Government Bond Index Fund ETF Shares (VGIT)
Vanguard Long-Term Government Bond Index Fund ETF Shares (VGLT)
Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH)
Vanguard Intermediate-Term Corporate Bond Index Fund ETF Shares (VCIT)
Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT)
Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended August 31, 2014.
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.

 


 

Contents      
 
 
Vanguard ETF Summaries   Investing in Index Funds 45
Short-Term Government Bond ETF 1 More on the Funds and ETF Shares 46
Intermediate-Term Government Bond ETF 7 The Funds and Vanguard 61
Long-Term Government Bond ETF 13 Investment Advisor 62
Short-Term Corporate Bond ETF 19 Dividends, Capital Gains, and Taxes 64
Intermediate-Term Corporate Bond ETF 25 Share Price and Market Price 66
Long-Term Corporate Bond ETF 31 Additional Information 67
Mortgage-Backed Securities ETF 37 Financial Highlights 68
Investing in Vanguard ETF Shares 43 Glossary of Investment Terms 77

 


 

Vanguard Short-Term Government Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted government bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.08 %
12b-1 Distribution Fee   None  
Other Expenses   0.04 %
Total Annual Fund Operating Expenses   0.12 %

 

1


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 64% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 1–3 Year Government Float Adjusted Index. This Index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected securities) and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, all with maturities between 1 and 3 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 2.0 years as of August 31, 2014.

2


 

Principal Risks

The Fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds, so investors should expect the Fund’s monthly income to fluctuate.

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for the Fund because it invests primarily in short-term bonds, whose prices are much less sensitive to interest rate changes than are the prices of long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be very low for the Fund because it invests only in bonds issued by the U.S. Treasury or U.S. government agencies and instrumentalities.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Short-Term Government Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 0.36%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 1.14% (quarter ended June 30, 2010), and the lowest return for a quarter was –0.18% (quarter ended December 31, 2010).

4


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Short-Term Government Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes 0.26 % 0.92 %
Return After Taxes on Distributions 0.12   0.71  
Return After Taxes on Distributions and Sale of Fund Shares 0.16   0.64  
Based on Market Price        
Return Before Taxes 0.35   0.94  
Barclays U.S. 1-3 Year Government Float Adjusted Index        
(reflects no deduction for fees, expenses, or taxes) 0.37 % 1.04 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

5


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 50,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

6


 

Vanguard Intermediate-Term Government Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted government bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.07 %
12b-1 Distribution Fee   None  
Other Expenses   0.05 %
Total Annual Fund Operating Expenses   0.12 %

 

7


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 43% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 3–10 Year Government Float Adjusted Index. This Index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities between 3 and 10 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 5.6 years as of August 31, 2014.

8


 

Principal Risks

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be very low for the Fund because it invests only in bonds issued by the U.S. Treasury or U.S. government agencies and instrumentalities.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

9


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Intermediate-Term Government Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 2.62%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 5.55% (quarter ended September 30, 2011), and the lowest return for a quarter was –2.72% (quarter ended December 31, 2010).

10


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Intermediate-Term Government Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes –2.73 % 3.47 %
Return After Taxes on Distributions –3.35   2.64  
Return After Taxes on Distributions and Sale of Fund Shares –1.49   2.41  
Based on Market Price        
Return Before Taxes –2.58   3.46  
Barclays U.S. 3-10 Year Government Float Adjusted Index        
(reflects no deduction for fees, expenses, or taxes) –2.64 % 3.59 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

11


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 50,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

12


 

Vanguard Long-Term Government Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted government bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.05 %
12b-1 Distribution Fee   None  
Other Expenses   0.07 %
Total Annual Fund Operating Expenses   0.12 %

 

13


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 23% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Long Government Float Adjusted Index. This Index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities greater than 10 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 24.4 years as of August 31, 2014.

14


 

Principal Risks

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be high for the Fund because it invests primarily in long-term bonds, whose prices are much more sensitive to interest rate changes than are the prices of short-term bonds.

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally low for long-term bond funds.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be very low for the Fund because it invests only in bonds issued by the U.S. Treasury or U.S. government agencies and instrumentalities.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

15


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Government Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 15.41%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 24.35% (quarter ended September 30, 2011), and the lowest return for a quarter was –7.88% (quarter ended December 31, 2010).

16


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Long-Term Government Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes –12.73 % 5.06 %
Return After Taxes on Distributions –13.84   3.79  
Return After Taxes on Distributions and Sale of Fund Shares –7.16   3.46  
Based on Market Price        
Return Before Taxes –12.40   5.10  
Barclays U.S. Long Government Float Adjusted Index        
(reflects no deduction for fees, expenses, or taxes) –12.49 % 5.27 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

17


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 50,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

18


 

Vanguard Short-Term Corporate Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.09 %
12b-1 Distribution Fee   None  
Other Expenses   0.03 %
Total Annual Fund Operating Expenses   0.12 %

 

19


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 56% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 1–5 Year Corporate Bond Index. This Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 1 and 5 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 3.0 years as of August 31, 2014.

20


 

Principal Risks

The Fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it. The Fund is subject to the following risks, which could affect the Fund’s performance:

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally high for short-term bond funds, so investors should expect the Fund’s monthly income to fluctuate.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be moderate for the Fund.

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for the Fund because it invests primarily in short-term bonds, whose prices are much less sensitive to interest rate changes than are the prices of long-term bonds.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

21


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Short-Term Corporate Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 1.65%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 2.82% (quarter ended September 30, 2010), and the lowest return for a quarter was –1.14% (quarter ended June 30, 2013).

22


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Short-Term Corporate Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes 1.37 % 3.75 %
Return After Taxes on Distributions 0.51   2.89  
Return After Taxes on Distributions and Sale of Fund Shares 0.81   2.58  
Based on Market Price        
Return Before Taxes 1.36   3.84  
Barclays U.S. 1-5 Year Corporate Bond Index        
(reflects no deduction for fees, expenses, or taxes) 1.52 % 4.05 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

23


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Managers

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since its inception in 2009 (co-managed since 2013).

Paul M. Malloy, CFA, Portfolio Manager at Vanguard. He has co-managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

24


 

Vanguard Intermediate-Term Corporate Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.09 %
12b-1 Distribution Fee   None  
Other Expenses   0.03 %
Total Annual Fund Operating Expenses   0.12 %

 

25


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 65% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 5–10 Year Corporate Bond Index. This Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 5 and 10 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 7.4 years as of August 31, 2014.

26


 

Principal Risks

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be moderate for the Fund because it invests primarily in intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be moderate for the Fund.

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

27


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Intermediate-Term Corporate Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 5.93%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 5.56% (quarter ended September 30, 2010), and the lowest return for a quarter was –4.04% (quarter ended June 30, 2013).

28


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Intermediate-Term Corporate Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes –1.80 % 6.66 %
Return After Taxes on Distributions –3.33   5.11  
Return After Taxes on Distributions and Sale of Fund Shares –0.91   4.59  
Based on Market Price        
Return Before Taxes –2.00   6.68  
Barclays U.S. 5-10 Year Corporate Bond Index        
(reflects no deduction for fees, expenses, or taxes) –1.64 % 6.84 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

29


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Managers

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since its inception in 2009 (co-managed since 2013).

Paul M. Malloy, CFA, Portfolio Manager at Vanguard. He has co-managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

30


 

Vanguard Long-Term Corporate Bond ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted corporate bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.08 %
12b-1 Distribution Fee   None  
Other Expenses   0.04 %
Total Annual Fund Operating Expenses   0.12 %

 

31


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 10+ Year Corporate Bond Index. This Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 24.0 years as of August 31, 2014.

