Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: The ship's wheel represents leadership and guidance, essential qualities in navigating difficult seas.
This one is a replica based on an 18th-century British vessel. The HMS Vanguard, another ship of that era, served as the flagship for Admiral Horatio Nelson when he defeated a French fleet at the Battle of the Nile.

Intermediate U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Signal Shares and Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq market price and the net asset value for a share. U.S. Pat. No. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646.

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Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Signal Shares and Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq market price and the net asset value for a share. U.S. Pat. No. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646.

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Signal Shares and Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq market price and the net asset value for a share. U.S. Pat. No. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646.

For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV.

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Chairman’s Letter

Dear Shareholder,

The year ended August 31, 2013, was difficult for the U.S. bond market. Prices dropped after the Federal Reserve chairman indicated that a key support for the bond market—the central bank’s large-scale purchases of U.S. Treasury bonds and mortgage-backed securities—might be reduced earlier than many anticipated.

The Vanguard Sector Bond Index Funds produced a wide span of returns from narrowly positive to sharply negative. Returns for the government funds ranged from 0.04% for the short-term fund to –13.13% for the long-term fund. The range for the corporate funds was 1.03% for the short-term fund to –6.55% for the long-term fund. The Mortgage-Backed Securities Index Fund returned –2.36%. (The returns cited in this letter are for the funds’ ETF Shares, based on net asset value.)

Six of the seven funds posted increases in the 30-day SEC yields for their ETF Shares during the period (bond prices and yields move in opposite directions). The exception was the mortgage-backed fund, which finished the period at 0.95%, compared with 1.12% a year earlier. Mortgage-backed securities can respond differently from other types of bonds to interest rate changes.

After the close of the period, we announced that we would make Admiral Shares available for certain Vanguard index funds while streamlining our share class offerings through the phaseout of Signal Shares. For

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the Vanguard Sector Bond Index Funds, Signal Shares have been renamed Admiral Shares. Individuals who directly invest a minimum of $10,000 can qualify for Admiral Shares.

We also announced that we had eliminated the purchase fee for the Short-Term Corporate Bond Index Fund and reduced the purchase fee, from 0.50% to 0.25%, for the Intermediate-Term Corporate Bond Index Fund.

Bond returns turned negative amid worry about the Fed’s next move
The overall bond market generated slightly positive returns through the first eight months of the period before reversing course in May, following comments by the Federal Reserve that it might scale back its stimulative bond-buying program. The broad U.S. taxable bond market returned –2.47%, while municipal bonds posted a –3.70% result for the period.

Returns for money market funds and savings accounts were minuscule as the Fed’s target for short-term rates remained between 0% and 0.25%.

Stocks posted robust results despite setbacks at the finish
U.S. stocks advanced about 20% for the 12 months ended August 31, despite slipping in June and August. Through most of the fiscal year, stocks surged as the economy continued to show modest growth and investors appeared more receptive to risk.

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Much of the market’s recent weakness was linked to fears about the Fed’s plans. Heightened strife in the Middle East also contributed to anxiety in the global markets.

International stocks in aggregate finished with a return of about 13%. Developed markets in the Pacific region and Europe posted results closer to those of the United States. Returns for emerging-market stocks were virtually flat as economic growth slowed in China and Brazil.

Although global economic worries and tensions over conflicts abroad have unsettled markets, Jonathan Lemco, a senior sovereign debt analyst in the Vanguard Taxable Credit Research Group, pointed out that investors can still manage risks amid international instability. “Vanguard believes a diversified portfolio is the best way to spread the risk of geopolitical uncertainty,” he said.

The fund expense ratios shown are from the prospectus dated December 21, 2012, and represent estimated costs for the current fiscal year. For the fiscal year ended August 31, 2013, the funds’ expense ratios were: for the Short-Term Government Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; for the Intermediate-Term Government Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; for the Long-Term Government Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; for the Short-Term Corporate Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; for the Intermediate-Term Corporate Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; for the Long-Term Corporate Bond Index Fund, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares; and for the Mortgage-Backed Securities Index Fund, 0.12% for Signal Shares and 0.12% for ETF Shares. Peer-group expense ratios are derived from data provided by Lipper, a Thomson Reuters Company, and capture information through year-end 2012.

Peer groups: For the Short-Term Government Bond Index Fund, Short U.S. Government Funds; for the Intermediate-Term Government Bond Index Fund, Intermediate U.S. Government Funds; for the Long-Term Government Bond Index Fund, General U.S. Government Funds; for the Short-Term Corporate Bond Index Fund, Short-Intermediate Investment-Grade Debt Funds; for the Intermediate-Term Corporate Bond Index Fund, Intermediate Investment-Grade Debt Funds; for the Long-Term Corporate Bond Index Fund, Corporate BBB-Rated Debt Funds; for the Mortgage-Backed Securities Index Fund, U.S. Mortgage Funds.

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Yields marched higher, pressuring bond returns

A rise in bond yields started to accelerate in May in the wake of hints, and then more expansive comments, from the Fed that it might scale back its bond-buying program earlier than originally thought. Because the nation’s central bank is such a large presence in the bond market, investors feared that its reduced demand would lower bond prices and crimp returns.

