Vanguard Core-Plus
Bond ETF
Prospectus
December
6, 2023
Exchange-traded
fund shares that are not individually redeemable and are listed on
Nasdaq
Vanguard Core-Plus
Bond ETF Shares (VPLS)
This is the Fund’s initial prospectus, so it does not contain performance data.
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
(Fees paid directly from your investment)
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Transaction
Fee on Purchases and Sales |
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Transaction
Fee on Reinvested Dividends |
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*
(Expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
% |
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12b-1
Distribution Fee |
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Other
Expenses |
% |
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Total
Annual Fund Operating Expenses1
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% |
1
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1
Year |
3
Years |
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$ |
$ |
1
2
3
4
5
Investment
Advisor
The Vanguard Group,
Inc. (Vanguard)
Portfolio
Managers
Michael Chang, CFA,
Portfolio Manager at Vanguard. He has co-managed the Fund since its inception in
2023.
Arvind Narayanan,
CFA, Senior Portfolio Manager and Principal of Vanguard. He has co-managed the
Fund since its inception in 2023.
Brian W. Quigley,
CFA, Portfolio Manager at Vanguard. He has co-managed the Fund since its
inception in 2023.
Daniel Shaykevich,
Senior Portfolio Manager and Principal of Vanguard. He has co-managed the Fund
since its inception in 2023.
Purchase
and Sale of Fund Shares
ETF Shares may only
be bought and sold in the secondary market through a brokerage firm. The price
you pay or receive for ETF Shares will be the prevailing market price, which may
be more (premium) or less (discount) than the NAV of the shares. The brokerage
firm may charge you a commission to execute the transaction. Unless imposed by
your brokerage firm, there is no minimum dollar amount you must invest and no
minimum number of shares you must buy. ETF Shares of the Fund cannot be directly
purchased from or redeemed with the Fund, except by certain authorized
broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in
large blocks (Creation Units), typically in exchange for baskets of
securities.
An investor may
incur costs attributable to the difference between the highest price a buyer is
willing to pay to purchase ETF Shares (bid) and the lowest price a seller is
willing to accept for ETF Shares (ask) when buying or selling shares in the
secondary market (bid-ask spread). Recent information, including information on
the Fund's NAV, market price, premiums and discounts, and bid-ask spreads, is
available online at vanguard.com.
Tax
Information
The Fund’s
distributions may be taxable as ordinary income or capital gain. If you are
investing through a tax-advantaged account, such as an IRA or an employer-
sponsored retirement or savings plan, special tax rules apply.
Payments
to Financial Intermediaries
The Fund and its
investment advisor do not pay financial intermediaries for sales of Fund
shares.
6
Investing
in Vanguard ETF®Shares
What
Are Vanguard ETF Shares?
Vanguard ETF Shares
are an exchange-traded class of shares issued by certain Vanguard funds. ETF
Shares represent an interest in the portfolio of stocks or bonds held by the
issuing fund.
How
Are Vanguard ETF Shares Different From Conventional Mutual Fund
Shares?
Conventional mutual
fund shares can be directly purchased from and redeemed with the issuing fund
for cash at the net asset value (NAV), typically calculated once a day. ETF
Shares, by contrast, cannot be purchased directly from or redeemed directly with
the issuing fund by an individual investor. Rather, ETF Shares can only be
purchased or redeemed directly from the issuing fund by certain authorized
broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in
large blocks (Creation Units), usually in exchange for baskets of securities and
not for cash (although some funds issue and redeem Creation Units in exchange
for cash or a combination of cash and securities).
An organized
secondary trading market is expected to exist for ETF Shares, unlike
conventional mutual fund shares, because ETF Shares are listed for trading on a
national securities exchange. Individual investors can purchase and sell ETF
Shares on the secondary market through a broker. Secondary-market transactions
occur not at NAV, but at market prices that are subject to change throughout the
day based on the supply of and demand for ETF Shares, changes in the prices of
the fund’s portfolio holdings, and other factors.
The market price of
a fund's ETF Shares typically will differ somewhat from the NAV of those shares.
The difference between market price and NAV is expected to be small most of the
time, but in times of market disruption or extreme market volatility, the
difference may become significant.
How
Do I Buy and Sell Vanguard ETF Shares?
ETF Shares of the
Fund are listed for trading on Nasdaq. You can buy and sell ETF Shares on the
secondary market in the same way you buy and sell any other exchange-traded
security—through a broker. Your broker may charge a commission to execute a
transaction. You will also incur the cost of the “bid-ask spread,” which is the
difference between the highest price a buyer is willing to pay to purchase ETF
Shares (bid) and the lowest price a seller is willing to accept for ETF Shares
(ask) when buying or selling shares in the secondary market. Because
secondary-market transactions occur at market prices, you may pay more (premium)
or less (discount) than NAV when you buy ETF Shares and receive more or less
than NAV when you sell those shares. In times of severe
7
market disruption,
the bid-ask spread and premiums/discounts can increase significantly. Unless
imposed by your broker, there is no minimum dollar amount you must invest and no
minimum number of ETF Shares you must buy.
Your ownership of
ETF Shares will be shown on the records of the broker through which you hold the
shares. Vanguard will not have any record of your ownership. Your account
information will be maintained by your broker, which will provide you with
account statements, confirmations of your purchases and sales of ETF Shares, and
tax information. Your broker also will be responsible for ensuring that you
receive income and capital gains distributions, as well as shareholder reports
and other communications from the fund whose ETF Shares you own. You will
receive other services (e.g., dividend reinvestment and average cost
information) only if your broker offers these services.
A
Similar But Distinct Vanguard Fund
The Fund offered by
this prospectus should not be confused with Vanguard Core-Plus Bond Fund, a
separate Vanguard fund that shares an investment objective, and similar
principal investment strategies and risks. Differences in scale, certain
investment processes, and underlying holdings are expected to produce different
investment returns by the funds. To obtain a prospectus for Vanguard Core-Plus
Bond Fund, please call 800-662-744.
8
More
on the Fund and ETF Shares
This prospectus
describes the principal risks you would face as a Fund shareholder. It is
important to keep in mind one of the main principles of investing: generally,
the higher the risk of losing money, the higher the potential reward. The
reverse, also, is generally true: the lower the risk, the lower the potential
reward. As you consider an investment in any fund, you should take into account
your personal tolerance for fluctuations in the securities markets. Look for
this
symbol throughout
the prospectus. It is used to mark detailed information about the more
significant risks that you would confront as a Fund shareholder. To highlight
terms and concepts important to fund investors, we have provided Plain
Talk® explanations along
the way. Reading the prospectus will help you decide whether the Fund is the
right investment for you. We suggest that you keep this prospectus for future
reference.
symbol throughout
the prospectus. It is used to mark detailed information about the more
significant risks that you would confront as a Fund shareholder. To highlight
terms and concepts important to fund investors, we have provided Plain
Talk® explanations along
the way. Reading the prospectus will help you decide whether the Fund is the
right investment for you. We suggest that you keep this prospectus for future
reference.A
Note to Investors
Vanguard ETF Shares
can be purchased directly from the issuing Fund only by certain authorized
broker-dealers in exchange for a basket of securities (or, in some cases, for
cash or a combination of cash and securities). Individual investors generally
will not be able to purchase ETF Shares directly from the Fund. Instead, these
investors will purchase ETF Shares on the secondary market through a
broker.