32


 

Principal Risks

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The Fund is subject to the following risks, which could affect the Fund’s performance:

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be high for the Fund because it invests primarily in long-term bonds, whose prices are much more sensitive to interest rate changes than are the prices of short-term bonds.

Credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be moderate for the Fund.

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally low for long-term bond funds.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

33


 

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Corporate Bond Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 12.35%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 9.17% (quarter ended September 30, 2011), and the lowest return for a quarter was –5.80% (quarter ended June 30, 2013).

34


 

Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Long-Term Corporate Bond Index Fund ETF Shares        
Based on NAV        
Return Before Taxes –5.92 % 7.63 %
Return After Taxes on Distributions –7.81   5.65  
Return After Taxes on Distributions and Sale of Fund Shares –3.33   5.16  
Based on Market Price        
Return Before Taxes –5.14   7.87  
Barclays U.S. 10+ Year Corporate Bond Index        
(reflects no deduction for fees, expenses, or taxes) –5.68 % 7.82 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

35


 

Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Managers

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has managed the Fund since its inception in 2009 (co-managed since 2013).

Paul M. Malloy, CFA, Portfolio Manager at Vanguard. He has co-managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for baskets of securities. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

36


 

Vanguard Mortgage-Backed Securities ETF

Investment Objective

The Fund seeks to track the performance of a market-weighted mortgage-backed securities index.

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees      
(Fees paid directly from your investment)      
 
Transaction Fee on Purchases and Sales None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Reinvested Dividends None through Vanguard    
  (Broker fees vary)    
Transaction Fee on Conversion to ETF Shares None through Vanguard    
  (Broker fees vary)    
 
Annual Fund Operating Expenses      
(Expenses that you pay each year as a percentage of the value of your investment)    
 
Management Fees   0.07 %
12b-1 Distribution Fee   None  
Other Expenses   0.05 %
Total Annual Fund Operating Expenses   0.12 %

 

37


 

Example

The following example is intended to help you compare the cost of investing in the Fund’s ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you invested $10,000 in the Fund’s shares. This example assumes that the Shares provide a return of 5% a year and that total annual fund operating expenses remain as stated in the preceding table. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year   3 Years   5 Years   10 Years
$ 12   $ 39 $ 68 $ 154

 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 514% of the average value of its portfolio.

Principal Investment Strategies

The Fund employs an indexing investment approach designed to track the performance of the Barclays U.S. MBS Float Adjusted Index. This Index covers U.S. agency mortgage-backed pass-through securities issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). To be included in the Index, pool aggregates must have at least $250 million currently outstanding and a weighted average maturity of at least 1 year.

The Fund invests by sampling the Index, meaning that it holds a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the Fund’s assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 6.6 years as of August 31, 2014.

38


 

Principal Risks

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The Fund is subject to the following risks, which could affect the Fund’s performance:

Prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Prepayment risk, which is a type of call risk, is high for the Fund.

Extension risk, which is the chance that during periods of rising interest rates, homeowners will prepay their mortgages at slower rates. This will lengthen the duration or average life of mortgage-backed securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates. Extension risk is high for the Fund.

Interest rate risk, which is the chance that bond prices will decline because of rising interest rates. In addition, when interest rates decline, mortgage-backed securities’ prices typically do not rise as much as the prices of comparable bonds. This is because the market tends to discount mortgage-backed securities’ prices for prepayment risk when interest rates decline. Interest rate risk should be moderate for the Fund.

Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Income risk is generally moderate for intermediate-term bond funds, so investors should expect the Fund’s monthly income to fluctuate accordingly.

Credit risk, which is the chance that the issuer of a mortgage-backed security will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Credit risk should be very low for the Fund because it invests in securities issued by U.S. government agencies and instrumentalities, including many securities backed by the full faith and credit of the U.S. government.

Index sampling risk, which is the chance that the securities selected for the Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low.

Because ETF Shares are traded on an exchange, they are subject to additional risks:

• The Fund’s ETF Shares are listed for trading on Nasdaq and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more

39


 

or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although the Fund’s ETF Shares are listed for trading on Nasdaq, it is possible that an active trading market may not be maintained.

• Trading of the Fund’s ETF Shares may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of the Fund’s ETF Shares may also be halted if (1) the shares are delisted from Nasdaq without first being listed on another exchange or (2) Nasdaq officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund‘s ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Fund‘s target index, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Mortgage-Backed Securities Index Fund ETF Shares1


1 The year-to-date return as of the most recent calendar quarter, which ended on September 30, 2014, was 4.12%.

During the periods shown in the bar chart, the highest return for a calendar quarter was 2.73% (quarter ended June 30, 2010), and the lowest return for a quarter was –1.90% (quarter ended June 30, 2013).

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Average Annual Total Returns for Periods Ended December 31, 2013        
      Since  
      Inception  
      (Nov. 19,  
  1 Year 2009 )
Vanguard Mortgage-Backed Securities Index Fund ETF Shares        
Based on NAV        
Return Before Taxes –1.28 % 2.81 %
Return After Taxes on Distributions –1.70   1.98  
Return After Taxes on Distributions and Sale of Fund Shares –0.72   1.87  
Based on Market Price        
Return Before Taxes –1.26   2.82  
Barclays U.S. MBS Float Adjusted Index        
(reflects no deduction for fees, expenses, or taxes) –0.98 % 2.88 %

 

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares may be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

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Investment Advisor

The Vanguard Group, Inc. (Vanguard)

Portfolio Managers

William D. Baird, Portfolio Manager at Vanguard. He has co-managed the Fund since its inception in 2009.

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has co-managed the Fund since 2013.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. The brokerage firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, typically in exchange for cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares.

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Investing in Vanguard ETF® Shares

What Are Vanguard ETF Shares?

Vanguard ETF Shares are an exchange-traded class of shares issued by certain Vanguard mutual funds. ETF Shares represent an interest in the portfolio of stocks or bonds held by the issuing fund. The following ETF Shares are offered through this prospectus:

Vanguard Fund Vanguard ETF Shares
Short-Term Government Bond Index Fund Short-Term Government Bond ETF
Intermediate-Term Government Bond Index Fund Intermediate-Term Government Bond ETF
Long-Term Government Bond Index Fund Long-Term Government Bond ETF
Short-Term Corporate Bond Index Fund Short-Term Corporate Bond ETF
Intermediate-Term Corporate Bond Index Fund Intermediate-Term Corporate Bond ETF
Long-Term Corporate Bond Index Fund Long-Term Corporate Bond ETF
Mortgage-Backed Securities Index Fund Mortgage-Backed Securities ETF

 

In addition to ETF Shares, each Fund offers two conventional (not exchange-traded) classes of shares. This prospectus, however, relates only to ETF Shares.

How Are Vanguard ETF Shares Different From Conventional Mutual Fund Shares?

Conventional mutual fund shares are bought from and redeemed with the issuing fund for cash at net asset value (NAV), which is typically calculated once a day. ETF Shares, by contrast, cannot be purchased directly from or redeemed directly with the issuing fund by an individual investor. Rather, ETF Shares can only be purchased or redeemed by or through certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, usually in exchange for baskets of securities and not for cash, although some funds issue and redeem Creation Units in exchange for cash or a combination of cash and securities.

An organized secondary trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on a national securities exchange. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of and demand for ETF Shares and on changes in the prices of the fund’s portfolio holdings.

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The market price of a fund’s ETF Shares typically will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of market disruption or extreme market volatility, the difference may become significant.

How Do I Buy and Sell Vanguard ETF Shares?

