Semiannual
Report |
May 31, 2022
Vanguard
U.S. Factor ETFs
| Vanguard U.S. Liquidity Factor ETF |
| Vanguard U.S. Minimum Volatility ETF |
| Vanguard U.S. Momentum Factor ETF |
| Vanguard U.S. Multifactor ETF |
| Vanguard U.S. Quality Factor ETF |
| Vanguard U.S. Value Factor ETF |
Contents
|
About Your Fund’s Expenses
|
1 |
|
U.S. Liquidity Factor ETF
|
3 |
|
U.S. Minimum Volatility ETF
|
20 |
|
U.S. Momentum Factor ETF
|
32 |
|
U.S. Multifactor ETF
|
47 |
|
U.S. Quality Factor ETF
|
62 |
|
U.S. Value Factor ETF
|
78 |
|
Trustees Approve Advisory Arrangements
|
95 |
|
Liquidity Risk Management
|
97 |
About Your
Fund’s Expenses
As
a shareholder of the fund, you incur ongoing costs, which include costs for
portfolio management, administrative services, and shareholder reports (like
this one), among others. Operating expenses, which are deducted from a fund’s
gross income, directly reduce the investment return of the fund.
A
fund’s expenses are expressed as a percentage of its average net assets. This
figure is known as the expense ratio. The following examples are intended to
help you understand the ongoing costs (in dollars) of investing in your fund and
to compare these costs with those of other mutual funds. The examples are based
on an investment of $1,000 made at the beginning of the period shown and held
for the entire period.
The
accompanying table illustrates your fund’s costs in two ways:
| • | Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. |
To
do so, simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
given for your fund under the heading ”Expenses Paid During Period.“
| • | Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. |
Note
that the expenses shown in the table are meant to highlight and help you compare
ongoing costs only and do not reflect
transaction costs incurred by the fund for buying and selling securities.
Further, the expenses do not include any purchase, redemption, or account
service fees described in the fund prospectus. If such fees were applied to your
account, your costs would be higher. Your fund does not carry a “sales
load.”
The
calculations assume no shares were bought or sold during the period. Your actual
costs may have been higher or lower, depending on the amount of your investment
and the timing of any purchases or redemptions.
You
can find more information about the fund’s expenses, including annual expense
ratios, in the Financial Statements section of this report. For additional
information on operating expenses and other shareholder costs, please refer to
your fund’s current prospectus.
1
| Six Months Ended May 31, 2022 | |||
| Beginning Account Value 11/30/2021 |
Ending Account Value 5/31/2022 |
Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| U.S. Liquidity Factor ETF | $1,000.00 | $878.50 | $0.61 |
| U.S. Minimum Volatility ETF | $1,000.00 | $1,012.40 | $0.65 |
| U.S. Momentum Factor ETF | $1,000.00 | $902.90 | $0.62 |
| U.S. Multifactor ETF | $1,000.00 | $982.00 | $0.89 |
| U.S. Quality Factor ETF | $1,000.00 | $886.60 | $0.61 |
| U.S. Value Factor ETF | $1,000.00 | $1,057.40 | $0.67 |
| Based on Hypothetical 5% Yearly Return | |||
| U.S. Liquidity Factor ETF | $1,000.00 | $1,024.28 | $0.66 |
| U.S. Minimum Volatility ETF | $1,000.00 | $1,024.28 | $0.66 |
| U.S. Momentum Factor ETF | $1,000.00 | $1,024.28 | $0.66 |
| U.S. Multifactor ETF | $1,000.00 | $1,024.03 | $0.91 |
| U.S. Quality Factor ETF | $1,000.00 | $1,024.28 | $0.66 |
| U.S. Value Factor ETF | $1,000.00 | $1,024.28 | $0.66 |
The
calculations are based on expenses incurred in the most recent six-month period.
The funds' annualized six-month expense ratios for that period are 0.13% for the
U.S. Liquidity Factor ETF, 0.13% for the U.S. Minimum Volatility ETF, 0.13% for
the U.S. Momentum Factor ETF, 0.18% for the U.S. Multifactor ETF, 0.13% for the
U.S. Quality Factor ETF, and 0.13% for the U.S. Value Factor ETF. The dollar
amounts shown as “Expenses Paid” are equal to the annualized expense ratio
multiplied by the average account value over the period, multiplied by the
number of days in the most recent six-month period, then divided by the number
of days in the most recent 12-month period (182/365).
2
U.S.
Liquidity Factor ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 5.0% |
| Consumer Discretionary | 7.5 |
| Consumer Staples | 2.9 |
| Energy | 2.4 |
| Financials | 25.0 |
| Health Care | 18.2 |
| Industrials | 23.9 |
| Real Estate | 0.6 |
| Technology | 11.0 |
| Telecommunications | 1.9 |
| Utilities | 1.6 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
3
U.S.
Liquidity Factor ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
4
U.S.
Liquidity Factor ETF
5
U.S.
Liquidity Factor ETF
6
U.S.
Liquidity Factor ETF
7
U.S.
Liquidity Factor ETF
8
U.S.
Liquidity Factor ETF
9
U.S.
Liquidity Factor ETF
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| Micro E-mini S&P 500 Index | June 2022 | 7 | 145 | — |
See
accompanying Notes, which are an integral part of the Financial
Statements.
10
U.S.
Liquidity Factor ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $38,657) | 44,500 |
| Affiliated Issuers (Cost $152) | 152 |
| Total Investments in Securities | 44,652 |
| Investment in Vanguard | 2 |
| Cash | 1 |
| Cash Collateral Pledged—Futures Contracts | 10 |
| Receivables for Investment Securities Sold | 153 |
| Receivables for Accrued Income | 35 |
| Total Assets | 44,853 |
| Liabilities | |
| Payables for Investment Securities Purchased | 146 |
| Collateral for Securities on Loan | 45 |
| Payables to Vanguard | 2 |
| Variation Margin Payable—Futures Contracts | 1 |
| Total Liabilities | 194 |
| Net Assets | 44,659 |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 39,427 |
| Total Distributable Earnings (Loss) | 5,232 |
| Net Assets | 44,659 |
| Net Assets | |
| Applicable
to 465,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
44,659 |
| Net Asset Value Per Share | $96.04 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
11
U.S.
Liquidity Factor ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 303 |
| Interest2 | — |
| Securities Lending—Net | 1 |
| Total Income | 304 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | — |
| Management and Administrative | 11 |
| Marketing and Distribution | — |
| Custodian Fees | 1 |
| Shareholders’ Reports | 12 |
| Trustees’ Fees and Expenses | — |
| Professional Services | 8 |
| Total Expenses | 32 |
| Net Investment Income | 272 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 379 |
| Futures Contracts | 3 |
| Realized Net Gain (Loss) | 382 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (6,826) |
| Futures Contracts | (2) |
| Change in Unrealized Appreciation (Depreciation) | (6,828) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (6,174) |
| 1 | Dividends are net of foreign withholding taxes of less than $1,000. |
| 2 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were each less than $1,000. Purchases and sales are for temporary cash investment purposes. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
12
U.S.