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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. |
9
The following
sections explain the principal investment strategies and policies that the Fund
uses in pursuit of its investment objective. The Fund's board of trustees, which
oversees the Fund's management, may change investment strategies or policies in
the interest of shareholders without a shareholder vote, unless those strategies
or policies are designated as fundamental. Note that the Fund's investment
objective is not fundamental and may be changed without a shareholder vote. The
Fund may change its 80% policy only upon 60 days' notice to
shareholders.
Market
Exposure
The Fund invests
mainly in bonds. As a result, it is subject to certain risks.
The
Fund is subject to interest rate risk, which is the chance that bond prices will
decline because of rising interest rates.
Although fixed
income securities (commonly referred to as bonds) are often thought to be less
risky than stocks, there have been periods when bond prices have fallen
significantly because of rising interest rates. For instance, prices of
long-term bonds fell by almost 48% between December 1976 and September
1981.
To illustrate the
relationship between bond prices and interest rates, the following table shows
the effect of a 1% and a 2% change (both up and down) in interest rates on the
values of three noncallable bonds (i.e., bonds that cannot be redeemed by the
issuer) of different maturities, each with a face value of $1,000.
How
Interest Rate Changes Affect the Value of a $1,000 Bond1
|
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 |
1 Assuming a 4%
coupon rate.
These figures are
for illustration only; you should not regard them as an indication of future
performance of the bond market as a whole or the Fund in particular.
10
|
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. |
Changes in interest
rates can affect bond income as well as bond
prices.
The
Fund is subject to income risk, which is the chance that the Fund’s income will
decline because of falling interest rates. A fund’s income declines when
interest rates fall because the fund then must invest new cash flow and cash
from maturing bonds in lower-yielding bonds. Income risk is generally high for
short-term bond funds and moderate for intermediate-term bond funds, so
investors should expect the Fund's monthly income to fluctuate
accordingly.
11
|
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. |
Although falling
interest rates tend to strengthen bond prices, they can cause another problem
for bond fund investors—bond calls.
|
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. |
The
Fund is subject to call risk, which is the chance that during periods of falling
interest rates, issuers of callable bonds may call (redeem) securities with
higher coupon rates or interest rates before their maturity dates. The Fund
would then lose any price appreciation above the bond’s call price and would be
forced to reinvest the unanticipated proceeds at lower interest rates, resulting
in a decline in the Fund’s income. Such redemptions and subsequent reinvestments
would also increase the Fund’s portfolio turnover rate.
12
The
Fund is subject to prepayment risk, which is the chance that during periods of
falling interest rates, homeowners will refinance their mortgages before their
maturity dates, resulting in prepayment of mortgage-backed securities held by
the Fund. The Fund would then lose any price appreciation above the mortgage's
principal and would be forced to reinvest the unanticipated proceeds at lower
interest rates, resulting in a decline in the Fund's income. Such prepayments
and subsequent reinvestments would also increase the Fund's portfolio turnover
rate.
The
Fund is subject to extension risk, which is the chance that during periods of
rising interest rates, certain
debt securities will be paid off substantially more slowly than originally
anticipated, and the value of those securities may fall. For funds that invest
in mortgage-backed securities, extension risk is the chance that during periods
of rising interest rates, homeowners will repay their mortgages at slower rates.
This will lengthen the duration or average life of mortgage-backed securities
held by the Fund and delay the Fund's ability to reinvest proceeds at higher
interest rates.
The
Fund is subject to credit risk, which is the chance that a bond issuer will fail
to pay interest or principal in a timely manner or that negative perceptions of
the issuer’s ability to make such payments will cause the price of that bond to
decline.
|
Plain
Talk About Credit Quality |
|
A
bond’s credit quality rating is an assessment of the issuer’s ability to
pay
interest
on the bond and, ultimately, to repay the principal. 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. |
The majority of the
Fund's exposure to fixed income securities is expected to have credit quality
that is investment-grade.
|
|
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% | |||
13
The Fund may invest
no more than 35% of its assets in non-investment-grade fixed income securities,
or junk bonds. Non-investment-grade fixed income securities are those rated the
equivalent of Moody’s Ba1 or below or, if unrated, are determined to be of
comparable quality by the Fund’s advisor. These bonds carry a high degree of
risk and are considered speculative by the major rating
agencies.
|
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. |
To a limited
extent, the Fund is subject to event
risk,
which is the chance that corporate fixed income securities held by the Fund may
suffer a substantial decline in credit quality and market value because of a
restructuring of the companies that issued the securities or because of other
factors negatively affecting the issuers.
The
Fund is subject to liquidity risk, which is the chance that the Fund may not be
able to sell a security in a timely manner at a desired
price.
Liquidity in the
bond market may be challenged depending on overall economic conditions and
credit tightening, as well as the willingness of market participants to buy and
sell such securities. There may be little trading in the secondary market for
particular bonds, loans, and other debt securities, which may make them more
difficult to value or sell.
14
|
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. |
The Fund may invest
in a variety of fixed income securities of issuers that are tied economically to
emerging market countries. Emerging market bonds include sovereign debt
securities, which include fixed income securities that are issued or guaranteed
by foreign governments or their agencies, authorities, political subdivisions or
instrumentalities, or other supranational agencies, as well as debt securities
issued or guaranteed by foreign corporations and foreign financial institutions.
Emerging market countries include countries whose economies or bond markets are
less developed. This would include most countries except for Australia, Canada,
Japan, New Zealand, the United States, the United Kingdom, and most European
Union countries that use the Euro (Austria, Belgium, Croatia, Cyprus, Estonia,
Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain). The advisor
will consider, among other things, a country's political and economic stability
and the development of its financial and capital markets when determining what
constitutes an emerging market country.
The
Fund is subject to emerging markets risk, which is the chance that the bonds of
governments, government agencies, government-owned corporations, and foreign
companies located in emerging market countries will be substantially more
volatile, and substantially less liquid, than bonds of governments, government
agencies, government-owned corporations, and foreign companies located in more
developed foreign markets because, among other factors, emerging market
countries can have more variable economic performance; greater custodial and
operational risks; less developed legal, tax, regulatory, and accounting
systems; and greater political, social, and economic instability than developed
markets.