ETF Shares of the Funds are listed for trading on Nasdaq. You can buy and sell ETF Shares on the secondary market in the same way you buy and sell any other exchange-traded security—through a broker. Your broker may charge a commission to execute a transaction. You will also incur the cost of the “bid-ask spread,” which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. Since secondary-market transactions occur at market prices, you may pay more or less than NAV when you buy ETF Shares and receive more or less than NAV when you sell those shares. In times of severe market disruption, the bid-ask spread can increase significantly. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must buy.

Your ownership of ETF Shares will be shown on the records of the broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of ETF Shares, and tax information. Your broker also will be responsible for ensuring that you receive income and capital gains distributions as well as shareholder reports and other communications from the fund whose ETF Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services.

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Investing in Index Funds

What Is Indexing?

Indexing is an investment strategy for tracking the performance of a specified market benchmark, or “index.” An index is a group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets—such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments—such as small-capitalization stocks or short-term bonds. The index sponsor determines the securities to include in the index, the weighting of each security in the index, and the appropriate time to make changes to the composition of the index. One cannot invest directly in an index.

An index fund holds all, or a representative sample, of the securities that make up its target index. Index funds attempt to mirror the performance of the target index, for better or worse. However, an index fund generally does not perform exactly like its target index. For example, like all mutual funds, index funds have operating expenses and transaction costs. Market indexes do not, and therefore they will usually have a slight performance advantage over funds that track them.

Index funds typically have the following characteristics:

Variety of investments. Most Vanguard index funds generally invest in the securities of a variety of companies and industries.

Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks.

Low cost. Index funds are inexpensive to run compared with actively managed funds. They have low or no research costs and typically keep trading activity—and thus dealer markups and other transaction costs—to a minimum compared with actively managed funds.

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More on the Funds and ETF Shares

This prospectus describes the principal risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms 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 Fund shareholder. 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 a Fund is the right investment for you. We suggest that you keep this prospectus for future reference.

Share Class Overview

This prospectus offers the Funds‘ ETF Shares, an exchange-traded class of shares. A separate prospectus offers the Funds‘ AdmiralShares, which generally have an investment minimum of $10,000. Another prospectus offers the Funds‘ Institutional Shares, which are generally for investors who invest a minimum of $5 million.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

A Note to Investors

Vanguard ETF Shares can be purchased directly from the issuing Fund only by or through authorized broker-dealers in exchange for a basket of securities (or, in some cases, for cash or a combination of cash and securities) that is expected to be worth several million dollars. Most individual investors, therefore, will not be able to purchase ETF Shares directly from the Fund. Instead, these investors will purchase ETF Shares on the secondary market with the assistance of a broker.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That is because
you, as a shareholder, pay a proportionate share of the costs of operating a fund,
plus 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 each Fund uses in pursuit of its objective. The Funds’ board of trustees, which

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oversees each Fund’s management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Note that each Fund’s investment objective is not fundamental and may be changed without a shareholder vote. However, each Fund’s policy of investing at least 80% of its assets in bonds that are included in its target index may be changed only upon 60 days’ notice to shareholders.

Market Exposure


Each Fund is subject to interest rate risk, which is the chance that bond prices will decline because of rising interest rates. Interest rate risk should be low for short-term bond funds, moderate for intermediate-term bond funds, and high for long-term bond funds.

Although bonds are often thought to be less risky than stocks, there have been periods when bond prices have fallen significantly because of rising interest rates. For instance, prices of long-term bonds fell by almost 48% between December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the following table shows the effect of a 1% and a 2% change (both up and down) in interest rates on the values of three noncallable (i.e., they cannot be redeemed by the issuer) bonds of different maturities, each with a face value of $1,000.

How Interest Rate Changes Affect the Value of a $1,000 Bond1        
    After a 1%   After a 1%   After a 2%   After a 2%
Type of Bond (Maturity)   Increase   Decrease   Increase   Decrease
Short-Term (2.5 years) $ 977 $ 1,024 $ 954 $ 1,049
Intermediate-Term (10 years)   922   1,086   851   1,180
Long-Term (20 years)   874   1,150   769   1,328
1 Assuming a 4% coupon.                

 

These figures are for illustration only; you should not regard them as an indication of future performance of the bond market as a whole or the Funds in particular.

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Plain Talk About Bonds and Interest Rates
 
As a rule, when interest rates rise, bond prices fall. The opposite is also true:
Bond prices go up when interest rates fall. Why do bond prices and interest rates
move in opposite directions? Let’s assume that you hold a bond offering a 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% bond for the price you paid—you would
probably have to lower your asking price. On the other hand, if interest rates were
falling and 3% bonds were being offered, you should be able to sell your 4%
bond for more than you paid.
 
How mortgage-backed securities are different: In general, declining interest rates
will not lift the prices of mortgage-backed securities—such as GNMAs—as much
as the prices of comparable bonds. Why? Because when interest rates fall, the
bond market tends to discount the prices of mortgage-backed securities for
prepayment risk—the possibility that homeowners will refinance their mortgages
at lower rates and cause the bonds to be paid off prior to maturity. In part to
compensate for this prepayment possibility, mortgage-backed securities tend to
offer higher yields than other bonds of comparable credit quality and maturity.

 

Changes in interest rates can affect bond income as well as bond prices.


Each Fund is subject to income risk, which is the chance that the Fund‘s income will decline because of falling interest rates. A fund‘s income declines when interest rates fall because the fund then must invest new cash flow and cash from maturing bonds in lower-yielding bonds. Income risk is generally higher for short-term bond funds and lower for long-term bond funds.

Plain Talk About Bond Maturities
 
A bond is issued with a specific maturity date—the date when the issuer must pay
back the bond’s principal (face value). Bond maturities range from less than 1 year
to more than 30 years. Typically, the longer a bond’s maturity, the more price risk
you, as a bond investor, will face as interest rates rise—but also the higher the
potential yield you could receive. Longer-term bonds are more suitable for
investors willing to take a greater risk of price fluctuations to get higher and more
stable interest income. Shorter-term bond investors should be willing to accept
lower yields and greater income variability in return for less fluctuation in the value
of their investment.

 

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Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


The Mortgage-Backed Securities Index Fund is subject to prepayment risk, which is the chance that during periods of falling interest rates, homeowners will refinance their mortgages before their maturity dates, resulting in prepayment of mortgage-backed securities held by the Fund. The Fund would then lose any price appreciation above the mortgage’s principal and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income. Prepayment risk is a form of call risk.

Prepayment risk is high for the Mortgage-Backed Securities Index Fund. The indexes that the Government and Corporate Bond Index Funds seek to track include only a limited number of callable bonds. Thus, call risk for these Funds should be very low.


The Mortgage-Backed Securities Index Fund is subject to extension risk, which is the chance that during periods of rising interest rates, homeowners will prepay their mortgages at slower rates. This will lengthen the duration or average life of mortgage-backed securities held by the Fund and delay the Fund’s ability to reinvest proceeds at higher interest rates. Extension risk is high for the Fund.


Each Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Plain Talk About Credit Quality
 
A bond’s credit-quality rating is an assessment of the issuer’s ability to pay interest
on the bond and, ultimately, to repay the principal. Credit quality is evaluated by one
of the nationally recognized statistical rating organizations (for example, Moody‘s
Investors Service, Inc., or Standard & Poor‘s) or through independent analysis
conducted by a fund’s advisor. The lower the rating, the greater the chance—in the
rating agency’s or advisor’s opinion—that the bond issuer will default, or fail to
meet its payment obligations. All things being equal, the lower a bond’s credit
rating, the higher its yield should be to compensate investors for assuming
additional risk. Mortgage-backed securities typically have higher yields than
comparable-quality corporate or government bonds to make up for their higher
prepayment risk. Investment-grade bonds are those rated in one of the four highest
ratings categories. A fund may treat an unrated bond as investment-grade if
warranted by the advisor’s analysis.

