VYM Vanguard High Dividend Yield

Item 1: Reports to Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the cover of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Total Returns

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Derived from data provided by Lipper Inc.

 

 

1

 

Chairman’s Letter

 

Dear Shareholder,

Over the past six months, the stock market’s preferences turned away from the value stocks, and the small-and mid-capitalization stocks, favored by Vanguard Selected Value Fund. Even so, the fund posted a respectable 10.2% total return for the fiscal year ended October 31, 2007.

The fund bested its market benchmark, the Russell Midcap Value Index. But it lagged the average return of peer mutual funds, in part because of relatively lighter exposure to utility and materials stocks.

If you own the Selected Value Fund in a taxable account, you may wish to review our report on the fund’s after-tax returns on page 23.

Stocks rode a bumpy path to impressive results

Despite some volatility, the U.S. stock market produced strong results during the fund’s fiscal year. Ongoing problems with low-quality mortgage loans (an unpleasant postscript to the housing downturn) rattled the market in the spring and summer, and continued to make investors skittish through the close of the fiscal period. At the end of October, crude oil prices touched historic highs, while the U.S. dollar dipped to record lows versus other major currencies.

 

 

 

 

 

 

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Still, the broad U.S. stock market returned an impressive 15.3% for the 12 months. In a reversal of earlier trends, large-cap stocks outperformed small-caps, and growth stocks outperformed value stocks.

International companies performed even better than domestic issues. Stocks in emerging markets fared particularly well, followed by European and Pacific region stocks (Japan was a notable laggard). The weak U.S. dollar boosted foreign stock returns for U.S.-based investors.

Bond investors converged on high-quality issues

As troubles in the subprime credit market rippled ever farther, fixed income investors sought the relative safety of U.S. Treasury bonds. This “flight to quality” drove prices for Treasuries higher and yields lower, and widened the spread between Treasury yields and the much-higher yields demanded by investors for riskier bonds.

Declines in Treasury yields were steepest at the short end of the maturity spectrum, aided by the actions of the Federal Reserve Board. The central bank lowered the target for short-term interest rates to 4.50% in two separate rate cuts (a half-percentage-point in September and a quarter-point on October 31). The yield of the 3-month Treasury bill finished the fiscal period at 3.92%, after spending much of the year near 5%; the 10-year Treasury note ended at 4.47%.

 

 

Market Barometer
	Average Annual Total Returns
	Periods Ended October 31, 2007
	One Year	Three Years		Five Years
Stocks
Russell 1000 Index (Large-caps)	15.0%	13.8%		14.5%
Russell 2000 Index (Small-caps)	9.3	13.7		18.7
Dow Jones Wilshire 5000 Index (Entire market)	15.3	14.2		15.3
MSCI All Country World Index ex USA (International)	33.0	27.4		26.4
Bonds
Lehman U.S. Aggregate Bond Index (Broad taxable market)	5.4%	3.9%		4.4%
Lehman Municipal Bond Index	2.9	3.7		4.5
Citigroup 3-Month Treasury Bill Index	5.0	4.1		2.9
CPI
Consumer Price Index	3.5%	3.1%		2.9%

 

 

 

 

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For the year, the broad taxable bond market returned 5.4%. Returns from tax-exempt bonds were lower, as these issues did not benefit from the late-summer rally in Treasuries.

Most stock sectors produced strong double-digit gains

Almost every sector contributed to the Selected Value Fund’s return for the fiscal year. Six sectors posted double-digit returns, ranging from 12% from the utilities sector to 42% from energy. The health care and consumer discretionary sectors produced smaller gains. Only the financials group had negative returns for the fund. (Selected Value owned no stocks in the telecommunication services sector.)

 

Keep in mind, however, that the fund’s primary focus is not on sectors but on individual stocks that appear to be undervalued but poised for a rebound. During the past year, in fact, Selected Value’s top ten performers represented almost every sector.

 

These stocks include MasterCard, an information technology company that is a major provider of credit-card processing services; it led with a 157% return. The other top contributors included two aerospace and defense companies, Goodrich and L-3 Communications (industrials); tobacco company Carolina Group (consumer staples); Triad Hospitals and Coventry Health Care (health care); integrated oil company Murphy Oil (energy); Reliant Energy (utilities);

 

 

 

 

 

 

 

 

 

 

 

 

1 Fund expense ratio reflects the fiscal year ended October 31, 2007. Peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2006.

 

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toolmaker Stanley Works (consumer discretionary); and papermaker Domtar (materials).

