The portfolio invests in a variety of high-quality and, to a lesser extent, medium-quality fixed income securities, at least 80% of which will be short- and intermediate-term investment-grade securities. High-quality fixed income securities are those rated the equivalent of A3 or better by Moody’s Investors Service, Inc., or another independent rating agency; medium-quality fixed income securities are those rated the equivalent of Baa1, Baa2, or Baa3 by Moody’s or another independent rating agency. (Investment-grade fixed income securities are those rated the equivalent of Baa3 and above by Moody’s.) The portfolio is expected to maintain a dollar-weighted average maturity of 1 to 3 years.
- 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 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; and adjust the overall credit risk of the portfolio or actively overweight or underweight credit risk to specific bond issuers.
- 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.
- The portfolio, may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash, commercial paper, or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the portfolio may succeed in avoiding losses but may otherwise fail to achieve its investment objective.