 

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The Mortgage-Backed Securities Index Fund has very low credit risk. The three Government Bond Index Funds invest primarily in U.S. Treasury and U.S. agency securities and have high credit quality and very low credit risk. The three Corporate Bond Index Funds are expected to have moderate credit risk as a result of their investments in investment-grade bonds. Investment-grade bonds are those rated BBB/Baa or higher by a credit-rating agency, and therefore investment-grade bonds are a mixture of high- and medium-quality bonds.

To a limited extent, the Corporate Bond Index Funds are also exposed to event risk, which is the chance that corporate fixed income securities held by these Funds may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities or because of other factors negatively affecting issuers.

Plain Talk About Types of Bonds
 
Bonds are issued (sold) by many sources: Corporations issue corporate bonds;
the federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; financial institutions issue asset-backed bonds;
and mortgage holders issue “mortgage-backed” pass-through certificates. Each
issuer is responsible for paying back the bond’s initial value as well as for making
periodic interest payments. Many bonds issued by government agencies and
entities are neither guaranteed nor insured by the U.S. government.

 

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The following summary table is provided to help you distinguish among the Funds and their various risks.

Risks of the Funds          
      Call/   Index
  Income Interest Prepayment Credit Sampling
Vanguard Fund Risk Rate Risk Risk Risk Risk
Short-Term Government Bond Index High Low Very Low Very Low Low
Intermediate-Term Government          
Bond Index Moderate Moderate Very Low Very Low Low
Long-Term Government Bond Index Low High Very Low Very Low Low
Short-Term Corporate Bond Index High Low Very Low Moderate Low
Intermediate-Term Corporate          
Bond Index Moderate Moderate Very Low Moderate Low
Long-Term Corporate Bond Index Low High Very Low Moderate Low
Mortgage-Backed Securities Index Moderate Moderate High Very Low Low

 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all bonds held in its target index—which is an indexing strategy called “replication”—each Fund uses index “sampling” techniques to select securities. Using computer programs, each Fund’s advisor generally selects a representative sample of securities that approximates the full target index in terms of key risk factors and other characteristics. These factors include duration, cash flow, quality, and callability of the underlying bonds. In addition, each Fund keeps sector and subsector exposure within tight boundaries relative to its target index. Because the Funds do not hold all of the securities included in their target indexes, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target indexes. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit exposure in the portfolio.


Each Fund is subject to index sampling risk, which is the chance that the securities selected for a Fund, in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk should be low for each Fund.

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The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target index, as of August 31, 2014.

  Number of Bonds Number of Bonds in
Vanguard Fund in Fund Target Index
Short-Term Government Bond Index 130 382
Intermediate-Term Government Bond Index 162 429
Long-Term Government Bond Index 66 90
Short-Term Corporate Bond Index 1,797 1,969
Intermediate-Term Corporate Bond Index 1,474 1,627
Long-Term Corporate Bond Index 1,348 1,496
Mortgage-Backed Securities Index 4371 432
1 Issues are mortgage pools grouped by coupon.    

 

Types of bonds. Each Fund seeks to track an index that is a subset of the Barclays U.S. Aggregate Float Adjusted Index (the Aggregate Index). The Aggregate Index measures the total universe of taxable fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed securities, all with maturities of more than 1 year. Taken together, the seven Funds cover approximately 90% of the Aggregate Index; the only sectors not covered are asset-backed bonds, bonds issued by foreign governments (unless guaranteed by the U.S. government), taxable state and municipal bonds, and commercial mortgage-backed securities.

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The following grid shows, at a glance, the types of financial instruments that may be purchased by each Fund. An explanation of each type of financial instrument follows the grid.

      Mortgage-Backed
  Government Bond Corporate Bond Securities
  Index Funds Index Funds Index Fund
Corporate Debt Obligations    
U.S. Government and Agency Bonds
Mortgage-Backed Securities    
Mortgage Dollar Rolls    
Cash Equivalent Investments, Including      
Repurchase Agreements
Futures, Options, and Other Derivatives
International Dollar-Denominated Bonds  

 

Corporate debt obligations—usually called bonds—represent loans by an investor to a corporation.

U.S. government and agency bonds represent loans by investors to the U.S.

Treasury or a wide variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.

Mortgage-backed securities represent partial ownership interest in pools of commercial or residential mortgage loans made by financial institutions to finance a borrower’s real estate purchase. These loans are packaged by private or governmental issuers for sale to investors. As the underlying mortgage loans are paid by borrowers, the investors receive payments of interest and principal. To be announced (TBA) securities represent an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics for a fixed unit price, with settlement on a scheduled future date beyond the typical settlement period for most other securities.

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Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in mortgage-backed securities and have the potential to enhance the Fund‘s returns and reduce its administrative burdens, compared with holding mortgage-backed securities directly. These transactions may increase the Fund‘s portfolio turnover rate. Mortgage dollar rolls will be used only if consistent with the Fund‘s investment objective and risk profile.

Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a Fund to banks or large securities dealers. The Government Bond Index Funds and the Mortgage-Backed Securities Index Fund may invest only in repurchase agreements that are collateralized by U.S. Treasury or U.S. government agency securities. Repurchase agreements can carry several risks. For instance, if the seller is unable to repurchase the securities as promised, a fund may experience a loss when trying to sell the securities to another buyer. Also, if the seller becomes insolvent, a bankruptcy court may determine that the securities do not belong to a fund and order that the securities be used to pay off the seller’s debts. The Funds‘ advisor believes that these risks can be controlled through careful security selection and monitoring.

Futures, options, and other derivatives are described in detail under Other Investment Policies and Risks.

International dollar-denominated bonds are bonds denominated in U.S. dollars and issued by foreign governments and companies. To the extent that a Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.

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Plain Talk About U.S. Government-Sponsored Entities
 
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
nor guaranteed by the U.S. Treasury and are not backed by the full faith and credit
of the U.S. government. In most cases, these securities are supported only by
the credit of the GSE, standing alone. In some cases, a GSE’s securities may be
supported by the ability of the GSE to borrow from the U.S. Treasury or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.

 

Other Investment Policies and Risks

Under normal circumstances, each Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of each Fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue. The vast majority of these securities will have characteristics and risks similar to those in the target indexes. Subject to the same 20% limit, each Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed.

Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund‘s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund’s board of trustees. In any such instance, the substitute index would represent the same market segment as the current index.


Each Fund may invest in derivatives. In general, investments in derivatives may involve risks different from, and possibly greater than, those of investments directly in the underlying securities, assets, or market indexes.

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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 (such as the Barclays U.S. Aggregate Bond Index), or a reference rate (such as LIBOR). Each Fund may invest in derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of the Fund as disclosed in this prospectus. In particular, derivatives will be used only when they may help the advisor:

• Invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment.

• Add value when these instruments are attractively priced.

• Adjust sensitivity to changes in interest rates.

The Funds‘ derivative investments may include fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives. Losses (or gains) involving futures contracts can sometimes be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for other types of derivatives.

Plain Talk About Derivatives
 
Derivatives can take many forms. Some forms of derivatives—such as exchange-
traded futures and options on securities, commodities, or indexes—have been
trading on regulated exchanges for decades. These types of derivatives are
standardized contracts that can easily be bought and sold and whose market
values are determined and published daily. Non-exchange-traded derivatives (such
as certain swap agreements), on the other hand, tend to be more specialized or
complex and may be harder to value.

 

Vanguard may invest a small portion of each Fund’s assets in U.S. Treasury futures, which are a type of derivative, and/or shares of exchange-traded funds (ETFs). These U.S. Treasury futures and ETFs typically provide returns similar to those of the bonds listed in the index, or in a subset of the index, tracked by the Fund. Vanguard may purchase ETFs when doing so will reduce the Fund’s transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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Cash Management

Each Fund‘s daily cash balance may be invested in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests.