The negative performance of the fund’s financials stocks isn’t very surprising, given the troubles in the subprime mortgage market and related stresses. The fund nevertheless bested the index sector’s return, in part because the advisors were able to identify some of the group’s better performers, such as Annaly Capital Management, a real estate investment trust that invests in mortgage securities that are backed by government agencies and have almost no credit risk.

 

A rocky start still shadows the fund’s long-term record

Over the past ten years, the Selected Value Fund has posted an average annual return of 8.8%, well above the average for the broad domestic stock market but below that of the fund’s benchmark index. A hypothetical investment of $25,000 made in Selected Value at the start of the period would have grown to a bit more than $58,000 by October 31, 2007.

It’s important, of course, to take such an extended view of a fund’s performance. Prudent investing in stocks requires a long-term horizon. But a ten-year record can both reveal and conceal. In the case of Selected Value, the fund’s subpar early years continue to weigh down its long-term performance, as shown in the table below.

 

 

Total Returns
Ten Years Ended October 31, 2007
	Average
	Annual Return
Selected Value Fund	8.8%
Russell Midcap Value Index	11.7
Average Mid-Cap Value Fund 1	11.1

 

The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.

 

 

 

 

 

 

 

1 Derived from data provided by Lipper Inc.

 

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While we don’t ordinarily focus on selective periods, it’s worth noting that the fund’s performance has been significantly better since March 1999, when James P. Barrow, a founding partner of Barrow, Hanley, Mewhinney & Strauss, took over as manager. For example, from March 31, 1999, through October 31, 2007, the fund posted an average annual return of 13.4%, compared with 12.6% for the benchmark index.

The fund’s more recent results include the work of Donald Smith & Co., which began managing a portion of Selected Value’s assets in 2005. Both advisors have a value orientation and a long-term perspective; Donald Smith & Co. complements Barrow, Hanley by searching for stocks that are priced at particularly steep discounts.

Given our advisors’ talent, experience, and dedication, we are confident about Selected Value’s long-term performance prospects in the coming years.

Selected Value can play a role in a diversified long-term portfolio

The Selected Value Fund lives up to its name by being, indeed, selective: The fund held only 63 stocks in its portfolio at the fiscal year-end. Because of its concentrated focus, the fund is best employed not in isolation, but as one element of a portfolio that includes other stock holdings in its mix.

A prudent portfolio—and one that can be effective over the long-term periods that are best for measuring stock investing success—is balanced among stocks, bonds, and short-term investments, while also being diversified within each of these asset groups. We believe that the Selected Value Fund can be a useful part of such a diversified portfolio.

 

Thank you for entrusting your assets to Vanguard.

 

Sincerely,

 

 

John J. Brennan

Chairman and Chief Executive Officer

November 15, 2007

 

 

 

 

 

 

 

6

Advisors’ Report

 

During the fiscal year ended October 31, 2007, Vanguard Selected Value Fund returned 10.2%. This performance reflected the combined efforts of your fund’s two independent advisors. The use of multiple advisors provides exposure to distinct, yet complementary, investment approaches, enhancing the fund’s diversification.

The advisors, the amount and percentage of fund assets each manages, and a brief description of their investment strategies are presented in the table below. The advisors have also provided a discussion of the investment environment that existed during the fiscal year and of how their portfolio position reflects this assessment. These comments were prepared on November 19, 2007.

 

Barrow, Hanley, Mewhinney & Strauss, Inc.

 

Portfolio Managers:

James P. Barrow, Founding Partner Mark Giambrone, Principal

 

During the past fiscal year, the market advanced nicely overall. But it is difficult to discuss the last 12 months without focusing on the recent volatility related to housing and illiquidity in the financial markets.

We have kept the portfolio substantially underweighted in the financials sector and have avoided areas such as homebuilders, brokers, and mortgage lenders or originators. This stance has proven to be prudent and, although the market has sold down financials indiscriminately, we are

 

Vanguard Selected Value Fund Investment Advisors
	Fund Assets Managed
Investment Advisor	%	$ Million	Investment Strategy
Barrow, Hanley,	76	3,786	Conducts fundamental research on individual
Mewhinney & Strauss, Inc.			stocks exhibiting traditional value characteristics:
			price/earnings and price/book ratios below the
			market average and dividend yields above the
			market average.
Donald Smith & Co., Inc.	22	1,084	Fundamental research on the lowest price-to-
			tangible-book-value companies. Research focuses
			on underlying quality of book value and assets,
			and on long-term earnings potential.
Cash Investments 1	2	121	—

 

 

 

 

1 These short-term reserves are invested by Vanguard in equity index products to simulate investment in stocks. Each advisor may also maintain a modest cash position.

