The fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, government agencies, and corporations. The fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in a range of 7 to 20 years. At a minimum, all bonds purchased by the fund will be rated ”investment grade.”
Up to 20% of the fund’s assets may be invested in holdings that are not inflation-indexed. The fund will make such investments primarily when inflation-indexed bonds are less attractive. The fund’s non-inflation-indexed holdings may include the following:
- Corporate debt obligations.
- U.S. government and agency bonds.
- Cash investments.
- Futures, options, and other derivatives. The fund may invest up to 20% of its total assets in bond futures contracts, options, credit swaps, interest rate swaps, and other types of derivatives. These contracts may be used to keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in bonds, to reduce transaction costs, for hedging purposes, or to add value when these instruments are favorably priced. Losses (or gains) involving futures can 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 the fund. Similar risks exist for other types of derivatives. For this reason, the fund will not use derivatives for speculative purposes or as leveraged investments that magnify the gains or losses of an investment.
- Restricted or illiquid securities. Restricted securities are privately placed securities that generally can only be sold to qualified institutional buyers and, hence, could be difficult for the fund to convert to cash, if needed. The fund will not invest more than 15% of its assets in such illiquid securities.
- Mortgage dollar rolls are transactions in which 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 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 a fund’s portfolio turnover rate. Mortgage dollar rolls will be used only if consistent with a fund’s investment objective and risk profile.
- 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 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. The advisor will not use derivatives to change the risk exposure of the fund.
- The fund may temporarily depart from its normal investment policies and strategies when doing so is believed to be 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 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.