Liquidity Factor ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 272 | 637 | |
| Realized Net Gain (Loss) | 382 | 1,846 | |
| Change in Unrealized Appreciation (Depreciation) | (6,828) | 7,648 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (6,174) | 10,131 | |
| Distributions | |||
| Total Distributions | (330) | (661) | |
| Capital Share Transactions | |||
| Issued | 1,105 | 6,433 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (1,104) | (4,935) | |
| Net Increase (Decrease) from Capital Share Transactions | 1 | 1,498 | |
| Total Increase (Decrease) | (6,503) | 10,968 | |
| Net Assets | |||
| Beginning of Period | 51,162 | 40,194 | |
| End of Period | 44,659 | 51,162 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
13
U.S.
Liquidity Factor ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $110.02 | $89.32 | $86.44 | $78.25 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | .586 | 1.374 | 1.436 | 1.310 | 1.010 |
| Net Realized and Unrealized Gain (Loss) on Investments | (13.856) | 20.757 | 2.882 | 8.047 | 2.834 |
| Total from Investment Operations | (13.270) | 22.131 | 4.318 | 9.357 | 3.844 |
| Distributions | |||||
| Dividends from Net Investment Income | (.710) | (1.431) | (1.438) | (1.167) | (.594) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.710) | (1.431) | (1.438) | (1.167) | (.594) |
| Net Asset Value, End of Period | $96.04 | $110.02 | $89.32 | $86.44 | $78.25 |
| Total Return | -12.15% | 24.89% | 5.38% | 12.14% | 5.09% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $45 | $51 | $40 | $41 | $16 |
| Ratio of Total Expenses to Average Net Assets | 0.13% | 0.13% | 0.13% | 0.14%3 | 0.13%4,5 |
| Ratio of Net Investment Income to Average Net Assets | 1.11% | 1.28% | 1.83% | 1.62% | 1.58%4 |
| Portfolio Turnover Rate | 33% | 64%6 | 54%6 | 49% | 20% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.13%. |
| 4 | Annualized. |
| 5 | The ratio of total expenses to average net assets before an expense reduction of 0.02% was 0.15%. The fund incurred higher than anticipated expenses, in which Vanguard voluntarily agreed to assume payment of certain expenses. The fund is not obligated to repay this amount to Vanguard. |
| 6 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
14
U.S.
Liquidity Factor ETF
Notes
to Financial Statements
Vanguard
U.S. Liquidity Factor ETF is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. ETF Shares are listed for
trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its taxable income. The fund’s tax returns are
open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is
15
U.S.
Liquidity Factor ETF
generally
three years after the filing of the tax return. Management has analyzed the
fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s
financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
16
U.S.
Liquidity Factor ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $2,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA.
The fund’s trustees and officers are also directors and employees, respectively,
of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
17
U.S.
Liquidity Factor ETF
The
following table summarizes the market value of the fund’s investments and
derivatives as of May 31, 2022, based on the inputs used to value them:
| Level
1 ($000) |
Level
2 ($000) |
Level
3 ($000) |
Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 44,491 | — | 9 | 44,500 |
| Temporary Cash Investments | 152 | — | — | 152 |
| Total | 44,643 | — | 9 | 44,652 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Futures Contracts1 | — | — | — | — |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 38,812 |
| Gross Unrealized Appreciation | 7,703 |
| Gross Unrealized Depreciation | (1,863) |
| Net Unrealized Appreciation (Depreciation) | 5,840 |
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $1,086,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $15,771,000 of investment securities and sold $15,722,000 of investment securities, other than temporary cash investments. |
The
fund purchased securities from and sold securities to other Vanguard funds or
accounts managed by Vanguard or its affiliates, in accordance with procedures
adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended May 31, 2022, such purchases were
$171,000 and sales were $53,000, resulting in net realized gain of $35,000;
these amounts, other than temporary cash investments, are included in the
purchases and sales of investment securities noted above.
18
U.S.
Liquidity Factor ETF
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 10 | 60 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (10) | (45) | |
| Net Increase (Decrease) in Shares Outstanding | — | 15 |
At
May 31, 2022, one shareholder, a subsidiary of Vanguard, was the record or
beneficial owner of 46% of the fund’s net assets. If this shareholder were to
redeem its investment in the fund, the redemption might result in an increase in
the fund’s expense ratio, cause the fund to incur higher transaction costs, or
lead to the realization of taxable capital gains.
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
19
U.S.
Minimum Volatility ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 1.2% |
| Consumer Discretionary | 9.9 |
| Consumer Staples | 9.8 |
| Energy | 4.2 |
| Financials | 13.4 |
| Health Care | 16.9 |
| Industrials | 7.7 |
| Real Estate | 1.5 |
| Technology | 18.9 |
| Telecommunications | 7.3 |
| Utilities | 9.2 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
20
U.S.
Minimum Volatility ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
21
U.S.
Minimum Volatility ETF
22
U.S.
Minimum Volatility ETF
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| Micro E-mini S&P 500 Index | June 2022 | 9 | 186 | (5) |
See
accompanying Notes, which are an integral part of the Financial
Statements.
23
U.S.
Minimum Volatility ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $48,803) | 54,601 |
| Affiliated Issuers (Cost $192) | 192 |
| Total Investments in Securities | 54,793 |
| Investment in Vanguard | 2 |
| Cash Collateral Pledged—Futures Contracts | 14 |
| Receivables for Accrued Income | 69 |
| Receivables for Capital Shares Issued | 503 |
| Total Assets | 55,381 |
| Liabilities | |
| Payables for Investment Securities Purchased | 508 |
| Payables to Vanguard | 3 |
| Variation Margin Payable—Futures Contracts | 1 |
| Total Liabilities | 512 |
| Net Assets | 54,869 |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 55,722 |
| Total Distributable Earnings (Loss) | (853) |
| Net Assets | 54,869 |
| Net Assets | |
| Applicable
to 545,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
54,869 |
| Net Asset Value Per Share | $100.68 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
24
U.S.
Minimum Volatility ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends | 501 |
| Interest1 | — |
| Securities Lending—Net | 1 |
| Total Income | 502 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | — |
| Management and Administrative | 13 |
| Marketing and Distribution | — |
| Custodian Fees | 1 |
| Shareholders’ Reports | 12 |
| Trustees’ Fees and Expenses | — |
| Professional Services | 8 |
| Total Expenses | 34 |
| Net Investment Income | 468 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold1,2 | 1,519 |
| Futures Contracts | 5 |
| Realized Net Gain (Loss) | 1,524 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | (1,423) |
| Futures Contracts | (12) |
| Change in Unrealized Appreciation (Depreciation) | (1,435) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 557 |
| 1 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were less than $1,000, less than $1,000, less than $1,000, and $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 2 | Includes $246,000 of net gain (loss) resulting from in-kind redemptions. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
25
U.S.