 

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maintaining our underweighted position while beginning to look for opportunities. Other significant underweightings—in utilities and materials—also seem suitable to us, as these sectors appear either to be overvalued or to display valuations incorporating unsustainable moves in commodity prices. We continue to believe these underweighted positions are appropriate, although we are aware that continued weakness in the dollar could propel commodity prices higher irrespective of supply/demand fundamentals.

We are significantly invested in the health care and consumer discretionary sectors. Although our health care positions have detracted from performance during calendar 2007, we feel that they continue to represent opportunity and expect them to add to performance over our investment time horizon of three to four years. In overweighting consumer discretionary stocks, we do not ignore the current concerns about the housing market or consumer spending, but seek to take advantage of the price level of some very good businesses that have little or limited exposure to the housing sector.

We continue to find businesses displaying valuation characteristics below those of the market but fundamental characteristics superior to the market averages. These opportunities should enhance our portfolio’s performance over the longer term.

 

Donald Smith & Co., Inc.

 

Portfolio Managers:

Donald G. Smith, Chief Investment Officer

Richard L. Greenberg, CFA, Senior Vice President

 

At the end of October 2007, the portion of the Selected Value Fund that we manage continued to meet our criteria for a concentrated portfolio of low price-to-tangible-book-value stocks with attractive long-term earnings potential. On average, these holdings currently sell at 117% of tangible book value and 10 times “normalized earnings.” In contrast, stocks in the Standard & Poor’s 500 Index sell at more than 5x tangible book value and 18x normalized earnings.

The three largest industry weightings are insurance (17.9%), utilities (17.5%), and technology (17.3%). The insurance and utilities industries should be relatively immune from a slowing of the U.S. economy. The two insurance companies we own, Unum and CNA, have conservative investment portfolios that should suffer less than most from the subprime-mortgage fallout. Flextronics is our largest technology holding, delivered in exchange for our Solectron stock in a recently completed acquisition. At 10x next year’s earnings, Flextronics remains a cheap stock, so we have decided to maintain the position for now.

 

 

 

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Other tech holdings include the depressed semiconductor companies Qimonda, Semiconductor Manufacturing, Spansion, and Micron, which currently are selling at prices below book value and close to their lows. Eventually, we would expect a better supply/demand balance and higher memory-chip prices to lead to a recovery in these stocks.

We eliminated two positions (Tech Data, Magna International) and scaled back two others (Domtar, Reliant) in stocks that have done well. New positions were initiated or added to in several insurance companies (IPC Holdings, Unum, American National), a utility (Pinnacle West), and an out-of-favor retailer with large real estate values (Dillard’s), as well as in the semiconductor stocks named earlier.

In general, our universe of low price-to-book value stocks has not kept up with the market. The third calendar quarter was particularly difficult, with our target group of stocks declining roughly 16% while the S&P 500 stocks gained about 2%. Large liquidations by some of the quantitative hedge funds, which tend to emphasize value stocks, exacerbated the decline in our universe.

We have been correctly cautious toward financial companies and homebuilders that appeared vulnerable to the unwinding of the housing/subprime mortgage bubble. Our lack of holdings in the top-performing energy group, where we see little value, has hurt relative performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

Fund Profile

As of October 31, 2007

 

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	63	484	4,870
Median Market Cap	$6.1B	$8.1B	$36.8B
Price/Earnings Ratio	16.2x	17.3x	18.2x
Price/Book Ratio	1.8x	2.0x	2.9x
Yield	2.1%	2.0%	1.7%
Return on Equity	13.3%	13.0%	18.9%
Earnings Growth Rate	16.9%	15.6%	21.3%
Foreign Holdings	7.9%	0.0%	0.0%
Turnover Rate	33%	—	—
Expense Ratio	0.42%	—	—
Short-Term Reserves	5.8%	—	—

 

 

 

 

 

 

Ten Largest Holdings 4 (% of total net assets)
Pinnacle West Capital Corp.	electric utilities	3.9%
Murphy Oil Corp.	integrated oil and gas	3.1
Annaly Capital Management Inc. REIT	mortgage REITs	2.7
L-3 Communications Holdings, Inc.	aerospace and defense	2.7
Coventry Health Care Inc.	managed health care	2.6
Carolina Group	tobacco	2.6
El Paso Corp.	oil and gas storage and transportation	2.5
Royal Caribbean Cruises, Ltd.	hotels resorts and cruise lines	2.4
Goodrich Corp.	aerospace and defense	2.3
Reynolds American Inc.	tobacco	2.2
Top Ten		27.0%