15
The
Fund is subject to country/regional risk, which is the chance that world
events—such as political upheaval, financial troubles, or natural disasters—
will adversely affect the value and/or liquidity of securities issued by foreign
governments, government agencies, government-owned corporations, and foreign
companies. Because the Fund may invest its assets in bonds of issuers located in
any one country or region, the Fund's performance may be hurt disproportionately
by the poor performance of its investments in that area. Country/regional risk
is especially high in emerging market countries.
|
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. |
While the Fund
seeks to have a majority of its assets denominated in or hedged back to the U.S.
dollar, it has the ability to invest in bonds denominated in a foreign currency
on an unhedged basis. These bonds include sovereign debt securities, which
include fixed income securities that are issued or guaranteed by foreign
sovereign governments or their agencies, authorities, political subdivisions or
instrumentalities, or other supranational agencies, as well as debt securities
issued or guaranteed by foreign corporations and foreign financial
institutions.
The Fund may
attempt to hedge some or all of its foreign currency exposure, primarily through
the use of foreign currency exchange forward contracts. Such hedging is intended
to reduce the currency risk associated with investment in bonds denominated in
currencies other than the U.S. dollar. Local currency
16
bonds are bonds
denominated in the local currency of a non-U.S. country. To the extent that the
Fund owns local currency bonds and hedges its foreign currency exposure, it is
subject to currency hedging risk.
Currency risk can
affect the credit risk of the Fund's bonds because the issuer would have a large
burden if its local currency weakens significantly compared with the U.S.
dollar. If an issuer's local currency declines relative to the U.S. dollar, it
could negatively affect perceptions of the issuer's ability to make payments,
which could cause the issuer's bonds to decline in value. Many issuers manage
this risk by hedging currency exposure, and their effectiveness in doing so is
reflected in their credit rating.
The
Fund is subject to currency risk, which is the chance that the value of a
foreign investment, measured in U.S. dollars, will decrease because of
unfavorable changes in currency exchange rates. Currency risk is especially high
in emerging markets.
The
Fund is subject to currency hedging risk. The Fund has the ability to invest in
foreign bonds which may or may not be denominated in or hedged back to U.S.
dollars. The Fund will decline in value if it underhedges a currency that has
weakened or overhedges a currency that has strengthened relative to the U.S.
dollar. In addition, the Fund will incur expenses to hedge its foreign currency
exposure. By entering into currency hedging transactions, the Fund may eliminate
any chance to benefit from favorable fluctuations in relevant currency exchange
rates.
Market disruptions
can adversely affect local and global markets as well as normal market
conditions and operations. Any such disruptions could have an adverse impact on
the value of the Fund's investments and Fund performance.
Security
Selection
Vanguard’s actively
managed fixed income funds follow a portfolio manager-driven process that uses
both top-down and bottom-up inputs. Portfolio managers are responsible for
portfolio construction and strategy, leveraging the top-down insights of
Vanguard's senior investment leaders and Vanguard's Investment Strategy Group,
the bottom-up insights of the sector teams, and the relative value views across
fixed income sectors. Risk optimization measures are present throughout the
investment process, and the Senior Investment Committee provides governance and
oversight for the entire lineup. Securities are sold based on the advisor's
judgments about a security's fundamentals, technical factors, valuation, and
contribution to the overall portfolio.
The Fund may make
use of the unique features of the ETF structure, such as in- kind transactions
and custom baskets, to select securities.
17
The types of
financial instruments that may be purchased by the Fund are identified and
explained as follows:
• U.S.
government and agency bonds represent loans by
investors to the U.S. Treasury or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government. The market values of U.S. government and agency securities
and U.S. Treasury securities are subject to fluctuation.
• Corporate
bonds
are debt securities issued by businesses that want to borrow money for some
purpose—often to develop a new product or service, to expand into a new market,
or to buy another company. As with other types of bonds, the issuer promises to
repay the principal on a specific date and to make interest payments in the
meantime. The amount of interest offered depends both on market conditions and
on the financial health of the corporation issuing the bonds; a company whose
credit rating is not strong will have to offer a higher interest rate to obtain
buyers for its bonds.
• Municipal bonds represent loans by an investor to state or local governments or to other governmental authorities.
• Mortgage-backed securities represent partial ownership interest in pools of commercial or residential mortgage loans made by financial institutions to finance a borrower’s real estate purchase. These loans are packaged by private or governmental issuers for sale to investors. As the underlying mortgage loans are paid by borrowers, the investors receive payments of interest and principal. To be announced (TBA) securities represent an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics for a fixed unit price, with settlement on a scheduled future date beyond the typical settlement period for most other securities. The Fund may have short positions in TBAs. See also Other Investment Policies and Risks.
The Fund may also invest in mortgage-backed securities that are packaged by private corporations and are not guaranteed by the U.S. government.
The Fund may enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in
• Municipal bonds represent loans by an investor to state or local governments or to other governmental authorities.
• Mortgage-backed securities represent partial ownership interest in pools of commercial or residential mortgage loans made by financial institutions to finance a borrower’s real estate purchase. These loans are packaged by private or governmental issuers for sale to investors. As the underlying mortgage loans are paid by borrowers, the investors receive payments of interest and principal. To be announced (TBA) securities represent an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics for a fixed unit price, with settlement on a scheduled future date beyond the typical settlement period for most other securities. The Fund may have short positions in TBAs. See also Other Investment Policies and Risks.
The Fund may also invest in mortgage-backed securities that are packaged by private corporations and are not guaranteed by the U.S. government.
The Fund may enter into mortgage-dollar-roll transactions. In a mortgage-dollar-roll transaction, a fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. These transactions simulate an investment in
18
mortgage-backed
securities and have the potential to enhance a fund’s returns and reduce its
administrative burdens, compared with holding mortgage-backed securities
directly. These transactions may increase the fund’s portfolio turnover rate.
Mortgage dollar rolls will be used only to the extent that they are consistent
with the Fund’s investment objective and risk profile.
• Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a fund to banks or large securities dealers. Repurchase agreements can carry several risks. For instance, if the seller is unable to repurchase the securities as promised, a fund may experience a loss when trying to sell the securities to another buyer. Also, if the seller becomes insolvent, a bankruptcy court may determine that the securities do not belong to a fund and order that the securities be used to pay off the seller’s debts. The Fund’s advisor believes that these risks can be controlled through careful security selection and monitoring.
• Futures, options, and other derivatives are described in detail under Other Investment Policies and Risks.
• Asset-backed securities are bonds that represent partial ownership in pools of consumer or commercial loans—most often credit card, automobile, or trade receivables. Asset-backed securities, which can be types of corporate fixed income obligations, are issued by entities formed solely for that purpose, but their value ultimately depends on repayments by underlying borrowers. A primary risk of asset-backed securities is that their maturity is difficult to predict, being driven by borrowers’ prepayments.
• International dollar-denominated bonds are denominated in U.S. dollars and issued by foreign governments and companies. To the extent that the Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.