Minimum Volatility ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 468 | 699 | |
| Realized Net Gain (Loss) | 1,524 | 6,386 | |
| Change in Unrealized Appreciation (Depreciation) | (1,435) | 896 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 557 | 7,981 | |
| Distributions | |||
| Total Distributions | (439) | (905) | |
| Capital Share Transactions | |||
| Issued | 9,127 | 1,451 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (1,505) | (18,000) | |
| Net Increase (Decrease) from Capital Share Transactions | 7,622 | (16,549) | |
| Total Increase (Decrease) | 7,740 | (9,473) | |
| Net Assets | |||
| Beginning of Period | 47,129 | 56,602 | |
| End of Period | 54,869 | 47,129 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
26
U.S.
Minimum Volatility ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $100.28 | $87.08 | $91.10 | $81.69 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | .911 | 1.374 | 1.779 | 2.632 | 1.887 |
| Net Realized and Unrealized Gain (Loss) on Investments | .359 | 13.497 | (3.776) | 8.996 | 5.677 |
| Total from Investment Operations | 1.270 | 14.871 | (1.997) | 11.628 | 7.564 |
| Distributions | |||||
| Dividends from Net Investment Income | (.870) | (1.671) | (2.023) | (2.218) | (.874) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.870) | (1.671) | (2.023) | (2.218) | (.874) |
| Net Asset Value, End of Period | $100.68 | $100.28 | $87.08 | $91.10 | $81.69 |
| Total Return | 1.24% | 17.22% | -1.99% | 14.58% | 10.07% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $55 | $47 | $57 | $91 | $22 |
| Ratio of Total Expenses to Average Net Assets | 0.13% | 0.13% | 0.13% | 0.13% | 0.13%3 |
| Ratio of Net Investment Income to Average Net Assets | 1.74% | 1.43% | 2.14% | 3.05% | 2.90%3 |
| Portfolio Turnover Rate | 32%4 | 46%4 | 83%4 | 23% | 5% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | Annualized. |
| 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.
27
U.S.
Minimum Volatility ETF
Notes
to Financial Statements
Vanguard
U.S. Minimum Volatility ETF is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund. ETF Shares are listed
for trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its taxable income. The fund’s tax returns are
open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is
28
U.S.
Minimum Volatility ETF
generally
three years after the filing of the tax return. Management has analyzed the
fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s
financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
29
U.S.
Minimum Volatility ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $2,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA.
The fund’s trustees and officers are also directors and employees, respectively,
of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
At
May 31, 2022, 100% of the market value of the fund’s investments and derivatives
was determined based on Level 1 inputs.
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 48,995 |
| Gross Unrealized Appreciation | 7,305 |
| Gross Unrealized Depreciation | (1,512) |
| Net Unrealized Appreciation (Depreciation) | 5,793 |
30
U.S.
Minimum Volatility ETF
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $8,322,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $25,540,000 of investment securities and sold $17,928,000 of investment securities, other than temporary cash investments. Purchases and sales include $0 and $1,505,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
The
fund purchased securities from and sold securities to other Vanguard funds or
accounts managed by Vanguard or its affiliates, in accordance with procedures
adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended May 31, 2022, such purchases were
$0 and sales were $460,000, resulting in net realized gain of $120,000; these
amounts, other than temporary cash investments, are included in the purchases
and sales of investment securities noted above.
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 90 | 15 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (15) | (195) | |
| Net Increase (Decrease) in Shares Outstanding | 75 | (180) |
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
31
U.S.
Momentum Factor ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 6.2% |
| Consumer Discretionary | 10.3 |
| Consumer Staples | 7.0 |
| Energy | 21.6 |
| Financials | 15.4 |
| Health Care | 14.1 |
| Industrials | 13.7 |
| Real Estate | 0.6 |
| Technology | 9.4 |
| Telecommunications | 1.2 |
| Utilities | 0.5 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
32
U.S.
Momentum Factor ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
33
U.S.
Momentum Factor ETF
34
U.S.
Momentum Factor ETF
35
U.S.
Momentum Factor ETF
36
U.S.
Momentum Factor ETF
37
U.S.
Momentum Factor ETF
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | June 2022 | 2 | 413 | (22) |
| Micro E-mini S&P 500 Index | June 2022 | 10 | 207 | 2 |
| (20) | ||||
See
accompanying Notes, which are an integral part of the Financial
Statements.
38
U.S.
Momentum Factor ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $181,367) | 197,794 |
| Affiliated Issuers (Cost $610) | 610 |
| Total Investments in Securities | 198,404 |
| Investment in Vanguard | 7 |
| Cash | 241 |
| Cash Collateral Pledged—Futures Contracts | 36 |
| Receivables for Accrued Income | 313 |
| Total Assets | 199,001 |
| Liabilities | |
| Payables for Investment Securities Purchased | 103 |
| Collateral for Securities on Loan | 386 |
| Payables to Vanguard | 11 |
| Variation Margin Payable—Futures Contracts | 4 |
| Total Liabilities | 504 |
| Net Assets | 198,497 |
| 1 Includes $361 of securities on loan. | |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 190,626 |
| Total Distributable Earnings (Loss) | 7,871 |
| Net Assets | 198,497 |
| Net Assets | |
| Applicable
to 1,675,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
198,497 |
| Net Asset Value Per Share | $118.51 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
39
U.S.
Momentum Factor ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 1,612 |
| Interest2 | 1 |
| Securities Lending—Net | 7 |
| Total Income | 1,620 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 76 |
| Management and Administrative | 14 |
| Marketing and Distribution | 3 |
| Custodian Fees | 6 |
| Shareholders’ Reports | 16 |
| Trustees’ Fees and Expenses | — |
| Professional Services | 8 |
| Total Expenses | 123 |
| Net Investment Income | 1,497 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | (4,477) |
| Futures Contracts | (24) |
| Realized Net Gain (Loss) | (4,501) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (15,416) |
| Futures Contracts | (36) |
| Change in Unrealized Appreciation (Depreciation) | (15,452) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (18,456) |
| 1 | Dividends are net of foreign withholding taxes of less than $1,000. |
| 2 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $1,000, less than $1,000, less than $1,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $6,331,000 of net gain (loss) resulting from in-kind redemptions. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
40
U.S.
Momentum Factor ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 1,497 | 1,153 | |
| Realized Net Gain (Loss) | (4,501) | 47 | |
| Change in Unrealized Appreciation (Depreciation) | (15,452) | 16,403 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (18,456) | 17,603 | |
| Distributions | |||
| Total Distributions | (1,317) | (717) | |
| Capital Share Transactions | |||
| Issued | 52,402 | 124,004 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (25,048) | (8,454) | |
| Net Increase (Decrease) from Capital Share Transactions | 27,354 | 115,550 | |
| Total Increase (Decrease) | 7,581 | 132,436 | |
| Net Assets | |||
| Beginning of Period | 190,916 | 58,480 | |
| End of Period | 198,497 | 190,916 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
41
U.S.