Temporary Investment Measures

Each Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest, so long as the alternative is consistent with the Fund‘s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund‘s objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.

Special Risks of Exchange-Traded Shares


ETF Shares are not individually redeemable. They can be redeemed with the issuing Fund at NAV only by or through authorized broker-dealers and only in large blocks known as Creation Units, which would cost millions of dollars to assemble. Consequently, if you want to liquidate some or all of your ETF Shares, you must sell them on the secondary market at prevailing market prices.


The market price of ETF Shares may differ from NAV. Although it is expected that the market price of an ETF Share typically will approximate its NAV, there may be times when the market price and the NAV differ significantly. Thus, you may pay more (premium) or less (discount) than NAV when you buy ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares. These discounts and premiums are likely to be greatest during times of market disruption or extreme market volatility.

Vanguard’s website at vanguard.com shows the previous day’s closing NAV and closing market price for each Fund’s ETF Shares. The website also discloses, in the Premium/Discount Analysis section of the ETF Shares’ Price & Performance page, how frequently each Fund’s ETF Shares traded at a premium or discount to NAV (based on closing NAVs and market prices) and the magnitudes of such premiums and discounts.

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An active trading market may not exist. Although Vanguard ETF Shares are listed on a national securities exchange, it is possible that an active trading market may not be maintained. Although this could happen at any time, it is more likely to occur during times of severe market disruption. If you attempt to sell your ETF Shares when an active trading market is not functioning, you may have to sell at a significant discount to NAV. In extreme cases, you may not be able to sell your shares at all.


Trading may be halted. Trading of Vanguard ETF Shares on an exchange may be halted by the activation of individual or marketwide trading halts (which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of ETF Shares may also be halted if (1) the shares are delisted from the listing exchange without first being listed on another exchange or (2) exchange officials determine that such action is appropriate in the interest of a fair and orderly market or for the protection of investors.

Conversion Privilege

Owners of conventional shares issued by a Fund may convert those shares to ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan generally may not convert those shares to ETF Shares and should check with their plan sponsor or recordkeeper. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted to conventional shares. Also, ETF Shares of one fund cannot be exchanged for ETF Shares of another fund.

You must hold ETF Shares in a brokerage account. Thus, before converting conventional shares to ETF Shares, you must have an existing, or open a new, brokerage account. This account may be with Vanguard Brokerage Services® (Vanguard Brokerage) or with any other brokerage firm. To initiate a conversion of conventional shares to ETF Shares, please contact your broker.

Vanguard Brokerage does not impose a fee on conversions from Vanguard conventional shares to Vanguard ETF Shares. However, other brokerage firms may charge a fee to process a conversion. Vanguard reserves the right, in the future, to impose a transaction fee on conversions or to limit or terminate the conversion privilege.

Converting conventional shares to ETF Shares is generally accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker’s omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard’s records will reflect your broker, not you, as the owner of the shares. Next,

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your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account to ETF Shares of equivalent value, based on the respective NAVs of the two share classes.

Your Fund’s transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you.

Because the DTC is unable to handle fractional shares, only whole shares can be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares with a value equal to 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker’s omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares or (2) redeem the 2.481 conventional shares for cash at NAV and deliver that cash to your account. If your broker chose to redeem your conventional shares, you would realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion.

If you convert your conventional shares to ETF Shares through Vanguard Brokerage, all conventional shares for which you request conversion will be converted to ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will not be taxable.

Here are some important points to keep in mind when converting conventional shares of a Vanguard fund to ETF Shares:

• The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class to which the shares will be converted.

• Until the conversion process is complete, you will remain fully invested in a fund’s conventional shares, and your investment will increase or decrease in value in tandem with the NAV of those shares.

• The conversion transaction is nontaxable except, if applicable, to the very limited extent previously described.

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A precautionary note to investment companies: For purposes of the Investment Company Act of 1940, Vanguard ETF Shares are issued by registered investment companies, and the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of that Act. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard.

Frequent Trading and Market-Timing

Unlike frequent trading of a Vanguard fund’s conventional (i.e., not exchange-traded) classes of shares, frequent trading of ETF Shares does not disrupt portfolio management, increase the fund’s trading costs, lead to realization of capital gains by the fund, or otherwise harm fund shareholders. The vast majority of trading in ETF Shares occurs on the secondary market. Because these trades do not involve the issuing fund, they do not harm the fund or its shareholders. A few institutional investors are authorized to purchase and redeem ETF Shares directly with the issuing fund. Because these trades typically are effected in kind (i.e., for securities and not for cash), they do not cause any of the harmful effects to the issuing fund (as previously noted) that may result from frequent cash trades. For these reasons, the board of trustees of each fund that issues ETF Shares has determined that it is not necessary to adopt policies and procedures to detect and deter frequent trading and market-timing of ETF Shares.

Portfolio Holdings

We generally post on our website at vanguard.com, in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent month. This list is generally updated within 15 calendar days after the end of the month. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. Please consult the Fund’s Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund’s portfolio holdings.

Turnover Rate

Although the Funds generally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities in response to redemption requests from shareholders of conventional (not exchange-traded) shares or to changes in the composition of its target index or in an effort to manage the fund’s duration. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of

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its net assets within a one-year period. Shorter-term bonds will mature or be sold—and need to be replaced—more frequently than longer-term bonds. As a result, shorter-term bond funds tend to have higher turnover rates than longer-term bond funds. The Long-Term Government Bond Index Fund experienced lower portfolio turnover during the fiscal year ended August 31, 2014, as a result of a lower level of changes in the composition of its target index. The average turnover rate for bond funds was approximately 153%, as reported by Morningstar, Inc., on August 31, 2014.

Plain Talk About Turnover Rate
 
Before investing in a mutual fund, you should review its turnover rate. This gives
an indication of how transaction costs, which are not included in the fund’s
expense ratio, could affect the fund’s future returns. In general, the greater the
volume of buying and selling by the fund, the greater the impact that dealer
markups and other transaction costs will have on its 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 as taxable income.

 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of more than 170 mutual funds holding assets of approximately $2.7 trillion. All of the funds that are members of The Vanguard Group (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 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.

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Plain Talk About Vanguard’s Unique Corporate Structure
 
The Vanguard Group is truly a mutual mutual fund company. It 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 may be
owned by one person, by a private group of individuals, or by public investors
who own the management company’s stock. The management fees charged by
these companies include a profit component over and above the companies’ cost
of providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds’ expenses low.

 

Investment Advisor

The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Fixed Income Group. As of August 31, 2014, Vanguard served as advisor for approximately $2.2 trillion in assets. Vanguard provides investment advisory services to the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds.

For the fiscal year ended August 31, 2014, the advisory expenses represented an effective annual rate of less than 0.01% of each Fund’s average net assets.

For a discussion of why the board of trustees approved each Fund’s investment advisory arrangement, see the most recent annual report to shareholders covering the fiscal year ended August 31.

Vanguard’s Fixed Income Group is overseen by:

Mortimer J. Buckley, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguard’s Equity Investment and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Mr. Buckley joined Vanguard in 1991 and has held various senior leadership positions with Vanguard. He received his A.B. in economics from Harvard and an M.B.A. from Harvard Business School.

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Gregory Davis, CFA, Principal of Vanguard and global head of Vanguard’s Fixed Income Group. He has direct oversight responsibility for all money market funds, bond funds, and stable value portfolios managed by the Fixed Income Group. He has been with Vanguard since 1999 and has managed investment portfolios since 2000. He received his B.S. in insurance from The Pennsylvania State University and an M.B.A. from The Wharton School of the University of Pennsylvania.