 

 

Investment Focus

 

 

 

1 Russell Midcap Value Index.

2 Dow Jones Wilshire 5000 Index.

3 For an explanation of R-squared , beta , and other terms used here, see the Glossary on page 26.

4 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

10

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: October 31, 1997–October 31, 2007

Initial Investment of $25,000

 

 

 

	Average Annual Total Returns			Final Value
	Periods Ended October 31, 2007			of a $25,000
	One Year	Five Years	Ten Years	Investment
Selected Value Fund 1	10.15%	18.49%	8.79%	$58,031
Dow Jones Wilshire 5000 Index	15.28	15.31	7.44	51,238
Russell Midcap Value Index	9.73	20.36	11.69	75,534
Average Mid-Cap Value Fund 2	12.87	18.66	11.07	71,445

 

 

 

 

 

 

 

 

 

1 Total returns do not reflect the 1% fee assessed on redemptions after March 23, 2005, of shares held for less than one year, or the 1% fee assessed until March 23, 2005, on shares purchased on or after August 7, 2001, and held for less than five years. Nor do they include the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Derived from data provided by Lipper Inc.

 

 

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Fiscal-Year Total Returns (%): October 31, 1997–October 31, 2007

 

 

Average Annual Total Returns: Periods Ended September 30, 2007

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

 

 

 

 

 

 

 

 

 

1 Total returns do not reflect the 1% fee assessed on redemptions after March 23, 2005, of shares held for less than one year, or the 1% fee assessed until March 23, 2005, on shares purchased on or after August 7, 2001, and held for less than five years. Nor do they include the account service fee that may be applicable to certain accounts with balances below $10,000.

Note: See Financial Highlights table on page 17 for dividend and capital gains information.

 

 

 

12

Financial Statements

 

Statement of Net Assets

As of October 31, 2007

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

			Market
			Value •
		Shares	($000)
Common Stocks (91.5%) 1
Consumer Discretionary (16.5%)
	Royal Caribbean Cruises, Ltd.	2,755,400	118,152
	The Stanley Works	1,861,900	107,152
	Advance Auto Parts, Inc.	2,814,400	96,027
	Idearc Inc.	3,166,700	85,438
*	Hanesbrands Inc.	2,599,800	80,698
	Sherwin-Williams Co.	1,096,100	70,063
	Family Dollar Stores, Inc.	2,541,100	64,417
^	Dillard's Inc.	2,451,900	56,467
	Whirlpool Corp.	659,800	52,243
	Service Corp. International	3,345,600	48,411
*	Office Depot, Inc.	2,297,900	43,109
*	Dana Corp.	2,976,400	439
			822,616
Consumer Staples (5.8%)
	Carolina Group	1,519,800	130,368
	Reynolds American Inc.	1,721,600	110,923
	UST, Inc.	923,400	49,236
			290,527
Energy (7.7%)
	Murphy Oil Corp.	2,069,800	152,399
	El Paso Corp.	7,180,100	126,800
	Venture Production PLC	3,500,000	57,893
	Overseas Shipholding Group Inc.	472,900	35,184
	Marathon Oil Corp.	209,300	12,376
			384,652
Financials (20.0%)
	Commercial Banks (2.3%)
2	The South Financial Group, Inc.	3,811,700	78,750
	National City Corp.	1,500,000	36,375
	Diversified Financial Services (1.0%)
	CIT Group Inc.	1,446,800	50,985
	Insurance (7.8%)
	Willis Group Holdings Ltd.	2,215,800	93,795

 

 