Momentum Factor ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $132.12 | $106.33 | $85.18 | $76.73 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | .971 | 1.227 | .552 | .985 | .538 |
| Net Realized and Unrealized Gain (Loss) on Investments | (13.725) | 25.325 | 21.279 | 8.336 | 1.489 |
| Total from Investment Operations | (12.754) | 26.552 | 21.831 | 9.321 | 2.027 |
| Distributions | |||||
| Dividends from Net Investment Income | (.856) | (.762) | (.681) | (.871) | (.297) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.856) | (.762) | (.681) | (.871) | (.297) |
| Net Asset Value, End of Period | $118.51 | $132.12 | $106.33 | $85.18 | $76.73 |
| Total Return | -9.71% | 25.01% | 25.91% | 12.25% | 2.67% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $198 | $191 | $58 | $32 | $33 |
| Ratio of Total Expenses to Average Net Assets | 0.13% | 0.13% | 0.13% | 0.13% | 0.13%3 |
| Ratio of Net Investment Income to Average Net Assets | 1.42% | 0.95% | 0.62% | 1.24% | 0.83%3 |
| Portfolio Turnover Rate | 61%4 | 103%4 | 115%4 | 118% | 53% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | Annualized. |
| 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.
42
U.S.
Momentum Factor ETF
Notes
to Financial Statements
Vanguard
U.S. Momentum Factor ETF is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. ETF Shares are listed for
trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its taxable income. The fund’s tax returns are
open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is
43
U.S.
Momentum Factor ETF
generally
three years after the filing of the tax return. Management has analyzed the
fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s
financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
44
U.S.
Momentum Factor ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $7,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA.
The fund’s trustees and officers are also directors and employees, respectively,
of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
At
May 31, 2022, 100% of the market value of the fund’s investments and derivatives
was determined based on Level 1 inputs.
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 181,982 |
| Gross Unrealized Appreciation | 25,330 |
| Gross Unrealized Depreciation | (8,928) |
| Net Unrealized Appreciation (Depreciation) | 16,402 |
45
U.S.
Momentum Factor ETF
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $4,512,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $169,769,000 of investment securities and sold $142,057,000 of investment securities, other than temporary cash investments. Purchases and sales include $0 and $25,039,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 430 | 960 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (200) | (65) | |
| Net Increase (Decrease) in Shares Outstanding | 230 | 895 |
At
May 31, 2022, one shareholder was a record or beneficial owner of 33% of the
fund’s net assets. If this shareholder were to redeem its investment in the
fund, the redemption might result in an increase in the fund’s expense ratio,
cause the fund to incur higher transaction costs, or lead to the realization of
taxable capital gains.
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
46
U.S.
Multifactor ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 5.1% |
| Consumer Discretionary | 16.0 |
| Consumer Staples | 8.5 |
| Energy | 14.6 |
| Financials | 19.2 |
| Health Care | 13.5 |
| Industrials | 11.9 |
| Real Estate | 0.1 |
| Technology | 9.8 |
| Telecommunications | 1.3 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
47
U.S.
Multifactor ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
48
U.S.
Multifactor ETF
49
U.S.
Multifactor ETF
50
U.S.
Multifactor ETF
51
U.S.
Multifactor ETF
52
U.S.
Multifactor ETF
| Shares | Market Value• ($000) | ||
| Temporary Cash Investments (0.2%) | |||
| Money Market Fund (0.2%) | |||
| 1 | Vanguard Market Liquidity Fund, 0.854% (Cost $337) | 3,367 | 337 |
| Total Investments (99.8%) (Cost $127,140) | 148,854 | ||
| Other Assets and Liabilities—Net (0.2%) | 362 | ||
| Net Assets (100%) | 149,216 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| Micro E-mini S&P 500 Index | June 2022 | 31 | 640 | 8 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
53
U.S.
Multifactor ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $126,803) | 148,517 |
| Affiliated Issuers (Cost $337) | 337 |
| Total Investments in Securities | 148,854 |
| Investment in Vanguard | 5 |
| Cash | 11 |
| Cash Collateral Pledged—Futures Contracts | 28 |
| Receivables for Accrued Income | 332 |
| Total Assets | 149,230 |
| Liabilities | |
| Payables to Vanguard | 11 |
| Variation Margin Payable—Futures Contracts | 3 |
| Total Liabilities | 14 |
| Net Assets | 149,216 |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 143,704 |
| Total Distributable Earnings (Loss) | 5,512 |
| Net Assets | 149,216 |
| Net Assets | |
| Applicable
to 1,480,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
149,216 |
| Net Asset Value Per Share | $100.82 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
54
U.S.
Multifactor ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 1,468 |
| Interest2 | — |
| Securities Lending—Net | — |
| Total Income | 1,468 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 56 |
| Management and Administrative | 45 |
| Marketing and Distribution | 2 |
| Custodian Fees | 1 |
| Shareholders’ Reports | 13 |
| Trustees’ Fees and Expenses | — |
| Professional Services | 8 |
| Total Expenses | 125 |
| Net Investment Income | 1,343 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | (983) |
| Futures Contracts | (50) |
| Realized Net Gain (Loss) | (1,033) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (2,569) |
| Futures Contracts | 5 |
| Change in Unrealized Appreciation (Depreciation) | (2,564) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (2,254) |
| 1 | Dividends are net of foreign withholding taxes of $1,000. |
| 2 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $1,000, less than $1,000, less than $1,000, and ($1,000), respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $828,000 of net gain (loss) resulting from in-kind redemptions. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
55
U.S.
Multifactor ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 1,343 | 1,364 | |
| Realized Net Gain (Loss) | (1,033) | 3,068 | |
| Change in Unrealized Appreciation (Depreciation) | (2,564) | 15,645 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (2,254) | 20,077 | |
| Distributions | |||
| Total Distributions | (1,137) | (1,170) | |
| Capital Share Transactions | |||
| Issued | 45,387 | 31,503 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (3,060) | (2,076) | |
| Net Increase (Decrease) from Capital Share Transactions | 42,327 | 29,427 | |
| Total Increase (Decrease) | 38,936 | 48,334 | |
| Net Assets | |||
| Beginning of Period | 110,280 | 61,946 | |
| End of Period | 149,216 | 110,280 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
56
U.S.
Multifactor ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $103.55 | $79.93 | $79.60 | $76.07 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | .992 | 1.534 | 1.191 | 1.340 | 1.007 |
| Net Realized and Unrealized Gain (Loss) on Investments | (2.802) | 23.442 | .372 | 3.458 | .543 |
| Total from Investment Operations | (1.810) | 24.976 | 1.563 | 4.798 | 1.550 |
| Distributions | |||||
| Dividends from Net Investment Income | (.920) | (1.356) | (1.233) | (1.268) | (.480) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.920) | (1.356) | (1.233) | (1.268) | (.480) |
| Net Asset Value, End of Period | $100.82 | $103.55 | $79.93 | $79.60 | $76.07 |
| Total Return | -1.80% | 31.43% | 2.35% | 6.46% | 2.03% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $149 | $110 | $62 | $90 | $76 |
| Ratio of Total Expenses to Average Net Assets | 0.18% | 0.18% | 0.19%3 | 0.19%3 | 0.18%4 |
| Ratio of Net Investment Income to Average Net Assets | 1.79% | 1.56% | 1.66% | 1.79% | 1.59%4 |
| Portfolio Turnover Rate | 26%5 | 75%5 | 95%5 | 98% | 64% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.18%. |
| 4 | Annualized. |
| 5 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
57
U.S.