• Foreign currency bonds are bonds denominated in the local currency of a non-U.S. country and issued by foreign governments, government agencies, and
• Cash equivalent investments is a blanket term that describes a variety of short-term fixed income investments, including money market instruments, commercial paper, bank certificates of deposit, banker’s acceptances, and repurchase agreements. Repurchase agreements represent short-term (normally overnight) loans by a fund to banks or large securities dealers. Repurchase agreements can carry several risks. For instance, if the seller is unable to repurchase the securities as promised, a fund may experience a loss when trying to sell the securities to another buyer. Also, if the seller becomes insolvent, a bankruptcy court may determine that the securities do not belong to a fund and order that the securities be used to pay off the seller’s debts. The Fund’s advisor believes that these risks can be controlled through careful security selection and monitoring.
• Futures, options, and other derivatives are described in detail under Other Investment Policies and Risks.
• Asset-backed securities are bonds that represent partial ownership in pools of consumer or commercial loans—most often credit card, automobile, or trade receivables. Asset-backed securities, which can be types of corporate fixed income obligations, are issued by entities formed solely for that purpose, but their value ultimately depends on repayments by underlying borrowers. A primary risk of asset-backed securities is that their maturity is difficult to predict, being driven by borrowers’ prepayments.
• International dollar-denominated bonds are denominated in U.S. dollars and issued by foreign governments and companies. To the extent that the Fund owns foreign bonds, it is subject to country risk, which is the chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value and/or liquidity of securities issued by companies in foreign countries. In addition, the prices of foreign bonds and the prices of U.S. bonds have, at times, moved in opposite directions. Because the bond’s value is designated in dollars rather than in the currency of the issuer’s country, the investor is not exposed to currency risk; rather, the issuer assumes that risk, usually to attract U.S. investors. Although currency movements do not affect the value of international dollar-denominated bonds directly, they could affect the value indirectly by adversely affecting the issuer’s ability (or the market’s perception of the issuer’s ability) to pay interest or repay principal.
• Foreign currency bonds are bonds denominated in the local currency of a non-U.S. country and issued by foreign governments, government agencies, and
19
companies. The fund
will seek to have a majority of its assets either denominated in or hedged back
to the U.S. dollar, but will also have the ability to invest in bonds
denominated in a local currency on an unhedged basis. To the extent that a
fund’s investments in foreign currency bonds are hedged, the fund is subject to
currency hedging risk. Currency hedging risk is the chance that the currency
hedging transactions entered into by the fund may not perfectly offset the
fund’s foreign currency exposure.
• Preferred stocks distribute set dividends from the issuer. The preferred-stock holder’s claim on the issuer’s income and assets ranks before that of common-stock holders, but after that of bondholders.
• Convertible securities are bonds or preferred stocks that are convertible into, or exchangeable for, common stocks.
• Collateralized mortgage obligations (CMOs) are special bonds that are collateralized by mortgages or mortgage pass-through securities. Cash flow rights on underlying mortgages—the rights to receive principal and interest payments—are divided up and prioritized to create short-, intermediate-, and long-term bonds. CMOs rely on assumptions about the timing of cash flows on the underlying mortgages, including expected prepayment rates. The primary risk of a CMO is that these assumptions are wrong, which would either shorten or lengthen the bond’s maturity. The Fund will invest only in CMOs that are believed to be consistent with its maturity and credit-quality standards.
• Bank Loans are special bonds that are fixed or floating rate loans arranged through private negotiations between a company or a non-U.S. government and one or more financial institutions. Bank loans often involve borrowers who are less financially strong than companies with higher credit ratings and therefore may be more likely to encounter financial difficulties and be more vulnerable to adverse market events and negative sentiments. For this reason, bank loans will generally be rated below investment-grade and involve greater risks of default, downgrade, or price declines and are more volatile than investment-grade securities. A significant portion of floating rate investments may be “covenant lite” loans that may contain fewer or less restrictive constraints on the borrower or other borrower-friendly characteristics.
A fund may have difficulty disposing of bank loans because, in certain cases, the market for such instruments is not highly liquid. The lack of a highly liquid secondary market may have an adverse impact on the value of such instruments and on a fund's ability to dispose of the bank loan in response to a specific economic event, such as deterioration in the creditworthiness of the borrower, but there is no guarantee that an investment in these securities will result in a high rate of return. In addition, transactions in bank loans may take more than seven days to settle. As a result, the proceeds related to the sale of bank loans may not be available to make additional investments or to meet a fund's
• Preferred stocks distribute set dividends from the issuer. The preferred-stock holder’s claim on the issuer’s income and assets ranks before that of common-stock holders, but after that of bondholders.
• Convertible securities are bonds or preferred stocks that are convertible into, or exchangeable for, common stocks.
• Collateralized mortgage obligations (CMOs) are special bonds that are collateralized by mortgages or mortgage pass-through securities. Cash flow rights on underlying mortgages—the rights to receive principal and interest payments—are divided up and prioritized to create short-, intermediate-, and long-term bonds. CMOs rely on assumptions about the timing of cash flows on the underlying mortgages, including expected prepayment rates. The primary risk of a CMO is that these assumptions are wrong, which would either shorten or lengthen the bond’s maturity. The Fund will invest only in CMOs that are believed to be consistent with its maturity and credit-quality standards.
• Bank Loans are special bonds that are fixed or floating rate loans arranged through private negotiations between a company or a non-U.S. government and one or more financial institutions. Bank loans often involve borrowers who are less financially strong than companies with higher credit ratings and therefore may be more likely to encounter financial difficulties and be more vulnerable to adverse market events and negative sentiments. For this reason, bank loans will generally be rated below investment-grade and involve greater risks of default, downgrade, or price declines and are more volatile than investment-grade securities. A significant portion of floating rate investments may be “covenant lite” loans that may contain fewer or less restrictive constraints on the borrower or other borrower-friendly characteristics.
A fund may have difficulty disposing of bank loans because, in certain cases, the market for such instruments is not highly liquid. The lack of a highly liquid secondary market may have an adverse impact on the value of such instruments and on a fund's ability to dispose of the bank loan in response to a specific economic event, such as deterioration in the creditworthiness of the borrower, but there is no guarantee that an investment in these securities will result in a high rate of return. In addition, transactions in bank loans may take more than seven days to settle. As a result, the proceeds related to the sale of bank loans may not be available to make additional investments or to meet a fund's
20
redemption
obligations until a substantial period after the sale of the loans. To the
extent that extended settlement creates short-term liquidity needs, a fund has
the ability to satisfy these needs in a number of different ways, for example,
by holding additional cash, selling other investments (potentially at an
inopportune time, which could result in losses to the fund), or other
methods.
The
Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other funds
with a similar investment objective.
The
Fund is subject to management of certain similar funds risk. The name,
investment objective, principal investment strategies, and risks of the Fund are
similar to another separate fund managed by the Fund's portfolio managers.
However, the investment results of the Fund may be higher or lower than, and
there is no guarantee that the investment results of the Fund will be comparable
to, that other fund due to differences in scale, certain investment processes,
and underlying holdings.
|
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. |
21
Other
Investment Policies and Risks
In addition to
investing in bonds, the Fund may make other kinds of investments to achieve its
investment objective.