			Market
			Value •
		Shares	($000)
	Unum Group	3,537,900	82,575
	Axis Capital Holdings Ltd.	1,938,300	77,028
	CNA Financial Corp.	1,687,200	66,864
	XL Capital Ltd. Class A	329,800	23,729
	IPC Holdings Ltd.	548,300	16,400
	American National Insurance Co.	121,211	15,673
	American Financial Group, Inc.	404,600	12,098
	Real Estate Investment Trusts (5.5%)
	Annaly Capital Management Inc. REIT	7,946,900	135,813
2	First Industrial Realty Trust REIT	2,706,300	110,282
	American Financial Realty Trust REIT	3,969,700	26,756
	Thrifts & Mortgage Finance (3.4%)
	People's United Financial Inc.	6,231,197	110,791
	New York Community Bancorp, Inc.	3,004,700	55,917
	Hudson City Bancorp, Inc.	330,000	5,168
			998,999
Health Care (8.7%)
*	Coventry Health Care Inc.	2,185,200	131,789
	Hillenbrand Industries, Inc.	1,703,375	94,060
	Omnicare, Inc.	2,795,700	82,473
	Quest Diagnostics, Inc.	1,433,100	76,212
*	Valeant Pharmaceuticals International	3,410,400	49,621
			434,155
Industrials (13.7%)
	L-3 Communications Holdings, Inc.	1,209,400	132,599
	Goodrich Corp.	1,635,800	113,950
	Avery Dennison Corp.	1,651,900	95,645
	Air France KLM ADR	2,433,200	92,875
	Ryder System, Inc.	1,659,900	79,426
	ITT Industries, Inc.	1,148,900	76,884

 

 

 

 

 

 

 

 

 

 

 

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			Market
			Value •
		Shares	($000)
	Pitney Bowes, Inc.	1,307,700	52,360
	Briggs & Stratton Corp.	1,838,700	41,389
			685,128
Information Technology (6.5%)
*	Computer Sciences Corp.	1,709,400	99,812
*	Flextronics International Ltd.	7,647,234	94,137
*	Qimonda AG ADR	5,381,964	51,990
	MasterCard, Inc. Class A	198,800	37,683
*	Semiconductor Manufacturing International Corp. ADR	4,626,200	26,924
*	Spansion Inc. Class A	1,292,500	9,112
*	Micron Technology, Inc.	524,425	5,512
			325,170
Materials (1.5%)
*	Domtar Corp.	8,333,500	71,501
Utilities (11.1%)
	Pinnacle West Capital Corp.	4,826,500	194,991
	Xcel Energy, Inc.	4,798,100	108,197
	MDU Resources Group, Inc.	3,594,800	101,230
	CenterPoint Energy Inc.	4,538,500	76,065
*	Reliant Energy, Inc.	2,646,200	72,823
			553,306
Total Common Stocks
(Cost $3,816,076)			4,566,054
Temporary Cash Investments (8.3%) 1
Money Market Fund (8.1%)
3	Vanguard Market Liquidity Fund, 4.955%	399,885,455	399,885
3	Vanguard Market Liquidity Fund, 4.955%—Note G	4,800,000	4,800

 

 

	Face	Market
	Amount	Value •
	($000)	($000)
U.S. Agency Obligation (0.2%)
4 Federal Home Loan Bank
5 4.511%, 1/23/08	10,000	9,896
Total Temporary Cash Investments
(Cost $414,583)		414,581
Total Investments (99.8%)
(Cost $4,230,659)		4,980,635
Other Assets and Liabilities (0.2%)
Other Assets—Note C		35,250
Liabilities—Note G		(25,343)
		9,907
Net Assets (100%)
Applicable to 225,740,000 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization)		4,990,542
Net Asset Value Per Share		$22.11

 

 

 

 

* Non-income-producing security.

^ Part of security position is on loan to broker-dealers. See Note G in Notes to Financial Statements.

1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund's effective common stock and temporary cash investment positions represent 93.9% and 5.9%, respectively, of net assets. See Note E in Notes to Financial Statements.

2 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. See Note I in Notes to Financial Statements.

3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

4 The issuer operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government. If needed, access to additional funding from the U.S. Treasury (beyond the issuer's line of credit) would require congressional action.

5 Securities with a value of $9,896,000 have been segregated as initial margin for open futures contracts.

6 See Note E in Notes to Financial Statements for the tax-basis components of net assets.

ADR—American Depositary Receipt.

REIT—Real Estate Investment Trust.