Multifactor ETF
Notes
to Financial Statements
Vanguard
U.S. Multifactor ETF is registered under the Investment Company Act of 1940 as
an open-end investment company, or mutual fund. ETF Shares are listed for
trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its income. The fund’s tax returns are open to
examination by the relevant tax authorities until expiration of the applicable
statute of limitations, which is generally
58
U.S.
Multifactor ETF
three
years after the filing of the tax return. Management has analyzed the fund’s tax
positions taken for all open federal and state income tax years, and has
concluded that no provision for income tax is required in the fund’s financial
statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
59
U.S.
Multifactor ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $5,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA.
The fund’s trustees and officers are also directors and employees, respectively,
of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
At
May 31, 2022, 100% of the market value of the fund’s investments and derivatives
was determined based on Level 1 inputs.
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 127,140 |
| Gross Unrealized Appreciation | 25,714 |
| Gross Unrealized Depreciation | (3,992) |
| Net Unrealized Appreciation (Depreciation) | 21,722 |
60
U.S.
Multifactor ETF
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $15,829,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $81,047,000 of investment securities and sold $38,706,000 of investment securities, other than temporary cash investments. Purchases and sales include $0 and $3,060,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
The
fund purchased securities from and sold securities to other Vanguard funds or
accounts managed by Vanguard or its affiliates, in accordance with procedures
adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended May 31, 2022, such purchases were
$221,000 and sales were $0; these amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities
noted above.
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 445 | 315 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (30) | (25) | |
| Net Increase (Decrease) in Shares Outstanding | 415 | 290 |
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
61
U.S.
Quality Factor ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 3.5% |
| Consumer Discretionary | 18.9 |
| Consumer Staples | 5.2 |
| Energy | 4.2 |
| Financials | 15.9 |
| Health Care | 15.8 |
| Industrials | 15.8 |
| Real Estate | 0.1 |
| Technology | 19.0 |
| Telecommunications | 1.6 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
62
U.S.
Quality Factor ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
63
U.S.
Quality Factor ETF
64
U.S.
Quality Factor ETF
65
U.S.
Quality Factor ETF
66
U.S.
Quality Factor ETF
67
U.S.
Quality Factor ETF
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | June 2022 | 1 | 207 | (5) |
| Micro E-mini S&P 500 Index | June 2022 | 19 | 392 | (24) |
| (29) | ||||
See
accompanying Notes, which are an integral part of the Financial
Statements.
68
U.S.
Quality Factor ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $184,873) | 184,612 |
| Affiliated Issuers (Cost $802) | 802 |
| Total Investments in Securities | 185,414 |
| Investment in Vanguard | 7 |
| Cash Collateral Pledged—Futures Contracts | 35 |
| Receivables for Accrued Income | 173 |
| Total Assets | 185,629 |
| Liabilities | |
| Due to Custodian | 132 |
| Payables for Investment Securities Purchased | 1 |
| Collateral for Securities on Loan | 157 |
| Payables to Vanguard | 10 |
| Variation Margin Payable—Futures Contracts | 4 |
| Total Liabilities | 304 |
| Net Assets | 185,325 |
| 1 Includes $142 of securities on loan. | |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 182,142 |
| Total Distributable Earnings (Loss) | 3,183 |
| Net Assets | 185,325 |
| Net Assets | |
| Applicable
to 1,720,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
185,325 |
| Net Asset Value Per Share | $107.75 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
69
U.S.
Quality Factor ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 1,263 |
| Interest2 | 1 |
| Securities Lending—Net | 4 |
| Total Income | 1,268 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 74 |
| Management and Administrative | 20 |
| Marketing and Distribution | 3 |
| Custodian Fees | — |
| Shareholders’ Reports | 13 |
| Trustees’ Fees and Expenses | — |
| Professional Services | 8 |
| Total Expenses | 118 |
| Net Investment Income | 1,150 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | 3,322 |
| Futures Contracts | (21) |
| Realized Net Gain (Loss) | 3,301 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (27,221) |
| Futures Contracts | (28) |
| Change in Unrealized Appreciation (Depreciation) | (27,249) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (22,798) |
| 1 | Dividends are net of foreign withholding taxes of $2,000. |
| 2 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $1,000, less than $1,000, less than $1,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $5,577,000 of net gain (loss) resulting from in-kind redemptions. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
70
U.S.
Quality Factor ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 1,150 | 1,098 | |
| Realized Net Gain (Loss) | 3,301 | 2,545 | |
| Change in Unrealized Appreciation (Depreciation) | (27,249) | 14,521 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (22,798) | 18,164 | |
| Distributions | |||
| Total Distributions | (1,025) | (932) | |
| Capital Share Transactions | |||
| Issued | 83,129 | 74,754 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (17,563) | (2,908) | |
| Net Increase (Decrease) from Capital Share Transactions | 65,566 | 71,846 | |
| Total Increase (Decrease) | 41,743 | 89,078 | |
| Net Assets | |||
| Beginning of Period | 143,582 | 54,504 | |
| End of Period | 185,325 | 143,582 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
71
U.S.
Quality Factor ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $122.20 | $94.79 | $84.21 | $78.58 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | .725 | 1.403 | 1.291 | 1.199 | .899 |
| Net Realized and Unrealized Gain (Loss) on Investments | (14.499) | 27.292 | 10.428 | 5.559 | 3.266 |
| Total from Investment Operations | (13.774) | 28.695 | 11.719 | 6.758 | 4.165 |
| Distributions | |||||
| Dividends from Net Investment Income | (.676) | (1.285) | (1.139) | (1.128) | (.585) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.676) | (1.285) | (1.139) | (1.128) | (.585) |
| Net Asset Value, End of Period | $107.75 | $122.20 | $94.79 | $84.21 | $78.58 |
| Total Return | -11.34% | 30.42% | 14.29% | 8.75% | 5.52% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $185 | $144 | $55 | $21 | $18 |
| Ratio of Total Expenses to Average Net Assets | 0.13% | 0.13% | 0.13% | 0.13% | 0.13%3,4 |
| Ratio of Net Investment Income to Average Net Assets | 1.18% | 1.21% | 1.59% | 1.52% | 1.40%3 |
| Portfolio Turnover Rate | 24%5 | 56%5 | 58% | 80% | 25% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | Annualized. |
| 4 | The ratio of total expenses to average net assets before an expense reduction of 0.04% was 0.17%. The fund incurred higher than anticipated expenses, in which Vanguard voluntarily agreed to assume payment of certain expenses. The fund is not obligated to repay this amount to Vanguard. |
| 5 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
72
U.S.
Quality Factor ETF
Notes
to Financial Statements
Vanguard
U.S. Quality Factor ETF is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. ETF Shares are listed for
trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its taxable income. The fund’s tax returns are
open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is
73
U.S.
Quality Factor ETF
generally
three years after the filing of the tax return. Management has analyzed the
fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s
financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
74
U.S.
Quality Factor ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $7,000, representing less than 0.01% of the fund’s net
assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA.
The fund’s trustees and officers are also directors and employees, respectively,
of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
75
U.S.