The Fund may purchase nonpublic securities, generally referred to as 144A securities. The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid securities are investments that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Restricted securities are a special type of illiquid security; these securities have not been publicly issued and legally can be resold only to qualified buyers. From time to time, the board of trustees may determine that particular restricted securities are not illiquid, and those securities may then be purchased by the Fund without limit. The Fund may also hold other types of securities, such as various types of warrants, including, but not limited to warrants linked to countries' economic performance or commodity prices.
The Fund may purchase nonpublic securities, generally referred to as 144A securities. The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid securities are investments that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Restricted securities are a special type of illiquid security; these securities have not been publicly issued and legally can be resold only to qualified buyers. From time to time, the board of trustees may determine that particular restricted securities are not illiquid, and those securities may then be purchased by the Fund without limit. The Fund may also hold other types of securities, such as various types of warrants, including, but not limited to warrants linked to countries' economic performance or commodity prices.
.
The Fund may invest in derivatives, which may involve risks different from, and
possibly greater than, those of investments directly in the underlying
securities or assets.
Generally speaking,
a derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, a bond, or a currency), a physical asset (such
as gold, oil, or wheat), a market index, or a reference rate. The Fund may
invest in derivatives, which may involve risks different from, and possibly
greater than, those of investments directly in the underlying securities or
assets. The Fund may invest in derivatives only if the expected risks and
rewards of the derivatives are consistent with the investment objective,
policies, strategies, and risks of the Fund as disclosed in this prospectus. In
particular, derivatives will be used only when they may help the advisor to
accomplish one or more of the following:
• Invest in
eligible asset classes with greater efficiency and lower cost than is possible
through direct investment.
• Add value when
these instruments are attractively priced.
• Adjust
sensitivity to changes in interest rates.
• Adjust the
overall credit risk of the portfolio or actively overweight or underweight
credit risk to specific bond issuers.
• Hedge foreign
currency exposure.
• Hedge foreign
interest rate exposure.
22
The Fund's
derivative investments may include fixed income futures contracts, fixed income
options including options on swaps; currency swaps; foreign currency exchange
forwards; interest rate swaps; total return swaps; credit default swaps; TBAs;
or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial—in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives. The Fund may also
invest in U.S. Treasury futures for either cash management purposes or
potentially to add value since they may be favorably priced.
The Fund may enter into a currency swap or foreign currency exchange forward to sell or buy an amount of foreign currency with which it does not have exposure.
The Fund may enter into a currency swap or foreign currency exchange forward to sell or buy an amount of foreign currency with which it does not have exposure.
|
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. |
The
Fund is subject to counterparty risk, which is the chance that the counterparty
to a derivatives contract, or other investment vehicle, with the Fund will be
unable or unwilling to meet its financial obligations.
The Fund may invest
a small portion of its assets in shares of exchange-traded funds (ETFs). These
ETFs typically provide returns similar to those of bonds. The Fund may purchase
ETFs when doing so will reduce the Fund’s transaction costs, facilitate cash
management, mitigate risk, or have the potential to add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
Fund assets invested in ETF Shares of other Vanguard funds. Fund assets invested
in ETF Shares of other Vanguard funds are excluded when allocating to the Fund
its share of the costs of Vanguard operations.
Cash
Management
The Fund's daily
cash balance may be invested in Vanguard Market Liquidity Fund and/or Vanguard
Municipal Cash Management Fund (each, a CMT Fund),
23
which are low-cost
money market funds. When investing in a CMT Fund, the Fund bears its
proportionate share of the expenses of the CMT Fund in which it invests.
Vanguard receives no additional revenue from Fund assets invested in a CMT Fund.
Investment in a CMT Fund may generate taxable income for the Fund and
potentially may require the Fund to distribute income subject to federal
personal income tax or the alternative minimum tax.
Redemption
Requests
Methods
used to meet redemption requests. Redemptions of ETF
Shares are typically met through a combination of cash and securities held by
the Fund; see “How Are Vanguard ETF Shares Different From Conventional Mutual
Fund Shares?” If cash is used to meet redemptions, the Fund typically obtains
such cash through positive cash flows or the sale of Fund holdings consistent
with the Fund’s investment objective and strategy. Please consult the Fund's
Statement
of Additional Information for further
information on redemptions of ETF Shares.
Under certain
circumstances, including under stressed market conditions, the Fund may borrow
money (subject to certain regulatory conditions and if available under
board-approved procedures) through an interfund lending facility; through a bank
line-of-credit, including a joint committed credit facility; or through an
uncommitted line-of-credit from Vanguard in order to meet redemption
requests.
Potential
redemption activity impacts. At times, the Fund
may experience adverse effects when certain large shareholders, or multiple
shareholders comprising significant ownership of the Fund, redeem large amounts
of shares of the Fund. Large redemptions may cause the Fund to sell portfolio
securities at times when it would not otherwise do so. This may result in the
Fund distributing capital gains or other taxable income to non-redeeming
shareholders. Large redemptions may also increase the Fund’s transaction costs.
Redemption activity can occur for many reasons, including shareholder reactions
to market movements or other events unrelated to Vanguard’s actions, or when
Vanguard makes product changes that, for example, may result in a shareholder
redeeming shares of the Fund to purchase shares of another similar fund or
investment vehicle.
Temporary
Investment Measures
The Fund may
temporarily depart from its normal investment policies and strategies when the
advisor believes that doing so is in the Fund's best interest, so long as the
strategy or policy employed is consistent with the Fund's investment objective.
For instance, the Fund may invest beyond its normal limits in derivatives or
exchange-traded funds that are consistent with the Fund's investment objective
when those instruments are more favorably priced or provide needed liquidity, as
might be the case when the Fund receives large
24
cash flows that it
cannot prudently invest immediately. By temporarily departing from its normal
investment policies, the Fund may distribute income subject to federal personal
income tax or the alternative minimum tax and may otherwise fail to meet its
objective.
In addition, the
Fund may take temporary defensive positions that are inconsistent with its
normal investment policies and strategies—for instance, by allocating
substantial assets to cash equivalent investments or other less volatile
instruments— in response to adverse or unusual market, economic, political, or
other conditions. In doing so, the Fund may succeed in avoiding losses but may
otherwise fail to achieve its investment objective.
Special
Risks of Exchange-Traded Shares
ETF
Shares are not individually redeemable. They
can be redeemed with the issuing Fund at NAV only by certain authorized
broker-dealers and only in large blocks known as Creation Units. Consequently,
if you want to liquidate some or all of your ETF Shares, you must sell them on
the secondary market at prevailing market prices.
The
market price of ETF Shares may differ from NAV. Although
it is expected that the market price of an ETF Share typically will approximate
its NAV, there may be times when the market price and the NAV differ
significantly. Thus, you may pay more (premium) or less (discount) than NAV when
you buy ETF Shares on the secondary market, and you may receive more or less
than NAV when you sell those shares. These discounts and premiums are likely to
be greatest during times of market disruption or extreme market
volatility.