We can expect that the funds’ results will continue to be influenced by the actions of the Fed and by investors’ perceptions of what those actions will be. Of course, peering into the future is fraught with uncertainty, and the unprecedented steps taken by the Fed (and other central banks) have left us sailing in uncharted waters.

What does seem certain is that the timing of the Fed’s actions will be determined by the evolving conditions in the U.S. economy.

Among the government funds, the Short-Term Government Bond Index Fund’s barely positive return made it the best performer, reflecting the fund’s shorter duration, a gauge of interest rate sensitivity. Conversely, the Long-Term Government Bond Index Fund suffered the steepest decline, a consequence of its longer duration. A similar pattern was seen with the corporate funds, although they fared better than their government counterparts. Because the Fed’s buying has been targeted at government securities, investors apparently didn’t think the

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Fed’s anticipated pullback would have as much of an effect on the corporate segment of the market.

The Mortgage-Backed Securities Index Fund invests primarily in U.S. agency mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac. Investors anticipated that demand for these securities would fall when the Fed begins to taper its purchases.

Whether it’s stocks or bonds, market-timing is ill-advised

Many investors who owned stocks during the financial crisis probably still have a healthy respect for the unpredictability of that asset class. The crisis was tough to go through, but investors who stayed the course benefited from the strong rally that followed.

Bonds are going through a rough patch of late. Investors have seen rates move higher and prices fall, and many are wondering how they can reposition their bond holdings to avoid further pain. Should they shift to shorter-duration bonds, to higher-quality bonds, or even to cash and wait it out on the sidelines?

While it’s understandable to want to sidestep potential losses, keep in mind that preparing your portfolio for higher interest rates is essentially an attempt to time the market, and that’s no easier with bonds than it is with stocks. This point was highlighted in a recent Vanguard report on rates and bonds, which said: “Interest rate movements rarely conform to expectations. … Just because interest rates are low doesn’t mean they can’t go lower or that they must go higher.” (You can find the full report, Risk of Loss: Should the Prospect of Rising Rates Push Investors From High-Quality Bonds?, at vanguard.com/research.)

The authors’ conclusion will sound familiar to many Vanguard investors: Avoid the temptation to make abrupt adjustments to your asset allocation. The authors also remind investors that bonds remain one of the best diversifiers of equity market risk and that “they will likely provide downside protection to balanced investors over the long term.”

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
October 16, 2013

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Short-Term Government Bond Index Fund

Fund Profile
As of August 31, 2013

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

For information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus

1 The expense ratios shown are from the prospectus dated December 21, 2012, and represent estimated costs for the current fiscal year. For the fiscal year ended August 31, 2013, the expense ratios were 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares.

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Short-Term Government Bond Index Fund

Performance Summary

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

Cumulative Performance: November 19, 2009, Through August 31, 2013
Initial Investment of $10,000

For a benchmark description, see the Glossary.

Short U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

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

See Financial Highlights for dividend and capital gains information.

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

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

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

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Short-Term Government Bond Index Fund

Average Annual Total Returns: Periods Ended June 30, 2013

This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.

Securities and Exchange Commission rules require that we provide this information.

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Short-Term Government Bond Index Fund

Financial Statements

Statement of Net Assets
As of August 31, 2013

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

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See Note A in Notes to Financial Statements.
1 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
2 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
See accompanying Notes, which are an integral part of the Financial Statements.

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See Note A in Notes to Financial Statements.

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

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

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1 Includes fiscal 2013 and 2012 short-term gain distributions totaling $163,000 and $178,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($1,000) and $1,000.

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

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1 Inception.

2 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees.

3 Annualized.

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

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

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1 Inception.
2 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction fees.
3 Annualized.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

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

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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.

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

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Short-Term Government Bond Index Fund

Notes to Financial Statements

Vanguard Short-Term Government Bond Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers three classes of shares: Signal Shares, Institutional Shares, and ETF Shares. Signal Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.

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Short-Term Government Bond Index Fund

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

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

The following table summarizes the market value of the fund’s investments as of August 31, 2013, based on the inputs used to value them:

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

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Short-Term Government Bond Index Fund

E. During the year ended August 31, 2013, the fund purchased $397,835,000 of investment securities and sold $278,453,000 of investment securities, other than temporary cash investments. Purchases and sales include $163,192,000 and $39,209,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

G. Management has determined that no material events or transactions occurred subsequent to August 31, 2013, that would require recognition in these financial statements. On October 16, 2013, Signal Shares were renamed Admiral Shares.

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Intermediate-Term Government Bond Index Fund

Fund Profile
As of August 31, 2013

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

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

For information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus

1 The expense ratios shown are from the prospectus dated December 21, 2012, and represent estimated costs for the current fiscal year. For the fiscal year ended August 31, 2013, the expense ratios were 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.12% for ETF Shares.

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Intermediate-Term Government Bond Index Fund

Performance Summary

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

Cumulative Performance: November 19, 2009, Through August 31, 2013
Initial Investment of $10,000

For a benchmark description, see the Glossary.

Intermediate U.S. Government Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

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

See Financial Highlights for dividend and capital gains information.

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

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

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

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Intermediate-Term Government Bond Index Fund

Average Annual Total Returns: Periods Ended June 30, 2013
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.

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Intermediate-Term Government Bond Index Fund

Financial Statements

Statement of Net Assets
As of August 31, 2013

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