 

 

 

 

 

 

 

 

 

 

 

 

14

Statement of Operations

 

 

	Year Ended
	October 31, 2007
	($000)
Investment Income
Income
Dividends 1,2	79,989
Interest 2	27,917
Security Lending	609
Total Income	108,515
Expenses
Investment Advisory Fees—Note B
Basic Fee	11,003
Performance Adjustment	(950)
The Vanguard Group—Note C
Management and Administrative	9,860
Marketing and Distribution	1,045
Custodian Fees	64
Auditing Fees	24
Shareholders’ Reports	56
Trustees’ Fees and Expenses	6
Total Expenses	21,108
Expenses Paid Indirectly—Note D	(406)
Net Expenses	20,702
Net Investment Income	87,813
Realized Net Gain (Loss)
Investment Securities Sold 2	355,554
Futures Contracts	16,191
Foreign Currencies	(11)
Realized Net Gain (Loss)	371,734
Change in Unrealized Appreciation (Depreciation)
Investment Securities	(20,089)
Futures Contracts	(1,158)
Foreign Currencies	—
Change in Unrealized Appreciation (Depreciation)	(21,247)
Net Increase (Decrease) in Net Assets Resulting from Operations	438,300

 

 

 

 

 

 

1 Dividends are net of foreign withholding taxes of $249,000.

2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $6,454,000, $27,373,000, and $13,977,000 respectively.

 

 

15

Statement of Changes in Net Assets

 

 

	Year Ended October 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	87,813	69,379
Realized Net Gain (Loss)	371,734	232,577
Change in Unrealized Appreciation (Depreciation)	(21,247)	400,832
Net Increase (Decrease) in Net Assets Resulting from Operations	438,300	702,788
Distributions
Net Investment Income	(65,559)	(57,290)
Realized Capital Gain 1	(215,117)	(167,917)
Total Distributions	(280,676)	(225,207)
Capital Share Transactions—Note H
Issued	1,140,416	838,408
Issued in Lieu of Cash Distributions	248,158	197,996
Redeemed 2	(881,899)	(894,260)
Net Increase (Decrease) from Capital Share Transactions	506,675	142,144
Total Increase (Decrease)	664,299	619,725
Net Assets
Beginning of Period	4,326,243	3,706,518
End of Period 3	4,990,542	4,326,243

 

 

 

 

 

 

 

 

 

 

 

1 Includes fiscal 2007 and 2006 short-term gain distributions totaling $25,199,000 and $48,400,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net of redemption fees of $1,189,000 and $1,774,000.

3 Net Assets—End of Period includes undistributed net investment income of $59,069,000 and $44,653,000.

 

 

16

Financial Highlights

 

 

	Year Ended October 31,
For a Share Outstanding
Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$21.38	$18.99	$16.76	$14.10	$11.27
Investment Operations
Net Investment Income	.40	.35	.30	.26	.25
Net Realized and Unrealized Gain (Loss)
on Investments 1	1.70	3.18	2.19	2.66	2.82
Total from Investment Operations	2.10	3.53	2.49	2.92	3.07
Distributions
Dividends from Net Investment Income	(.32)	(.29)	(.26)	(.26)	(.24)
Distributions from Realized Capital Gains	(1.05)	(.85)	—	—	—
Total Distributions	(1.37)	(1.14)	(.26)	(.26)	(.24)
Net Asset Value, End of Period	$22.11	$21.38	$18.99	$16.76	$14.10
Total Return 2	10.15%	19.38%	14.96%	20.94%	27.74%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$4,991	$4,326	$3,707	$1,925	$1,265
Ratio of Total Expenses to
Average Net Assets 3	0.42%	0.45%	0.51%	0.60%	0.78%
Ratio of Net Investment Income to
Average Net Assets	1.74%	1.75%	1.81%	1.78%	2.05%
Portfolio Turnover Rate	33%	37%	28%	35%	40%

 

 

 

 

 

 

 

 

 

 

1 Includes increases from redemption fees of $.01, $.01, $.01, $.01, and $.01.

2 Total returns do not reflect the 1% fee assessed on redemptions after March 23, 2005, of shares held for less than one year; the 1% fee assessed until March 23, 2005, on shares purchased on or after August 7, 2001, and held for less than five years; or the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Includes performance-based investment advisory fee increases (decreases) of (0.02%), (0.05%), (0.02%), 0.01%, and 0.11%. See accompanying Notes , which are an integral part of the Financial Statements .

 

 

71

Notes to Financial Statements

 

Vanguard Selected Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund files reports with the SEC under the company name Vanguard Whitehall Funds.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

 

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

 

Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

 

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

5. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.

 

6. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

18

B. Barrow, Hanley, Mewhinney & Strauss, Inc., and Donald Smith & Co., Inc., each provide investment advisory services to a portion of the fund for fees calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Barrow, Hanley, Mewhinney & Strauss, Inc., is subject to quarterly adjustments based on performance for the preceding three years relative to the Russell Midcap Value Index. The basic fee of Donald Smith & Co., Inc., is subject to quarterly adjustments based on performance since July 31, 2005, relative to the MSCI Investable Market 2500 Index.