Quality Factor ETF
The
following table summarizes the market value of the fund’s investments and
derivatives as of May 31, 2022, based on the inputs used to value them:
| Level
1 ($000) |
Level
2 ($000) |
Level
3 ($000) |
Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 184,612 | — | — | 184,612 |
| Temporary Cash Investments | 802 | — | — | 802 |
| Total | 185,414 | — | — | 185,414 |
| Derivative Financial Instruments | ||||
| Liabilities | ||||
| Futures Contracts1 | 29 | — | — | 29 |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 185,676 |
| Gross Unrealized Appreciation | 14,780 |
| Gross Unrealized Depreciation | (15,071) |
| Net Unrealized Appreciation (Depreciation) | (291) |
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $281,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $125,925,000 of investment securities and sold $60,367,000 of investment securities, other than temporary cash investments. Purchases and sales include $0 and $17,556,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
The
fund purchased securities from and sold securities to other Vanguard funds or
accounts managed by Vanguard or its affiliates, in accordance with procedures
adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended May 31, 2022, such purchases were
$104,000 and sales were $0; these amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities
noted above.
76
U.S.
Quality Factor ETF
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 700 | 625 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (155) | (25) | |
| Net Increase (Decrease) in Shares Outstanding | 545 | 600 |
At
May 31, 2022, one shareholder was a record or beneficial owner of 45% of the
fund’s net assets. If this shareholder were to redeem its investment in the
fund, the redemption might result in an increase in the fund’s expense ratio,
cause the fund to incur higher transaction costs, or lead to the realization of
taxable capital gains.
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
77
U.S.
Value Factor ETF
Fund
Allocation
As
of May 31, 2022
| Basic Materials | 6.4% |
| Consumer Discretionary | 17.7 |
| Consumer Staples | 4.8 |
| Energy | 10.4 |
| Financials | 24.7 |
| Health Care | 8.2 |
| Industrials | 15.2 |
| Real Estate | 0.3 |
| Technology | 8.0 |
| Telecommunications | 4.2 |
| Utilities | 0.1 |
The
table reflects the fund’s investments, except for short-term investments and
derivatives. Sector categories are based on the Industry Classification
Benchmark (“ICB”), except for the “Other” category (if applicable), which
includes securities that have not been provided an ICB classification as of the
effective reporting period.
The
Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept
any liability to any person for any loss or damage arising out of any error or
omission in the ICB.
78
U.S.
Value Factor ETF
Financial
Statements (unaudited)
Schedule
of Investments
As
of May 31, 2022
The
fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are
available on the SEC’s website at www.sec.gov.
79
U.S.
Value Factor ETF
80
U.S.
Value Factor ETF
81
U.S.
Value Factor ETF
82
U.S.
Value Factor ETF
83
U.S.
Value Factor ETF
84
U.S.
Value Factor ETF
85
U.S.
Value Factor ETF
Derivative
Financial Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number
of Long (Short) Contracts |
Notional Amount |
Value
and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | June 2022 | 13 | 2,685 | (47) |
| Micro E-mini S&P 500 Index | June 2022 | 9 | 186 | (10) |
| (57) | ||||
See
accompanying Notes, which are an integral part of the Financial
Statements.
86
U.S.
Value Factor ETF
Statement
of Assets and Liabilities
As
of May 31, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $717,875) | 805,650 |
| Affiliated Issuers (Cost $4,249) | 4,249 |
| Total Investments in Securities | 809,899 |
| Investment in Vanguard | 21 |
| Cash | 6 |
| Cash Collateral Pledged—Futures Contracts | 158 |
| Receivables for Accrued Income | 1,370 |
| Receivables for Capital Shares Issued | 5,797 |
| Total Assets | 817,251 |
| Liabilities | |
| Payables for Investment Securities Purchased | 6,303 |
| Collateral for Securities on Loan | 1,955 |
| Payables to Vanguard | 44 |
| Variation Margin Payable—Futures Contracts | 17 |
| Total Liabilities | 8,319 |
| Net Assets | 808,932 |
| 1 Includes $1,776 of securities on loan. | |
| At May 31, 2022, net assets consisted of: | |
| Paid-in Capital | 721,238 |
| Total Distributable Earnings (Loss) | 87,694 |
| Net Assets | 808,932 |
| Net Assets | |
| Applicable
to 7,735,000 outstanding $.001 par value shares of beneficial interest (unlimited authorization) |
808,932 |
| Net Asset Value Per Share | $104.58 |
See
accompanying Notes, which are an integral part of the Financial
Statements.
87
U.S.
Value Factor ETF
Statement
of Operations
| Six
Months Ended May 31, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 6,118 |
| Interest2 | 4 |
| Securities Lending—Net | 5 |
| Total Income | 6,127 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 205 |
| Management and Administrative | 122 |
| Marketing and Distribution | 11 |
| Custodian Fees | — |
| Shareholders’ Reports | 18 |
| Trustees’ Fees and Expenses | — |
| Other Expenses | 9 |
| Total Expenses | 365 |
| Net Investment Income | 5,762 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | 7,942 |
| Futures Contracts | (13) |
| Realized Net Gain (Loss) | 7,929 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | 16,654 |
| Futures Contracts | (106) |
| Change in Unrealized Appreciation (Depreciation) | 16,548 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 30,239 |
| 1 | Dividends are net of foreign withholding taxes of $3,000. |
| 2 | Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $4,000, less than $1,000, less than $1,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $9,158,000 of net gain (loss) resulting from in-kind redemptions. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
88
U.S.
Value Factor ETF
Statement
of Changes in Net Assets
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 5,762 | 6,528 | |
| Realized Net Gain (Loss) | 7,929 | 7,659 | |
| Change in Unrealized Appreciation (Depreciation) | 16,548 | 52,714 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 30,239 | 66,901 | |
| Distributions | |||
| Total Distributions | (4,941) | (5,430) | |
| Capital Share Transactions | |||
| Issued | 359,908 | 273,133 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (24,538) | (19,466) | |
| Net Increase (Decrease) from Capital Share Transactions | 335,370 | 253,667 | |
| Total Increase (Decrease) | 360,668 | 315,138 | |
| Net Assets | |||
| Beginning of Period | 448,264 | 133,126 | |
| End of Period | 808,932 | 448,264 | |
See
accompanying Notes, which are an integral part of the Financial
Statements.
89
U.S.