Vanguard’s website
at vanguard.com shows the previous
day’s closing NAV and closing market price for the Fund’s ETF Shares. The
website also discloses, in the Premium/Discount Analysis section of the ETF
Shares’ Price & Performance page, how frequently the Fund’s ETF Shares
traded at a premium or discount to NAV (based on closing NAVs and market prices)
and the magnitudes of such premiums and discounts.
An
active trading market may not exist. Although
Vanguard ETF Shares are listed on a national securities exchange, it is possible
that an active trading market may not be maintained. Although this could happen
at any time, it is more likely to occur during times of severe market
disruption. If you attempt to sell your ETF Shares when an active trading market
is not functioning, you may have to sell at a significant discount to NAV. In
extreme cases, you may not be able to sell your shares at
all.
25
Trading
may be halted. Trading
of Vanguard ETF Shares on an exchange may be halted by the activation of
individual or marketwide trading halts (which halt trading for a specific period
of time when the price of a particular security or overall market prices decline
by a specified percentage). Trading of ETF Shares may also be halted if (1) the
shares are delisted from the listing exchange without first being listed on
another exchange or (2) exchange officials determine that such action is
appropriate in the interest of a fair and orderly market or for the protection
of investors.
A
precautionary note to investment companies: The Fund's ETF
Shares are issued by a registered investment company, and therefore the
acquisition of such shares by other investment companies and private funds is
subject to the restrictions of Section 12(d)(1) of the Investment Company Act of
1940 (the 1940 Act). SEC Rule 12d1-4 under the 1940 Act permits registered
investment companies to invest in other registered investment companies beyond
the limits in Section 12(d)(1), subject to certain conditions, including that
funds with different investment advisors must enter into a fund of funds
investment agreement.
Shareholder
Rights
The Fund's
Agreement and Declaration of Trust, as amended, requires a shareholder bringing
a derivative action on behalf of Vanguard Malvern Funds (the Trust) that is
subject to a pre-suit demand to collectively hold at least 10% of the
outstanding shares of the Trust or at least 10% of the outstanding shares of the
series or class to which the demand relates and to undertake to reimburse the
Trust for the expense of any counsel or advisors used when considering the
merits of the demand in the event that the board of trustees determines not to
bring such action. In each case, these requirements do not apply to claims
arising under the federal securities laws to the extent that any such federal
securities laws, rules, or regulations do not permit such
application.
Frequent
Trading and Market-Timing
Unlike frequent
trading of a Vanguard fund’s conventional (i.e., not exchange-traded) classes of
shares, frequent trading of ETF Shares does not disrupt portfolio management or
otherwise harm fund shareholders. The vast majority of trading in ETF Shares
occurs on the secondary market. Because these trades do not involve the issuing
fund, they do not harm the fund or its shareholders. Certain broker-dealers are
authorized to purchase and redeem ETF Shares directly with the issuing fund.
Because these trades typically are effected in kind (i.e., for securities and
not for cash), or are assessed a transaction fee when effected in cash, they do
not cause any of the harmful effects to the issuing fund (as previously noted)
that may result from frequent
26
trading. For these
reasons, the board of trustees of each fund that issues ETF Shares has
determined that it is not necessary to adopt policies and procedures to detect
and deter frequent trading and market-timing of ETF Shares.
Portfolio
Holdings
Please consult the
Fund's Statement
of Additional Information or our website for
a description of the policies and procedures that govern disclosure of the
Fund’s portfolio holdings.
Turnover
Rate
Although the Fund
generally seeks to invest for the long term, it may sell securities regardless
of how long they have been held. The Fund has no operating history, and
therefore has no portfolio turnover information.
Shorter-term bonds
will mature or be sold—and need to be replaced—more frequently than longer-term
bonds. As a result, shorter-term bond funds tend to have higher turnover rates
than longer-term bond funds. In general, the greater the turnover rate, the
greater the impact transaction costs will have on a fund’s return. Also, funds
with high turnover rates may be more likely to generate capital gains, including
short-term capital gains, that must be distributed to shareholders and will be
taxable to shareholders investing through a taxable account.
The
Fund and Vanguard
The Fund is a
member of The Vanguard Group, Inc. (Vanguard), a family of over 200 funds. All
of the funds that are members of Vanguard (other than funds of funds) share in
the expenses associated with administrative services and business operations,
such as personnel, office space, and equipment.
Vanguard Marketing
Corporation provides marketing services to the funds. Although fund shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund (other than a
fund of funds) or each share class of a fund (in the case of a fund with
multiple share classes) pays its allocated share of the Vanguard funds’
marketing costs.
27
|
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. |
Investment
Advisor
The Vanguard Group,
Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975,
serves as advisor to the Fund through its Fixed Income Group. As of October 31,
2023, Vanguard served as advisor for approximately $6.3 trillion in assets.
Vanguard provides investment advisory services to the Fund pursuant to the
Funds’ Service Agreement and subject to the supervision and oversight of the
trustees and officers of the Fund.
Although the Fund
is managed solely by Vanguard, the Fund reserves the right to utilize a
multimanager approach in the future. Under the terms of an SEC exemption, the
Fund's board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement with a third-party investment advisor or hire
a new third-party investment advisor—either as a replacement for an existing
advisor or as an additional advisor. Any significant change in the Fund's
advisory arrangements will be communicated to shareholders in writing. As the
Fund's sponsor and overall manager, Vanguard may provide investment advisory
services to the Fund at any time. Vanguard may also recommend to the board of
trustees that an advisor be hired, terminated, or replaced or that the terms of
an existing advisory agreement be revised. The Fund has filed an application
seeking a similar SEC exemption with respect to investment advisors that are
wholly owned subsidiaries of Vanguard. If the exemption is granted, the Fund may
rely on the new SEC relief.
For a discussion of
why the board of trustees approved the Fund's investment advisory arrangement,
see the Fund’s first annual or semiannual report to shareholders following the
Fund’s commencement of operations.
The managers
primarily responsible for the day-to-day management of the Fund
are:
28
Michael
Chang,
CFA, Portfolio Manager at Vanguard. He has been with Vanguard since 2017, has
worked in investment management since 2002, has managed investment portfolios
since 2011, and has co-managed the Fund since its inception in 2023. Education:
B. Com., University of British Columbia.
Arvind
Narayanan, CFA, Senior
Portfolio Manager and Principal of Vanguard. He has been with Vanguard since
2019, has worked in investment management since 2002, has managed investment
portfolios since 2006, and has co-managed the Fund since its inception in 2023.
Education: B.A., Goucher College; M.B.A., New York University.
Brian
W. Quigley, CFA, Portfolio
Manager at Vanguard. He has been with Vanguard since 2003, has worked in
investment management since 2005, has managed investment portfolios since 2015,
and has co-managed the Fund since its inception in 2023. Education: B.S., Lehigh
University.
Daniel
Shaykevich, Senior Portfolio
Manager and Principal of Vanguard. He has worked in investment management since
2001, has managed investment portfolios since 2004, has been with Vanguard since
2013, and has co-managed the Fund since its inception in 2023. Education: B.S.,
Carnegie Mellon University.
