Personal Investors

Strategy and policy

Investment strategy

The fund employs an indexing investment approach designed to track the performance of the Barclays U.S. 1–5 Year Government/Credit Float Adjusted Bond Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of between 1 and 5 years and are publicly issued. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. Under normal circumstances, the fund’s dollar-weighted average maturity is not expected to exceed 3 years.

Investment policy

  • The fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of each fund’s assets may be used to purchase nonpublic, investment-grade securities, generally referred to as 144A securities, as well as smaller public issues or medium-term notes not included in the index because of the small size of the issue.
  • Subject to the same 20% limit, the fund may also purchase other investments that are outside of their target indexes or may hold bonds that, when acquired, were included in the index but subsequently were removed.
  • The fund may also 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.
  • The fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the fund’s agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the fund’s board of trustees. In any such instance, the substitute index would measure the same market segment as the current index.
  • The fund may invest, to a limited extent, in derivatives. 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, oil, or wheat), or a market index (such as the Barclays U.S. Aggregate Bond Index). 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 the prospectus. In particular, derivatives will be used only when 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 funds’ derivative investments may include fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, 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 invest in shares of bond exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds listed in the index or a subset of the index. Vanguard may purchase ETFs when doing so will facilitate cash management or potentially add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the fund its share of the costs of Vanguard operations.
  • The fund’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 fund bears its proportionate share of the at-cost expenses of the CMT fund in which it invests.
  • 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 alternative 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 objective when those instruments are more favorably priced or provide needed liquidity, as might be the case if the fund receives large cash flows that it cannot prudently invest immediately.

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