| |
Transaction
Fee on Purchases and Sales |
|
Transaction
Fee on Reinvested Dividends |
|
| |
Management
Fees |
% |
12b-1
Distribution Fee |
|
Other
Expenses |
% |
Total
Annual Fund Operating Expenses1
|
% |
1
Year |
3
Years |
$ |
$ |
Plain
Talk About Fund Expenses |
All
funds have operating expenses. These expenses, which are deducted
from
a fund’s gross income, are expressed as a percentage of the net assets
of
the fund. Assuming that operating expenses remain as stated in the Fees
and
Expenses section, Vanguard Core-Plus Bond ETF Shares’ expense ratio
would
be 0.20%, or $2.00 per $1,000 of average net
assets. |
Plain
Talk About Costs of Investing |
Costs
are an important consideration in choosing an ETF. That is because
you,
as a shareholder, pay a proportionate share of the costs of operating a
fund
and any transaction costs incurred when the fund buys or sells
securities.
These costs can erode a substantial portion of the gross income
or
the capital appreciation a fund achieves. Even seemingly small differences
in
expenses can, over time, have a dramatic effect on a fund’s
performance. |
Type
of Bond (Maturity) |
After
a 1%
Increase |
After
a 1%
Decrease |
After
a 2%
Increase |
After
a 2%
Decrease |
Short-Term
(2.5 years) |
$977 |
$1,024 |
$954 |
$1,049 |
Intermediate-Term
(10 years) |
922 |
1,086 |
851 |
1,180 |
Long-Term
(20 years) |
874 |
1,150 |
769 |
1,328 |
Plain
Talk About Bonds and Interest Rates |
As
a rule, when interest rates rise, bond prices fall. The opposite is also
true:
Bond
prices go up when interest rates fall. Why do bond prices and interest
rates
move in opposite directions? Let’s assume that you hold a bond
offering
a 4% yield. A year later, interest rates are on the rise and bonds of
comparable
quality and maturity are offered with a 5% yield. With
higher-yielding
bonds available, you would have trouble selling your 4% bond
for
the price you paid—you would probably have to lower your asking price.
On
the other hand, if interest rates were falling and 3% bonds were being
offered,
you should be able to sell your 4% bond for more than you
paid. |
How
mortgage-backed securities are different:
In general, declining interest
rates
will not lift the prices of mortgage-backed securities—such as those
guaranteed
by the Government National Mortgage Association—as much as
the
prices of comparable bonds. Why? Because when interest rates fall, the
bond
market tends to discount the prices of mortgage-backed securities for
prepayment
risk—the possibility that homeowners will refinance their
mortgages
at lower rates and cause the bonds to be paid off prior to maturity.
In
part to compensate for this prepayment possibility, mortgage-backed
securities
tend to offer higher yields than other bonds of comparable credit
quality
and maturity. In contrast, when interest rates rise, prepayments tend
to
slow down, subjecting mortgage-backed securities to extension risk—the
possibility
that homeowners will repay their mortgages at slower rates. This
will
lengthen the duration or average life of mortgage-backed securities held
by
a fund and delay the fund’s ability to reinvest proceeds at higher
interest
rates,
making the fund more sensitive to changes in interest
rates. |
Plain
Talk About Bond Maturities |
A
bond is issued with a specific maturity date—the date when the issuer must
pay
back the bond’s principal (face value). Bond maturities range from less
than
1 year to more than 30 years. Typically, the longer a bond’s maturity, the
more
price risk you, as a bond investor, will face as interest rates rise—but
also
the higher the potential yield you could receive. Longer-term bonds are
generally
more suitable for investors willing to take a greater risk of price
fluctuations
to get higher and more stable interest income. Shorter-term bond
investors
should be willing to accept lower yields and greater income
variability
in return for less fluctuation in the value of their investment. The
stated
maturity of a bond may differ from the effective maturity of a bond,
which
takes into consideration that an action such as a call or refunding may
cause
bonds to be repaid before their stated maturity
dates. |
Plain
Talk About Callable Bonds |
Although
bonds are issued with clearly defined maturities, in some cases the
bond
issuer has a right to call in (redeem) the bond earlier than its maturity
date.