The Fund's
Statement
of Additional Information provides
information about the portfolio manager’s compensation, other accounts under
management, and ownership of shares of the Fund.
Dividends,
Capital Gains, and Taxes
Fund
Distributions
The Fund
distributes to shareholders virtually all of its net income (interest less
expenses) as well as any net short-term or long-term capital gains realized from
the sale of its holdings. From time to time, the Fund may also make
distributions that are treated as a return of capital. Income dividends
generally are declared monthly and distributed as soon as practicable
thereafter; capital gains distributions, if any, generally occur annually in
December and distributed as soon as practicable thereafter. In addition, the
Fund may occasionally make one or more supplemental distribution at other times
during the year.
29
|
Plain
Talk About Distributions |
|
As
a shareholder, you are entitled to your portion of a fund’s income from
interest
as well as capital gains from the fund’s sale of investments. Income
consists
of interest the fund earns from its money market and bond
investments.
Capital gains are realized whenever the fund sells securities for
higher
prices than it paid for them. These capital gains are either short-term
or
long-term, depending on whether the fund held the securities for one year
or
less or for more than one
year. |
Reinvestment
of Distributions
In order to
reinvest dividend and capital gains distributions, investors in the Fund's ETF
Shares must hold their shares at a broker that offers a reinvestment service.
This can be the broker’s own service or a service made available by a third
party, such as the broker’s outside clearing firm or the DTC. If a reinvestment
service is available, distributions of income and capital gains can
automatically be reinvested in additional whole and fractional ETF Shares of the
Fund. If a reinvestment service is not available, investors will receive their
distributions in cash. To determine whether a reinvestment service is available
and whether there is a commission or other charge for using this service,
consult your broker.
As with all
exchange-traded funds, reinvestment of dividend and capital gains distributions
in additional ETF Shares will occur four business days or more after the
ex-dividend date (the date when a distribution of dividends or capital gains is
deducted from the price of the Fund’s shares). The exact number of days depends
on your broker. During that time, the amount of your distribution will not be
invested in the Fund and therefore will not share in the Fund’s income, gains,
and losses.
Basic
Tax Points
Investors in
taxable accounts should be aware of the following basic federal income tax
points:
• Distributions are
taxable to you whether or not you reinvest these amounts in additional ETF
Shares.
• Distributions
declared in December—if paid to you by the end of January—are taxable as if
received in December.
• Any income
dividend distribution or short-term capital gains distribution that you receive
is taxable to you as ordinary income.
30
• Any distribution
of net long-term capital gains is taxable to you as long-term capital gains, no
matter how long you have owned ETF Shares.
• Capital gains
distributions may vary considerably from year to year as a result of the Fund's
normal investment activities and cash flows.
• Your cost basis
in the Fund will be decreased by the amount of any return of capital that you
receive. This, in turn, will affect the amount of any capital gain or loss that
you realize when selling your ETF Shares.
• Return of capital
distributions generally are not taxable to you until your cost basis has been
reduced to zero. If your cost basis is at zero, return of capital distributions
will be treated as capital gains.
• A sale of ETF
Shares is a taxable event. This means that you may have a capital gain to report
as income, or a capital loss to report as a deduction, when you complete your
tax return.
Individuals,
trusts, and estates whose income exceeds certain threshold amounts are subject
to a 3.8% Medicare contribution tax on “net investment income.” Net investment
income takes into account distributions paid by the Fund and capital gains from
any sale of ETF Shares.
Income dividends
and capital gains distributions that you receive, as well as your gains or
losses from any sale of ETF Shares, may be subject to state and local income
taxes. Depending on your state’s rules, however, any dividends attributable to
interest earned on direct obligations of the
U.S. government may be exempt from state and local taxes. Vanguard will notify
you each year how much, if any, of your dividends may qualify for this
exemption.
This prospectus
provides general tax information only. If you are investing through a
tax-advantaged account, such as an IRA or an employee-sponsored retirement or
savings plan, special tax rules apply. Please consult your tax advisor for
detailed information about any tax consequences for you.
Share
Price and Market Price
Share price, also
known as net
asset value (NAV), is
calculated as of the close of regular trading on the New York Stock Exchange
(NYSE), generally 4 p.m., Eastern time, on each day that the NYSE is open for
business (a business day). In the rare event the NYSE experiences unanticipated
disruptions and is unavailable at the close of the trading day, NAVs will be
calculated as of the close of regular trading on the Nasdaq (or another
alternate exchange if the Nasdaq is unavailable, as determined at Vanguard’s
discretion), generally 4 p.m., Eastern time. The NAV per share is computed by
dividing the total assets, minus
31
liabilities, of the
Fund by the number of shares outstanding. On U.S. holidays or other days when
the NYSE is closed, the NAV is not calculated, and the Fund does not sell or
redeem shares. However, on those days the value of the Fund's assets may be
affected to the extent that the Fund holds securities that change in value on
those days (such as foreign securities that trade on foreign markets that are
open).
Remember: If you
buy or sell ETF Shares on the secondary market, you will pay or receive the
market price, which may be higher or lower than NAV. Your transaction will be
priced at NAV only if you purchase or redeem your ETF Shares in Creation Unit
blocks (an option available only to certain authorized
broker-dealers).
Debt securities
held by a Vanguard fund are valued based on information furnished by an
independent pricing service or market quotations. When a fund determines that
pricing-service information or market quotations either are not readily
available or do not accurately reflect the value of a security, the security is
priced at its fair
value
(the amount that the owner might reasonably expect to receive upon the current
sale of the security).
The values of any
foreign securities held by a fund are converted into U.S. dollars using an
exchange rate obtained from an independent third party as of the close of
regular trading on the NYSE. The values of any mutual fund shares, including
institutional money market fund shares, held by a fund are based on the NAVs of
the shares. The values of any ETF shares or closed-end fund shares held by a
fund are based on the market value of the shares.
The fund also may
use fair-value pricing on bond market holidays when the fund is open for
business (such as Columbus Day and Veterans Day). Fair-value prices are
determined by Vanguard according to procedures adopted by the board of trustees.
When fair-value pricing is employed, the prices of securities used by the fund
to calculate the NAV may differ from quoted or published prices for the same
securities.
The Fund has
authorized certain financial intermediaries and their designees, and may, from
time to time, authorize certain funds of funds for which Vanguard serves as the
investment advisor (Vanguard Funds of Funds), to accept orders to buy or sell
fund shares on its behalf. The Fund will be deemed to receive an order when
accepted by the financial intermediary, its designee, or one of the Vanguard
Funds of Funds, and the order will receive the NAV next computed by the Fund
after such acceptance.
Vanguard’s website
will show the previous day’s closing NAV and closing market price for the Fund’s
ETF Shares.