Kenneth E. Volpert, CFA; Principal of Vanguard; global head of Fixed Income Indexing; and head of investments, Europe. He has direct oversight responsibility for all bond index funds managed by the Fixed Income Group. He managed investment portfolios from 1982 through May 2014 and has been with Vanguard since 1992. He received his B.S. from the University of Illinois and an M.B.A. from the University of Chicago.

Paul M. Jakubowski, Principal of Vanguard and head of credit. He has oversight responsibility for investment activities within the credit-related sectors of the taxable fixed income market as well as taxable credit research. He has worked in investment management since joining Vanguard in 2000 and has managed investment portfolios since 2013. He received his B.S. from the University of Richmond and an M.B.A. from Villanova University.

Ronald M. Reardon, Principal of Vanguard and head of rates. He has oversight responsibility for investment activities within the rates-related sectors of the taxable fixed income market, including foreign exchange. He has worked in investment management for Vanguard since 2001 and has managed investment portfolios since 2005. He received his B.S. from The College of New Jersey and an M.B.A. from the University of Rochester.

The managers primarily responsible for the day-to-day management of the Funds are:

William D. Baird, Portfolio Manager at Vanguard. He has worked in investment management since 1988, has managed investment portfolios since 1993, has been with Vanguard since 2008, and has co-managed the Mortgage-Backed Securities Index Fund since its inception in 2009. Education: B.A., Rutgers University; M.B.A., Stern School of Business at New York University.

Joshua C. Barrickman, CFA, Principal of Vanguard and head of Vanguard’s Fixed Income Indexing Americas. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; has managed the Short-Term Corporate, Intermediate-Term Corporate, and Long-Term Corporate Bond Index Funds since their inceptions in 2009 (co-managed since 2013); and has managed the Short-Term Government, Intermediate-Term Government, and Long-Term Government Bond Index Funds and co-managed the Mortgage-Backed Securities Index Fund since 2013. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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Paul M. Malloy, CFA, Portfolio Manager at Vanguard. He has worked in investment management since joining Vanguard in 2005 and has co-managed the Short-Term Corporate, Intermediate-Term Corporate, and Long-Term Corporate Bond Index Funds since 2013. Education: B.S., Saint Francis University.

The Statement of Additional Information provides information about each portfolio manager’s compensation, other accounts under management, and ownership of shares of the Funds.

Dividends, Capital Gains, and Taxes

Fund Distributions

Each Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net short-term or long-term capital gains realized from the sale of its holdings. The Fund’s income dividends are declared and distributed monthly; capital gains distributions, if any, generally occur annually in December.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest as
well as capital gains from the fund’s sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid for them.
These capital gains are either short-term or long-term, depending on whether the
fund held the securities for one year or less or for more than one year.

 

Reinvestment of Distributions

In order to reinvest dividend and capital gains distributions, investors in a Fund’s ETF Shares must hold their shares at a broker that offers a reinvestment service. This can be the broker’s own service or a service made available by a third party, such as the broker’s outside clearing firm or the Depository Trust Company (DTC). If a reinvestment service is available, distributions of income and capital gains can automatically be reinvested in additional whole and fractional ETF Shares of the Fund. If a reinvestment service is not available, investors will receive their distributions in cash. To determine whether a reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker.

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As with all exchange-traded funds, reinvestment of dividend and capital gains distributions in additional ETF Shares will occur four business days or more after the ex-dividend date (the date when a distribution of dividends or capital gains is deducted from the price of a Fund’s shares). The exact number of days depends on your broker. During that time, the amount of your distribution will not be invested in the Fund and therefore will not share in the Fund’s income, gains, and losses.

Basic Tax Points

Investors in taxable accounts should be aware of the following basic federal income tax points:

• Distributions are taxable to you whether or not you reinvest these amounts in additional ETF Shares.

• Distributions declared in December—if paid to you by the end of January—are taxable as if received in December.

• Any income dividend distribution or short-term capital gains distribution that you receive is taxable to you as ordinary income.

• Any distribution of net long-term capital gains is taxable to you as long-term capital gains, no matter how long you have owned ETF Shares.

• Capital gains distributions may vary considerably from year to year as a result of the Funds‘ normal investment activities and cash flows.

• A sale of ETF Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

Individuals, trusts, and estates whose income exceeds certain threshold amounts are subject to a 3.8% Medicare contribution tax on ”net investment income.” Net investment income takes into account distributions paid by the Fund and capital gains from any sale or exchange of Fund shares.

Income dividends and capital gains distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may be subject to state and local income taxes. Depending on your state’s rules, however, any dividends attributable to interest earned on direct obligations of the U.S. government may be exempt from state and local taxes. Vanguard will notify you each year how much, if any, of your dividends may qualify for this exemption.

This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about any tax consequences for you.

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Share Price and Market Price

Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to the share class by the number of Fund shares outstanding for that class. On U.S. holidays or other days when the NYSE is closed, the NAV is not calculated, and the Funds do not sell or redeem shares. However, on those days the value of a Fund’s assets may be affected to the extent that the Fund holds securities that change in value on those days (such as foreign securities that trade on foreign markets that are open).

Remember: If you buy or sell ETF Shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your ETF Shares in Creation Unit blocks (an option available only to certain authorized broker-dealers) or if you convert your conventional fund shares to ETF Shares.

Debt securities held by a Vanguard fund are valued based on information furnished by an independent pricing service or market quotations. Certain short-term debt instruments used to manage a fund’s cash are valued on the basis of amortized cost. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.

When a fund 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). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 fund to calculate the NAV may differ from quoted or published prices for the same securities.

Vanguard’s website will show the previous day’s closing NAV and closing market price for each Fund’s ETF Shares.

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Additional Information          
 
      Vanguard    
    Suitable Fund CUSIP  
  Inception Date for IRAs Number Number  
Short-Term Government Bond Index Fund          
ETF Shares 11/19/2009 Yes 3142 92206 C102
Intermediate-Term Government Bond          
Index Fund          
ETF Shares 11/19/2009 Yes 3143 92206 C706
Long-Term Government Bond Index Fund          
ETF Shares 11/19/2009 Yes 3144 92206 C847
Short-Term Corporate Bond Index Fund          
ETF Shares 11/19/2009 Yes 3145 92206 C409
Intermediate-Term Corporate Bond          
Index Fund          
ETF Shares 11/19/2009 Yes 3146 92206 C870
Long-Term Corporate Bond Index Fund          
ETF Shares 11/19/2009 Yes 3147 92206 C813
Mortgage-Backed Securities Index Fund          
ETF Shares 11/19/2009 Yes 3148 92206 C771

 

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Financial Highlights

The following financial highlights tables are intended to help you understand each Fund’s financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (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 each Fund’s financial statements—is included in the Funds‘ most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report by visiting vanguard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Tables
 
This explanation uses the Short-Term Government Bond Index Fund’s ETF Shares
as an example. The ETF Shares began fiscal year 2014 with a net asset value (share
price) of $60.75 per share. During the year, each ETF Share earned $0.198 from
investment income (interest) and $0.227 from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.225 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $60.95, reflecting earnings of $0.425
per share and distributions of $0.225 per share. This was an increase of $0.20 per
share (from $60.75 at the beginning of the year to $60.95 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 0.70% for the year.
 
As of August 31, 2014, the ETF Shares had approximately $497 million in net
assets. For the year, the expense ratio was 0.12% ($1.20 per $1,000 of net
assets), and the net investment income amounted to 0.34% of average net
assets. The Fund sold and replaced securities valued at 64% of its net assets.