 

The Vanguard Group manages the cash reserves of the fund on an at-cost basis.

 

For the year ended October 31, 2007, the aggregate investment advisory fee represented an effective annual basic rate of 0.22% of the fund’s average net assets before a decrease of $950,000 (0.02%) based on performance.

 

C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2007, the fund had contributed capital of $429,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.43% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. The fund’s custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2007, these arrangements reduced the fund’s management and administrative expenses by $376,000 and custodian fees by $30,000. The total expense reduction represented an effective annual rate of 0.01% of the fund’s average net assets.

 

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $7,827,000 from undistributed net investment income, and $32,582,000 from accumulated net realized gains, to paid-in capital.

 

For tax purposes, at October 31, 2007, the fund had $99,145,000 of ordinary income and $302,533,000 of long-term capital gains available for distribution.

 

At October 31, 2007, the cost of investment securities for tax purposes was $4,230,659,000. Net unrealized appreciation of investment securities for tax purposes was $749,976,000, consisting of unrealized gains of $976,139,000 on securities that had risen in value since their purchase and $226,163,000 in unrealized losses on securities that had fallen in value since their purchase.

 

19

At October 31, 2007, the aggregate settlement value of open futures contracts expiring in December 2007 and the related unrealized appreciation (depreciation) were:

 

 

			($000)
	Number	Aggregate	Unrealized
	of Long	Settlement	Appreciation
Futures Contracts	Contracts	Value	(Depreciation)
E-mini S&P 500 Index	838	65,150	1,824
S&P 500 Index	147	57,143	2,411

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

 

F. During the year ended October 31, 2007, the fund purchased $1,709,150,000 of investment securities and sold $1,461,311,000 of investment securities, other than temporary cash investments.

 

G. The market value of securities on loan to broker-dealers at October 31, 2007, was $4,606,000, for which the fund received cash collateral of $4,800,000.

 

H. Capital shares issued and redeemed were:

 

 

	Year Ended October 31,
	2007	2006
	Shares	Shares
	(000)	(000)
Issued	51,661	42,799
Issued in Lieu of Cash Distributions	11,806	10,487
Redeemed	(40,102)	(46,100)
Net Increase (Decrease) in Shares Outstanding	23,365	7,186

 

 

I. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of these companies were as follows:

 

 

		Current Period Transactions
	Oct. 31, 2006		Proceeds from		Oct. 31, 2007
	Market	Purchases	Securities	Dividend	Market
	Value	at Cost	Sold	Income	Value
	($000)	($000)	($000)	($000)	($000)
First Industrial Realty Trust REIT	54,810	63,016	—	3,384	110,282
Tech Data Corp.	144,435	15,541	161,167	—-	—-
The South Financial Group, Inc.	85,848	15,464	—	2,641	78,750
Winnebago Industries, Inc.	61,497	2,362	59,869	429	—
	346,590			6,454	189,032

 

 

 

20

J. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, and is effective for the fund’s fiscal year beginning November 1, 2007. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that as of October 31, 2007, no provision for income tax would be required in the fund’s financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

Report of Independent Registered Public Accounting Firm

 

To the Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Selected Value Fund:

 

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Selected Value Fund (the “Fund”) at October 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2007 by correspondence with the custodian and broker, and by agreement to the underlying ownership records for Vanguard Market Liquidity Fund, provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

 

December 6, 2007

 

 

---

Special 2007 tax information (unaudited) for Vanguard Selected Value Fund

This information for the fiscal year ended October 31, 2007, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $219,110,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.

The fund distributed $63,265,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 57.1% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

 

 

22

Your Fund’s After-Tax Returns

 

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

 

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2007. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

 

Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

 

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

 

 

Average Annual Total Returns: Selected Value Fund 1
Periods Ended October 31, 2007
	One	Five	Ten
	Year	Years	Years
Returns Before Taxes	10.15%	18.49%	8.79%
Returns After Taxes on Distributions	9.01	17.68	7.95
Returns After Taxes on Distributions and Sale of Fund Shares	7.72	16.05	7.30

 

 

 

 

 

 

 

1 Total returns do not reflect the 1% fee assessed on redemptions after March 23, 2005, of shares held for less than one year, or the 1% fee assessed until March 23, 2005, on shares purchased on or after August 7, 2001, and held for less than five years. Nor do they include the account service fee that may be applicable to certain accounts with balances below $10,000.

 

 

23

About Your Fund’s Expenses

 

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

 

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

The table below illustrates your fund’s costs in two ways:

 

• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

 

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading “Expenses Paid During Period.”