Value Factor ETF
Financial
Highlights
| For a Share Outstanding Throughout Each Period |
Six Months Ended May 31, 2022 |
Year Ended November 30, | February 13, 20181 to November 30, 2018 | ||
| 2021 | 2020 | 2019 | |||
| Net Asset Value, Beginning of Period | $99.84 | $73.96 | $75.51 | $74.35 | $75.00 |
| Investment Operations | |||||
| Net Investment Income2 | 1.068 | 1.923 | 1.689 | 1.671 | 1.276 |
| Net Realized and Unrealized Gain (Loss) on Investments | 4.671 | 25.644 | (1.634) | 1.053 | (1.295) |
| Total from Investment Operations | 5.739 | 27.567 | .055 | 2.724 | (.019) |
| Distributions | |||||
| Dividends from Net Investment Income | (.999) | (1.687) | (1.605) | (1.564) | (.631) |
| Distributions from Realized Capital Gains | — | — | — | — | — |
| Total Distributions | (.999) | (1.687) | (1.605) | (1.564) | (.631) |
| Net Asset Value, End of Period | $104.58 | $99.84 | $73.96 | $75.51 | $74.35 |
| Total Return | 5.74% | 37.51% | 0.70% | 3.83% | -0.08% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $809 | $448 | $133 | $81 | $37 |
| Ratio of Total Expenses to Average Net Assets | 0.13% | 0.13% | 0.14%3 | 0.14%3 | 0.13%4 |
| Ratio of Net Investment Income to Average Net Assets | 1.96% | 1.98% | 2.68% | 2.32% | 2.05%4 |
| Portfolio Turnover Rate | 27%5 | 43%5 | 52%5 | 73% | 16% |
| The expense ratio and net investment income ratio for the current period have been annualized. | |||||
| 1 | Inception. |
| 2 | Calculated based on average shares outstanding. |
| 3 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.13%. |
| 4 | Annualized. |
| 5 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See
accompanying Notes, which are an integral part of the Financial
Statements.
90
U.S.
Value Factor ETF
Notes
to Financial Statements
Vanguard
U.S. Value Factor ETF is registered under the Investment Company Act of 1940 as
an open-end investment company, or mutual fund. ETF Shares are listed for
trading on Cboe BZX Exchange, Inc.; they can be purchased and sold through a
broker. Significant market disruptions, such as those caused by pandemics (e.g.,
COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s
invasion of Ukraine), acts of terrorism, or other events, can adversely affect
local and global markets and normal market operations. Any such disruptions
could have an adverse impact on the value of the fund’s investments and fund
performance.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security
Valuation: Securities are valued as of the close of trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity
securities are valued at the latest quoted sales prices or official closing
prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund’s pricing time but after the close of the securities’
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Investments in Vanguard Market Liquidity Fund are valued
at that fund's net asset value.
2. Futures
Contracts: The fund uses index futures contracts to a limited extent, with the
objective of maintaining full exposure to the stock market while maintaining
liquidity. The fund may purchase or sell futures contracts to achieve a desired
level of investment, whether to accommodate portfolio turnover or cash flows
from capital share transactions. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the possibility
of an illiquid market. Counterparty risk involving futures is mitigated because
a regulated clearinghouse is the counterparty instead of the clearing broker. To
further mitigate counterparty risk, the fund trades futures contracts on an
exchange, monitors the financial strength of its clearing brokers and
clearinghouse, and has entered into clearing agreements with its clearing
brokers. The clearinghouse imposes initial margin requirements to secure the
fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities
pledged as initial margin for open contracts are noted in the Schedule of
Investments.
Futures
contracts are valued at their quoted daily settlement prices. The notional
amounts of the contracts are not recorded in the Statement of Assets and
Liabilities. Fluctuations in the value of the contracts are recorded in the
Statement of Assets and Liabilities as an asset (liability) and in the Statement
of Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures
contracts.
During
the six months ended May 31, 2022, the fund’s average investments in long and
short futures contracts represented less than 1% and 0% of net assets,
respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal
Income Taxes: The fund intends to continue to qualify as a regulated investment
company and distribute all of its taxable income. The fund’s tax returns are
open to examination by the relevant tax authorities until expiration of the
applicable statute of limitations, which is
91
U.S.
Value Factor ETF
generally
three years after the filing of the tax return. Management has analyzed the
fund’s tax positions taken for all open federal and state income tax years, and
has concluded that no provision for income tax is required in the fund’s
financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined on a tax basis at the fiscal year-end and may
differ from net investment income and realized capital gains for financial
reporting purposes.
5. Securities
Lending: To earn additional income, the fund lends its securities to qualified
institutional borrowers. Security loans are subject to termination by the fund
at any time, and are required to be secured at all times by collateral in an
amount at least equal to the market value of securities loaned. Daily market
fluctuations could cause the value of loaned securities to be more or less than
the value of the collateral received. When this occurs, the collateral is
adjusted and settled before the opening of the market on the next business day.
The fund further mitigates its counterparty risk by entering into securities
lending transactions only with a diverse group of prequalified counterparties,
monitoring their financial strength, and entering into master securities lending
agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy),
the fund may terminate any loans with that borrower, determine the net amount
owed, and sell or retain the collateral up to the net amount owed to the fund;
however, such actions may be subject to legal proceedings. While collateral
mitigates counterparty risk, in the event of a default, the fund may experience
delays and costs in recovering the securities loaned. The fund invests cash
collateral received in Vanguard Market Liquidity Fund, and records a liability
in the Statement of Assets and Liabilities for the return of the collateral,
during the period the securities are on loan. Collateral investments in Vanguard
Market Liquidity Fund are subject to market appreciation or depreciation.
Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan.
During the term of the loan, the fund is entitled to all distributions made on
or in respect of the loaned securities.
6. Credit
Facilities and Interfund Lending Program: The fund and certain other funds
managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion
committed credit facility provided by a syndicate of lenders pursuant to a
credit agreement and an uncommitted credit facility provided by Vanguard. Both
facilities may be renewed annually. Each fund is individually liable for its
borrowings, if any, under the credit facilities. Borrowings may be utilized for
temporary or emergency purposes and are subject to the fund’s regulatory and
contractual borrowing restrictions. With respect to the committed credit
facility, the participating funds are charged administrative fees and an annual
commitment fee of 0.10% of the undrawn committed amount of the facility, which
are allocated to the funds based on a method approved by the fund’s board of
trustees and included in Management and Administrative expenses on the fund’s
Statement of Operations. Any borrowings under either facility bear interest at
an agreed-upon spread plus the higher of the federal funds effective rate, the
overnight bank funding rate, or the Daily Simple Secured Overnight Financing
Rate inclusive of an additional agreed-upon spread. However, borrowings under
the uncommitted credit facility may bear interest based upon an alternate rate
agreed to by the fund and Vanguard.
In
accordance with an exemptive order (the “Order”) from the SEC, the fund may
participate in a joint lending and borrowing program that allows registered
open-end Vanguard funds to borrow money from and lend money to each other for
temporary or emergency purposes (the “Interfund Lending Program”), subject to
compliance with the terms and conditions of the Order, and to the extent
permitted by the fund’s investment objective and investment policies. Interfund
loans and
92
U.S.
Value Factor ETF
borrowings
normally extend overnight but can have a maximum duration of seven days. Loans
may be called on one business day’s notice. The interest rate to be charged is
governed by the conditions of the Order and internal procedures adopted by the
board of trustees. The board of trustees is responsible for overseeing the
Interfund Lending Program.
For
the six months ended May 31, 2022, the fund did not utilize the credit
facilities or the Interfund Lending Program.
7. Other:
Dividend income is recorded on the ex-dividend date. Non-cash dividends included
in income, if any, are recorded at the fair value of the securities received.
Interest income includes income distributions received from Vanguard Market
Liquidity Fund and is accrued daily. Security transactions are accounted for on
the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific
securities sold.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon
the request of Vanguard, the fund may invest up to 0.40% of its net assets as
capital in Vanguard. At May 31, 2022, the fund had contributed to Vanguard
capital in the amount of $21,000, representing less than 0.01% of the fund’s net
assets and 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s
trustees and officers are also directors and employees, respectively, of
Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level
1—Quoted prices in active markets for
identical securities.