 

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Short-Term Government Bond Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 60.75   $ 60.98   $ 61.11   $ 60.70   $ 60.04  
Investment Operations                              
Net Investment Income   .198     .158     .270     .405     .349  
Net Realized and Unrealized Gain (Loss) on Investments   .227     (.134 )   (.028 )   .434     .660  
Total from Investment Operations   .425     .024     .242     .839     1.009  
Distributions                              
Dividends from Net Investment Income   (.177 )   (.158 )   (.267 )   (.405 )   (.349 )
Distributions from Realized Capital Gains   (.048 )   (.096 )   (.105 )   (.024 )    
Total Distributions   (.225 )   (.254 )   (.372 )   (.429 )   (.349 )
Net Asset Value, End of Period $ 60.95   $ 60.75   $ 60.98   $ 61.11   $ 60.70  
Total Return   0.70 %   0.04 %   0.40 %   1.39 %   1.69 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 497   $ 307   $ 183   $ 150   $ 79  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %2
Ratio of Net Investment Income to Average Net Assets   0.34 %   0.26 %   0.44 %   0.66 %   0.84 %2
Portfolio Turnover Rate3   64 %   73 %   72 %   69 %   69 %

 

1 Inception.

2 Annualized.

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.

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Intermediate-Term Government Bond Index Fund ETF Shares                    
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 62.96   $ 66.58   $ 64.91   $ 63.58   $ 60.00  
Investment Operations                              
Net Investment Income   .920     .861     1.097     1.301     .961  
Net Realized and Unrealized Gain (Loss) on Investments   1.292     (2.940 )   1.791     1.949     3.579  
Total from Investment Operations   2.212     (2.079 )   2.888     3.250     4.540  
Distributions                              
Dividends from Net Investment Income   (.843 )   (.861 )   (1.094 )   (1.304 )   (.960 )
Distributions from Realized Capital Gains   (.189 )   (.680 )   (.124 )   (.616 )    
Total Distributions   (1.032 )   (1.541 )   (1.218 )   (1.920 )   (.960 )
Net Asset Value, End of Period $ 64.14   $ 62.96   $ 66.58   $ 64.91   $ 63.58  
Total Return   3.54 %   –3.18 %   4.50 %   5.30 %   7.65 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 164   $ 123   $ 133   $ 55   $ 38  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %2
Ratio of Net Investment Income to Average Net Assets   1.50 %   1.32 %   1.67 %   2.09 %   2.29 %2
Portfolio Turnover Rate3   43 %   54 %   51 %   41 %   106 %

 

1 Inception.

2 Annualized.

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.

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Long-Term Government Bond Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 66.33   $ 78.69   $ 68.07   $ 67.61   $ 59.84  
Investment Operations                              
Net Investment Income   2.100     2.055     2.213     2.321     1.691  
Net Realized and Unrealized Gain (Loss) on Investments   7.429     (12.216 )   10.611     .526     7.768  
Total from Investment Operations   9.529     (10.161 )   12.824     2.847     9.459  
Distributions                              
Dividends from Net Investment Income   (1.929 )   (2.056 )   (2.204 )   (2.324 )   (1.689 )
Distributions from Realized Capital Gains       (.143 )       (.063 )    
Total Distributions   (1.929 )   (2.199 )   (2.204 )   (2.387 )   (1.689 )
Net Asset Value, End of Period $ 73.93   $ 66.33   $ 78.69   $ 68.07   $ 67.61  
Total Return   14.65% –13.13%     19.06 %   4.63 %   16.21 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 107   $ 63   $ 75   $ 34   $ 78  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %2
Ratio of Net Investment Income to Average Net Assets   3.17 %   2.80 %   2.99 %   3.68 %   3.75 %2
Portfolio Turnover Rate3   23 %   54 %   46 %   40 %   70 %

 

1 Inception.

2 Annualized.

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.

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Short-Term Corporate Bond Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 78.97   $ 79.78   $ 78.06   $ 77.68   $ 75.05  
Investment Operations                              
Net Investment Income   1.436     1.523     1.793     1.815     1.334  
Net Realized and Unrealized Gain (Loss) on Investments   1.305     (.699 )   1.808     .443     2.636  
Total from Investment Operations   2.741     .824     3.601     2.258     3.970  
Distributions                              
Dividends from Net Investment Income   (1.321 )   (1.517 )   (1.789 )   (1.813 )   (1.340 )
Distributions from Realized Capital Gains   (.180 )   (.117 )   (.092 )   (.065 )    
Total Distributions   (1.501 )   (1.634 )   (1.881 )   (1.878 )   (1.340 )
Net Asset Value, End of Period $ 80.21   $ 78.97   $ 79.78   $ 78.06   $ 77.68  
Total Return   3.50 %   1.03 %   4.68 %   2.94 %   5.34 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 8,430   $ 6,705   $ 3,686   $ 1,905   $ 707  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %2
Ratio of Net Investment Income to Average Net Assets   1.82 %   1.92 %   2.33 %   2.39 %   2.56 %2
Portfolio Turnover Rate3   56 %   61 %   65 %   63 %   68 %

 

1 Inception.

2 Annualized.

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.

72


 

Intermediate-Term Corporate Bond Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 82.31   $ 86.78   $ 81.49   $ 80.67   $ 74.90  
Investment Operations                              
Net Investment Income   2.724     2.715     2.966     3.249     2.519  
Net Realized and Unrealized Gain (Loss) on                              
Investments2   5.024     (4.042 )   5.350     1.162     5.778  
Total from Investment Operations   7.748     (1.327 )   8.316     4.411     8.297  
Distributions                              
Dividends from Net Investment Income   (2.496 )   (2.713 )   (2.963 )   (3.248 )   (2.527 )
Distributions from Realized Capital Gains   (.582 )   (.430 )   (.063 )   (.343 )    
Total Distributions   (3.078 )   (3.143 )   (3.026 )   (3.591 )   (2.527 )
Net Asset Value, End of Period $ 86.98   $ 82.31   $ 86.78   $ 81.49   $ 80.67  
Total Return   9.60 %   –1.64 %   10.43 %   5.65 %   11.30 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 4,010   $ 3,161   $ 2,751   $ 725   $ 274  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %3
Ratio of Net Investment Income to Average Net Assets   3.25 %   3.16 %   3.62 %   4.15 %   4.60 %3
Portfolio Turnover Rate4   65 %   73 %   69 %   80 %   61 %

 

1 Inception.

2 Includes increases from purchase fees of $0.02, $0.00, $0.03, $0.06, and $0.01.

3 Annualized.

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

73


 

Long-Term Corporate Bond Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 82.11   $ 92.15   $ 80.80   $ 81.96   $ 74.67  
Investment Operations                              
Net Investment Income   3.964     4.018     3.980     4.091     3.236  
Net Realized and Unrealized Gain (Loss) on                              
Investments2   9.937     (9.816 )   11.351     (.917 )   7.286  
Total from Investment Operations   13.901     (5.798 )   15.331     3.174     10.522  
Distributions                              
Dividends from Net Investment Income   (3.631 )   (4.018 )   (3.981 )   (4.095 )   (3.232 )
Distributions from Realized Capital Gains       (.224 )       (.239 )    
Total Distributions   (3.631 )   (4.242 )   (3.981 )   (4.334 )   (3.232 )
Net Asset Value, End of Period $ 92.38   $ 82.11   $ 92.15   $ 80.80   $ 81.96  
Total Return   17.35 %   –6.55 %   19.40 %   4.19 %   14.54 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 878   $ 624   $ 1,032   $ 275   $ 66  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.14 %   0.15 %3
Ratio of Net Investment Income to Average Net Assets   4.63 %   4.47 %   4.73 %   5.36 %   5.65 %3
Portfolio Turnover Rate4   54 %   57 %   71 %   110 %   41 %