32
Additional
Information
The Fund's Bylaws
require, unless the Trust otherwise consents in writing, that the U.S. Federal
District Courts be the sole and exclusive forum for the resolution of complaints
under the Securities Act of 1933. This provision may limit a shareholder’s
ability to bring a claim in a different forum and may result in increased
shareholder costs in pursuing such a claim.
|
Vanguard
Fund |
Inception
Date |
|
Vanguard
Fund
Number |
CUSIP
Number |
|
Vanguard
Core-Plus Bond ETF |
— |
|
V022 |
922020755 |
Certain affiliates
of the Fund and the advisor may purchase and resell ETF Shares pursuant to the
prospectus.
CGS identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard & Poor’s Financial Services, LLC, and are not for use or dissemination in a manner that would serve as a substitute for any CUSIP service. The CUSIP Database, © 2023 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.
CFA® is a registered
trademark owned by CFA Institute.
33
Glossary
of Investment Terms
Authorized
Participant. Institutional
investors that are permitted to purchase Creation Units directly from, and
redeem Creation Units directly with, the issuing fund. To be an Authorized
Participant, an entity must be a participant in the Depository Trust Company and
must enter into an agreement with the fund’s Distributor.
Average
Maturity. The average length
of time until bonds held by a fund reach maturity and are repaid. In general,
the longer the average maturity, the more a fund's share price fluctuates in
response to changes in market interest rates. In calculating average maturity, a
fund uses a bond’s maturity or, if applicable, an earlier date on which the
advisor believes it is likely that a maturity-shortening device (such as a call,
put, refunding, prepayment, or redemption provision or an adjustable coupon
rate) will cause the bond to be repaid.
Bid-Ask
Spread. The difference
between the highest price a buyer is willing to pay to purchase ETF Shares (bid)
and the lowest price a seller is willing to accept for ETF Shares (ask) when
buying or selling shares in the secondary market.
Bond. A debt security
(IOU) issued by a corporation, a government, or a government agency in exchange
for the money the bondholder lends it. In most instances, the issuer agrees to
pay back the loan by a specific date and generally to make regular interest
payments until that date.
Capital
Gains Distributions. Payments to fund
shareholders of gains realized on securities that a fund has sold at a profit,
minus any realized losses.
Corporate
Bond.
An IOU issued by a business that wants to borrow money. As with other types of
bonds, the issuer promises to repay the borrowed money by a specific date and
generally to make interest payments in the meantime.
Coupon
Rate.
The interest rate paid by the issuer of a debt security until its maturity. It
is expressed as an annual percentage of the face value of the
security.
Creation
Unit.
A large block of a specified number of ETF Shares. Certain broker-dealers known
as “Authorized Participants” may purchase and redeem ETF Shares from the issuing
fund in Creation Unit size blocks.
Dividend
Distributions. Payments to fund
shareholders of income from interest or dividends generated by a fund's
investments.
34
Duration. A measure of the
sensitivity of bond—and bond fund—prices to interest rate movements. For
example, if a bond has a duration of two years, its price would fall by
approximately 2% when interest rates rise by 1%. On the other hand, the bond’s
price would rise by approximately 2% when interest rates fall by
1%.
Ex-Dividend
Date.
The date when a distribution of dividends and/or capital gains is deducted from
the share price of a mutual fund, ETF, or stock. On the ex-dividend date, the
share price drops by the amount of the distribution per share (plus or minus any
market activity).
Expense
Ratio.
A fund's total annual operating expenses expressed as a percentage of the fund's
average net assets. The expense ratio includes management and administrative
expenses, but it does not include the transaction costs of buying and selling
portfolio securities.
Face
Value.
The amount to be paid at a bond’s maturity; also known as the par value or
principal.
Fixed
Income Security. An investment,
such as a bond, representing a debt that must be repaid by a specified date, and
on which the borrower may pay a fixed, variable, or floating rate of
interest.
Inception
Date.
The date on which the assets of a fund (or one of its share classes) are first
invested in accordance with the fund's investment objective. For funds with a
subscription period, the inception date is the day after that period ends.
Investment performance is generally measured from the inception
date.
Investment-Grade
Bond.
A debt security whose credit quality is considered by independent bond rating
agencies, or through independent analysis conducted by a fund's advisor, to be
sufficient to ensure timely payment of principal and interest under current
economic circumstances. Debt securities rated in one of the four highest rating
categories are considered investment-grade. Other debt securities may be
considered by an advisor to be investment-grade.
Joint
Committed Credit Facility. The Fund may
participate, along with other funds managed by Vanguard, in a committed credit
facility provided by a syndicate of lenders pursuant to a credit agreement that
may be renewed annually; each Vanguard fund is individually liable for its
borrowings, if any, under the credit facility. The amount and terms of the
committed credit facility are subject to approval by the Fund's board of
trustees and renegotiation with the
35
lender syndicate on
an annual basis. New funds, such as the Vanguard Core-Plus Bond ETF, will
generally be added to the agreement during the annual renewal
process.
Mutual
Fund.
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over
time.
New
York Stock Exchange (NYSE). A stock exchange
based in New York City that is open for regular trading on business days, Monday
through Friday, from 9:30 a.m. to 4 p.m., Eastern time.
Par. The amount to be
paid at a bond’s maturity; also known as the face value.
Principal. The face value of
a debt instrument or the amount of money put into an investment.
Return
of Capital. A return of
capital occurs when a fund's distributions exceed its earnings in a fiscal year.
A return of capital is a return of all or part of your original investment or
amounts paid in excess of your original investment in a fund. In general, a
return of capital reduces your cost basis in a fund's shares and is not taxable
to you until your cost basis has been reduced to zero.
Securities. Stocks, bonds,
money market instruments, and other investments.
Total
Return. A percentage
change, over a specified time period, in a fund's net asset value, assuming the
reinvestment of all distributions of dividends and capital gains.
Volatility. The fluctuations
in value of a mutual fund or other security. The greater a fund's volatility,
the wider the fluctuations in its returns.
Yield. Income (interest
or dividends) earned by an investment, expressed as a percentage of the
investment’s price.
36
Connect
with Vanguard®˃
vanguard.com
For
More Information
If you would like
more information about Vanguard Core-Plus Bond ETF, the following documents are
available free upon request:
Annual/Semiannual
Reports to Shareholders
Additional
information about the Fund's investments will be available in the Fund's annual
and semiannual reports to shareholders. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
Statement
of Additional Information (SAI)
The SAI provides more
detailed information about the Fund's ETF Shares and is incorporated by
reference into (and thus legally a part of) this prospectus.
To receive a free
copy of the latest annual or semiannual report (once available) or the SAI, or
to request additional information about Vanguard ETF Shares, please visit
vanguard.com
or
contact us as follows:
Telephone:
866-499-8473; Text telephone for people with hearing impairment:
800-749-7273
Information
Provided by the SEC
Reports and other
information about the Fund are available in the EDGAR database on the SEC’s
website at sec.gov, or you can receive copies of this information, for a fee, by
electronic request at the following email address:
[email protected].
Fund's Investment
Company Act file number: 811-05628
©
2023 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P V022 122023
Vanguard Marketing Corporation, Distributor.
P V022 122023