Level
2—Other significant observable inputs
(including quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—Significant unobservable inputs (including
the fund’s own assumptions used to determine the fair value of investments). Any
investments and derivatives valued with significant unobservable inputs are
noted on the Schedule of Investments.
At
May 31, 2022, 100% of the market value of the fund’s investments and derivatives
was determined based on Level 1 inputs.
| D. | As of May 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 722,142 |
| Gross Unrealized Appreciation | 108,338 |
| Gross Unrealized Depreciation | (20,638) |
| Net Unrealized Appreciation (Depreciation) | 87,700 |
93
U.S.
Value Factor ETF
The
fund’s tax-basis capital gains and losses are determined only at the end of each
fiscal year. For tax purposes, at November 30, 2021, the fund had available
capital losses totaling $10,521,000 that may be carried forward indefinitely to
offset future net capital gains. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
November 30, 2022; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balance above.
| E. | During the six months ended May 31, 2022, the fund purchased $514,532,000 of investment securities and sold $179,528,000 of investment securities, other than temporary cash investments. Purchases and sales include $0 and $24,530,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares. |
The
fund purchased securities from and sold securities to other Vanguard funds or
accounts managed by Vanguard or its affiliates, in accordance with procedures
adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended May 31, 2022, such purchases were
$242,000 and sales were $171,000, resulting in net realized loss of $5,000;
these amounts, other than temporary cash investments, are included in the
purchases and sales of investment securities noted above.
| F. | Capital shares issued and redeemed were: |
| Six
Months Ended May 31, 2022 |
Year
Ended November 30, 2021 | ||
| Shares (000) |
Shares (000) | ||
| Issued | 3,475 | 2,895 | |
| Issued in Lieu of Cash Distributions | — | — | |
| Redeemed | (230) | (205) | |
| Net Increase (Decrease) in Shares Outstanding | 3,245 | 2,690 |
At
May 31, 2022, one shareholder was a record or beneficial owner of 39% of the
fund’s net assets. If this shareholder were to redeem its investment in the
fund, the redemption might result in an increase in the fund’s expense ratio,
cause the fund to incur higher transaction costs, or lead to the realization of
taxable capital gains.
| G. | Management has determined that no events or transactions occurred subsequent to May 31, 2022, that would require recognition or disclosure in these financial statements. |
94
Trustees
Approve Advisory Arrangements
The
board of trustees of Vanguard U.S. Liquidity Factor ETF, Vanguard U.S. Minimum
Volatility ETF, Vanguard U.S. Momentum Factor ETF, Vanguard U.S. Multifactor
ETF, Vanguard U.S. Quality Factor ETF, and Vanguard U.S. Value Factor ETF has
renewed each fund’s investment advisory arrangement with The Vanguard Group,
Inc. (Vanguard), through its Quantitative Equity Group. The board determined
that continuing each fund’s internalized management structure was in the best
interests of the fund and its shareholders.
The
board based its decisions upon an evaluation of the advisor’s investment staff,
portfolio management process, and performance. This evaluation included
information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The
Portfolio Review Department met regularly with the advisor and made monthly
presentations to the board during the fiscal year that directed the board’s
focus to relevant information and topics.
The
board, or an investment committee made up of board members, also received
information throughout the year during advisor presentations. For each advisor
presentation, the board was provided with letters and reports that included
information about, among other things, the advisory firm and the advisor’s
assessment of the investment environment, portfolio performance, and portfolio
characteristics.
In
addition, the board received periodic reports throughout the year, which
included information about each fund’s performance relative to its peers and
benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
Prior
to their meeting, the trustees were provided with a memo and materials that
summarized the information they received over the course of the year. They also
considered the factors discussed below, among others. However, no single factor
determined whether the board approved the arrangements. Rather, it was the
totality of the circumstances that drove the board’s decisions.
Nature,
extent, and quality of services
The
board reviewed the quality of the investment management services provided to the
funds since their inception in 2018, and also took into account the
organizational depth and stability of the advisor. The board considered that
Vanguard has been managing investments for more than four decades. The
Quantitative Equity Group adheres to a sound, disciplined investment management
process; the team has considerable experience, stability, and depth.
The
board concluded that Vanguard’s experience, stability, depth, and performance,
among other factors, warranted continuation of the advisory arrangements.
Investment
performance
The
board considered the short-term and since-inception performance of each fund,
along with that of a relevant benchmark index and peer group. The board
concluded that the performance was such that each advisory arrangement should
continue.
95
Cost
The
board concluded that each fund’s expense ratio was below the average expense
ratio charged by funds in its peer group and that each fund’s advisory expenses
were also below the peer-group average.
The
board does not conduct a profitability analysis of Vanguard because of
Vanguard’s unique structure. Unlike most other mutual fund management companies,
Vanguard is owned by the funds it oversees.
The
benefit of economies of scale
The
board concluded that each fund’s arrangement with Vanguard ensures that the
funds will realize economies of scale as they grow, with the cost to
shareholders declining as fund assets increase.
The
board will consider whether to renew the advisory arrangements again after a
one-year period.
96
Liquidity
Risk Management
Vanguard
funds (except for the money market funds) have adopted and implemented a written
liquidity risk management program (the “Program”) as required by Rule 22e-4
under the Investment Company Act of 1940. Rule 22e-4 requires that each fund
adopt a program that is reasonably designed to assess and manage the fund’s
liquidity risk, which is the risk that the fund could not meet redemption
requests without significant dilution of remaining investors’ interests in the
fund.
Assessment
and management of a fund’s liquidity risk under the Program take into
consideration certain factors, such as the fund’s investment strategy and the
liquidity of its portfolio investments during normal and reasonably foreseeable
stressed conditions, its short- and long-term cash-flow projections during both
normal and reasonably foreseeable stressed conditions, and its cash and
cash-equivalent holdings and access to other funding sources. As required by the
rule, the Program includes policies and procedures for classification of fund
portfolio holdings in four liquidity categories, maintaining certain levels of
highly liquid investments, and limiting holdings of illiquid investments.
The
board of trustees of Vanguard Wellington™ Fund approved the appointment of
liquidity risk management program administrators responsible for administering
the Program for Vanguard U.S. Liquidity Factor ETF, Vanguard U.S. Minimum
Volatility ETF, Vanguard U.S. Momentum Factor ETF, Vanguard U.S. Multifactor
ETF, Vanguard U.S. Quality Factor ETF, and Vanguard U.S. Value Factor ETF, and
for carrying out the specific responsibilities set forth in the Program,
including reporting to the board on at least an annual basis regarding the
Program’s operation, its adequacy, and the effectiveness of its implementation
for the past year (the “Program Administrator Report”). The board has reviewed
the Program Administrator Report covering the period from January 1, 2021,
through December 31, 2021 (the “Review Period”). The Program Administrator
Report stated that during the Review Period the Program operated and was
implemented effectively to manage the funds' liquidity risk.
97
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