The portfolio employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Bond Index. This index measures a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year. The portfolio invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the portfolio’s investments will be selected through the sampling process, and at least 80% of the portfolio’s assets will be invested in bonds held in the index. The portfolio maintains a dollar-weighted average maturity consistent with that of the index, which currently ranges between 5 and 10 years.
- The portfolio may invest in relatively conservative classes of collateralized mortgage obligations (CMOs), which offer a high degree of cash-flow predictability and a low level of vulnerability to mortgage prepayment risk. To reduce credit risk, these less-risky classes of CMOs are purchased only if they are issued by agencies of the U.S. government or issued by private companies that carry high-quality investment-grade ratings.
- The portfolio may invest a small portion of assets in shares of stock or bond exchange traded funds (ETFs), including ETF Shares issued by Vanguard funds. ETFs provide returns similar to those of the stocks or bonds listed in an index or in a subset of an index. Vanguard may purchase ETFs when doing so will reduce the portfolio’s transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing portfolio assets in ETF Shares of other Vanguard funds. Portfolio assets invested in ETF Shares are excluded when allocating to the portfolio its share of the costs of Vanguard operations.
- The portfolio reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the portfolio’s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the portfolio’s board of trustees. In any such instance, the substitute index would measure the same market segment as the current index.
- The portfolio may invest in derivatives. In general, derivatives may involve risks different from, and possibly greater than, those of a portfolio’s other investments. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the portfolio to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes.
- The portfolio may invest in fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of each Portfolio as disclosed in this prospectus. The advisors will not use derivatives to change the risk exposure of the portfolio. In particular, derivatives will be used only where they may help the advisor: invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment; add value when these instruments are attractively priced; or adjust sensitivity to changes in interest rates.
- The portfolio’s daily cash balance may be invested in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, the portfolio bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests.
- The portfolio may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the portfolio’s best interest, so long as the alternative is consistent with the fund’s investment objective. For instance, the fund may invest beyond the normal limits in derivatives or ETFs that are consistent with the fund’s objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.