When a bond is called, the bondholder may have to replace it with
another
bond with a lower yield than the original bond. One way for bond
investors
to protect themselves against call risk is to purchase a bond early
in
its lifetime, long before its call date. Another way is to buy bonds with
lower
coupon
rates or interest rates, which make them less likely to be
called. |
Plain
Talk About Credit Quality |
A
bond’s credit quality rating is an assessment of the issuer’s ability to
pay
interest
on the bond and, ultimately, to repay the principal. The lower the
credit
quality, the greater the perceived chance that the bond issuer will
default,
or fail to meet its payment obligations. All things being equal, the
lower
a bond’s credit quality, the higher its yield should be to compensate
investors
for assuming additional risk. |
|
Credit Ratings
of the Fund’s Investments
(Percentage of
Fund Assets Under Normal Circumstances) | ||||
Vanguard
Fund |
Issued
or Backed
by
U.S. Gov’t. or
its
Agencies and
Instrumentalities |
High
or
Highest
Quality
(Non-Gov’t.) |
Upper-
Medium
Quality |
Medium
Quality |
Non-
Investment-
Grade |
Vanguard
Core-Plus Bond ETF
|
——————————At
least 65%—————————— |
No
more
than
35% |
Plain
Talk About High-Yield Bonds |
High-yield
bonds, or “junk bonds,” are issued by companies or other entities
whose
ability to pay interest and principal on the debt in a timely manner is
considered
questionable. Such bonds are rated “below investment-grade” by
independent
rating agencies and are considered speculative. Because they
have
greater credit risk than investment-grade bonds, similar maturity
high-yield
bonds typically must pay more interest to attract investors. Some
high-yield
bonds are issued by smaller, less-seasoned companies, while
others
are issued as part of a corporate restructuring, such as an acquisition,
a
merger, or a leveraged buyout. Some high-yield bonds were once rated as
investment-grade
but have been downgraded to junk bond status because of
financial
difficulties experienced by their issuers. Conversely, an issuer’s
improving
financial condition may result in an upgrading of its junk bonds to
investment-grade
status. |
Plain
Talk About Types of Bonds |
Bonds
are issued (sold) by many sources: Corporations issue corporate
bonds;
the federal government issues U.S. Treasury bonds; agencies of the
federal
government issue agency bonds; financial institutions issue
asset-backed
bonds; and mortgage holders issue “mortgage-backed”
pass-through
certificates. Each issuer is responsible for paying back the
bond’s
initial value as well as for making periodic interest payments. Many
bonds
issued by government agencies and entities are neither guaranteed
nor
insured by the U.S.
government. |
Plain
Talk About International Investing |
U.S.
investors who invest in foreign securities will encounter risks not
typically
associated with U.S. companies because foreign stock and bond
markets
operate differently from the U.S. markets. For instance, foreign
companies
and governments may not be subject to the same or similar
auditing,
legal, tax, regulatory, financial reporting, accounting, and
recordkeeping
standards and practices as U.S. companies and the U.S.
government,
and their stocks and bonds may not be as liquid as those of
similar
U.S. entities. In addition, foreign stock exchanges, brokers,
companies,
bond markets, and dealers may be subject to less government
supervision
and regulation than their counterparts in the United States.
Further,
the imposition of economic or other sanctions on the United States
by
a foreign country, or on a foreign country or issuer by the United States,
could
impair a fund's ability to buy, sell, hold, receive, deliver, or otherwise
transact
in certain investment securities or obtain exposure to foreign
securities
and assets. These factors, among others, could negatively affect
the
returns U.S. investors receive from foreign
investments. |
Plain
Talk About U.S. Government-Sponsored Enterprises |
A
variety of U.S. government-sponsored enterprises (GSEs), such as the
Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs),
issue
debt and mortgage-backed securities. Although GSEs may be chartered
or
sponsored by acts of Congress, they are not funded by congressional
appropriations.
In September of 2008, the U.S. Treasury placed FNMA and
FHLMC
under conservatorship and appointed the Federal Housing Finance
Agency
(FHFA) to manage their daily operations. In addition, the U.S. Treasury
entered
into purchase agreements with FNMA and FHLMC to provide them
with
capital in exchange for senior preferred stock. Generally, a GSE’s
securities
are neither issued nor guaranteed by the U.S. Treasury and are not
backed
by the full faith and credit of the U.S. government. In most cases, these
securities
are supported only by the credit of the GSE, standing alone. In some
cases,
a GSE’s securities may be supported by the ability of the GSE to
borrow
from the U.S. Treasury or may be supported by the U.S. government in
some
other way. Securities issued by the Government National Mortgage
Association
(GNMA), however, are backed by the full faith and credit of the
U.S.
government. |
Plain
Talk About Derivatives |
Derivatives
can take many forms. Some forms of derivatives—such as
exchange-traded
futures and options on securities, commodities, or
indexes—have
been trading on regulated exchanges for decades. These
types
of derivatives are standardized contracts that can easily be bought and
sold
and whose market values are determined and published daily. On the
other
hand, non-exchange-traded derivatives—such as certain swap
agreements—tend
to be more specialized or complex and may be more
difficult
to accurately value. |
Plain
Talk About Vanguard’s Unique Corporate Structure |
Vanguard
is owned jointly by the funds it oversees and thus indirectly by the
shareholders
in those funds. Most other mutual funds are operated by
management
companies that are owned by third parties—either public or
private
stockholders—and not by the funds they
serve. |
Plain
Talk About Distributions |
As
a shareholder, you are entitled to your portion of a fund’s income from
interest
as well as capital gains from the fund’s sale of investments. Income
consists
of interest the fund earns from its money market and bond
investments.
Capital gains are realized whenever the fund sells securities for
higher
prices than it paid for them. These capital gains are either short-term
or
long-term, depending on whether the fund held the securities for one year
or
less or for more than one
year. |
Vanguard
Fund |
Inception
Date |
|
Vanguard
Fund
Number |
CUSIP
Number |
Vanguard
Core-Plus Bond ETF |
— |
|
V022 |
922020755 |