 

1 Inception.

2 Includes increases from purchase fees of $0.05, $0.07, $0.02, $0.07, and $0.10.

3 Annualized.

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

74


 

Mortgage-Backed Securities Index Fund ETF Shares                          
                            Nov. 19,  
                            20091 to
          Year Ended August 31,        
                            Aug. 31,  
For a Share Outstanding Throughout Each Period   2014     2013     2012     2011     2010  
Net Asset Value, Beginning of Period $ 50.85   $ 52.63   $ 51.90   $ 51.31   $ 49.98  
Investment Operations                              
Net Investment Income   .887     .292     .875     1.142     .836  
Net Realized and Unrealized Gain (Loss) on                              
Investments2   1.741     (1.524 )   .976     1.412     1.338  
Total from Investment Operations   2.628     (1.232 )   1.851     2.554     2.174  
Distributions                              
Dividends from Net Investment Income   (.828 )   (.294 )   (.868 )   (1.142 )   (.844 )
Distributions from Realized Capital Gains       (.254 )   (.253 )   (.822 )    
Total Distributions   (.828 )   (.548 )   (1.121 )   (1.964 )   (.844 )
Net Asset Value, End of Period $ 52.65   $ 50.85   $ 52.63   $ 51.90   $ 51.31  
Total Return   5.21 %   –2.36 %   3.62 %   5.14 %   4.39 %
Ratios/Supplemental Data                              
Net Assets, End of Period (Millions) $ 542   $ 417   $ 247   $ 73   $ 31  
Ratio of Total Expenses to Average Net Assets   0.12 %   0.12 %   0.12 %   0.15 %   0.15 %3
Ratio of Net Investment Income to Average Net Assets   1.72 %   0.57 %   1.57 %   2.30 %   2.12 %3
Portfolio Turnover Rate4   514 %   840 %   529 %   344 %   402 %

 

1 Inception.

2 Includes increases from purchase fees of $0.01, $0.01, $0.02, $0.00, and $0.00.

3 Annualized.

4 Includes 294%, 371%, 231%, 187%, and 166% attributable to mortgage-dollar-roll activity.

75


 

CFA® is a registered trademark owned by CFA Institute.

Morningstar data © 2014 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Vanguard Sector Bond ETFs are not sponsored, endorsed, issued, sold or promoted by Barclays Capital Inc. or any of its affiliates (“Barclays”). Barclays makes no representation or warranty, express or implied, to the owners or purchasers of Vanguard Sector Bond ETFs or any member of the public regarding the advisability of investing in securities generally or in Vanguard Sector Bond ETFs particularly or the ability of the Barclays Index to track general bond market performance. Barclays has not passed on the legality or suitability of the Vanguard Sector Bond ETFs with respect to any person or entity. Barclays’ only relationship to Vanguard and Vanguard Sector Bond ETFs is the licensing of the Barclays Index which is determined, composed and calculated by Barclays without regard to Vanguard or the Vanguard Sector Bond ETFs or any owners or purchasers of the Vanguard Sector Bond ETFs. Barclays has no obligation to take the needs of Vanguard, Vanguard Sector Bond ETFs or the owners of Vanguard Sector Bond ETFs into consideration in determining, composing or calculating the Barclays Index. Barclays is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of Vanguard Sector Bond ETFs to be issued. Barclays has no obligation or liability in connection with the administration, marketing or trading of the Vanguard Sector Bond ETFs.

BARCLAYS SHALL HAVE NO LIABILITY TO THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. BARCLAYS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF THE VANGUARD SECTOR BOND ETFS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. BARCLAYS RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BARCLAYS INDEX, AND BARCLAYS SHALL NOT BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BARCLAYS INDICES. BARCLAYS MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. BARCLAYS SHALL NOT BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY INDIRECT OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN.

©2014 Barclays. Used with Permission.

Source: Barclays Global Family of Indices. Copyright 2014, Barclays. All rights reserved.

76


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment. In selecting securities to buy and sell, active managers may rely on, among other things, research, market forecasts, quantitative models, and their own judgment and experience.

Authorized Participant. Institutional investors that are permitted to purchase Creation Units directly from, and redeem Creation Units directly with, the issuing fund. To be an Authorized Participant, an entity must be a participant in the Depository Trust Company and must enter into an agreement with the fund’s Distributor.

Average Maturity. The average length of time until bonds held by a fund reach maturity and are repaid. In general, the longer the average maturity, the more a fund’s share price fluctuates in response to changes in market interest rates. In calculating average maturity, a fund uses a bond’s maturity or, if applicable, an earlier date on which the advisor believes it is likely that a maturity-shortening device (such as a call, a put, a refunding, a prepayment, or a redemption provision or an adjustable coupon) will cause the bond to be repaid.

Bid-Ask Spread. The difference between the price a dealer is willing to pay for a security (the bid price) and the somewhat higher price at which the dealer is willing to sell the same security (the ask price).

Bond. A debt security (IOU) issued by a corporation, a government, or a government agency in exchange for the money you lend it. In most instances, the issuer agrees to pay back the loan by a specific date and generally to make regular interest payments until that date.

Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.

Corporate Bond. An IOU issued by a business that wants to borrow money. As with other types of bonds, the issuer promises to repay the borrowed money by a specific date and generally to make interest payments in the meantime.

Coupon Rate. The interest rate paid by the issuer of a debt security until its maturity. It is expressed as an annual percentage of the face value of the security.

Creation Unit. A large block of a specified number of ETF Shares. Certain broker-dealers known as “Authorized Participants” may purchase and redeem ETF Shares from the issuing fund in Creation Unit size aggregations.

Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund’s investments.

Ex-Dividend Date. The date when a distribution of dividends and/or capital gains is deducted from the price of a mutual fund or stock. On the ex-dividend date, the share price drops by the amount of the distribution (plus or minus any market activity).

77


 

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

Face Value. The amount to be paid at a bond’s maturity; also known as the par value or principal.

Fixed Income Security. An investment, such as a bond, representing a debt that must be repaid by a specified date, and on which the borrower must pay a fixed, variable, or floating rate of interest.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

Government Bond. An IOU issued by the U.S. government or a government agency in exchange for the money you lend it. The issuer promises to repay the borrowed money by a specific date and generally to make regular interest payments until that date.

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

Indexing. A low-cost investment strategy in which a mutual fund attempts to track—rather than outperform—a specified market benchmark, or “index.”

Investment-Grade Bond. A debt security whose credit quality is considered by independent bond-rating agencies, or through independent analysis conducted by a fund’s advisor, to be sufficient to ensure timely payment of principal and interest under current economic circumstances. Debt securities rated in one of the four highest rating categories are considered investment-grade. Other debt securities may be considered by an advisor to be investment-grade.

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.

Principal. The face value of a debt instrument or the amount of money put into an investment.

Securities. Stocks, bonds, money market instruments, and other investments.

78


 

Total Return. A percentage change, over a specified time period, in a mutual fund’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 fund’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.

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Additional information about the Funds’ investments is Institutional Investor Information
available in the Funds’ annual and semiannual reports P.O. Box 2900
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The SAI for the issuing Funds provides more detailed (including the SAI) at the SEC’s Public Reference Room
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of) this prospectus. other information about the Funds are also available in
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  information, for a fee, by electronic request at the
  following e-mail address: [email protected], or by
  writing the Public Reference Section, Securities and
  Exchange Commission, Washington, DC 20549-1520.
 
  Funds’ Investment Company Act file number: 811-07803

 

© 2014 The Vanguard Group, Inc. All rights reserved.
U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646;
and 8,417,623.
Vanguard Marketing Corporation, Distributor.
P 3142 122014