 

• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

 

Six Months Ended October 31, 2007
	Beginning	Ending	Expenses
	Account Value	Account Value	Paid During
Selected Value Fund	4/30/2007	10/31/2007	Period 1
Based on Actual Fund Return	$1,000.00	$988.82	$2.11
Based on Hypothetical 5% Yearly Return	1,000.00	1,023.09	2.14

 

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include the 1% fee on redemptions of shares held for less than one year, nor do they include the account service fee described in the prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

 

1 The calculations are based on expenses incurred in the most recent six-month period. The fund's annualized six-month expense ratio for that period is 0.42%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.

 

24

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

Glossary

 

Beta . A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. A fund’s beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

 

Earnings Growth Rate . The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

 

Equity Exposure . A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

 

Expense Ratio . The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.

 

Foreign Holdings . The percentage of a fund represented by stocks or depositary receipts of companies based outside the United States.

 

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 measured from the inception date.

 

Median Market Cap . An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

 

Price/Book Ratio . The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

 

Price/Earnings Ratio . The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

 

R-Squared . A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0.

 

Return on Equity . The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

 

Short-Term Reserves . The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

 

Turnover Rate . An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

 

Yield . A snapshot of a fund’s income from interest and dividends. The yield, expressed as a percentage of the fund’s net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of income provided by securities in the index.

26

 

 

 

 

 

 

 

 

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The People Who Govern Your Fund

 

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

 

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals.

 

Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members’ responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers.

 

Each trustee serves a fund until its termination; or until the trustee’s retirement, resignation, or death; or otherwise as specified in the fund’s organizational documents. Any trustee may be removed at a shareholders’ meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

 

 

Chairman of the Board, Chief Executive Officer, and Trustee
John J. Brennan 1
Born 1954	Principal Occupation(s) During the Past Five Years: Chairman of the Board, Chief Executive
Trustee since May 1987;	Officer, and Director/Trustee of The Vanguard Group, Inc., and of each of the investment
Chairman of the Board and	companies served by The Vanguard Group.
Chief Executive Officer
148 Vanguard Funds Overseen
Independent Trustees
Charles D. Ellis
Born 1937	Principal Occupation(s) During the Past Five Years: Applecore Partners (pro bono ventures
Trustee since January 2001	in education); Senior Advisor to Greenwich Associates (international business strategy
148 Vanguard Funds Overseen	consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business
	at New York University; Trustee of the Whitehead Institute for Biomedical Research.
Rajiv L. Gupta
Born 1945	Principal Occupation(s) During the Past Five Years: Chairman, President, and
Trustee since December 2001 2	Chief Executive Officer of Rohm and Haas Co. (chemicals); Board Member of
148 Vanguard Funds Overseen	the American Chemistry Council; Director of Tyco International, Ltd. (diversified
	manufacturing and services) since 2005; Trustee of Drexel University and of the
	Chemical Heritage Foundation.
Amy Gutmann
Born 1949	Principal Occupation(s) During the Past Five Years: President of the University of
Trustee since June 2006	Pennsylvania since 2004; Professor in the School of Arts and Sciences, Annenberg School
148 Vanguard Funds Overseen	for Communication, and Graduate School of Education of the University of Pennsylvania
	since 2004; Provost (2001–2004) and Laurance S. Rockefeller Professor of Politics and
	the University Center for Human Values (1990–2004), Princeton University; Director of
	Carnegie Corporation of New York since 2005 and of Schuylkill River Development
	Corporation and Greater Philadelphia Chamber of Commerce since 2004.

 

JoAnn Heffernan Heisen
Born 1950	Principal Occupation(s) During the Past Five Years: Corporate Vice President and
Trustee since July 1998	Chief Global Diversity Officer since 2006, Vice President and Chief Information
148 Vanguard Funds Overseen	Officer (1997–2005), and Member of the Executive Committee of Johnson &
	Johnson (pharmaceuticals/consumer products); Director of the University Medical
	Center at Princeton and Women’s Research and Education Institute.
André F. Perold
Born 1952	Principal Occupation(s) During the Past Five Years: George Gund Professor of Finance
Trustee since December 2004	and Banking, Harvard Business School; Senior Associate Dean, Director of Faculty
148 Vanguard Funds Overseen	Recruiting, and Chair of Finance Faculty, Harvard Business School; Director and Chairman
	of UNX, Inc. (equities trading firm) since 2003; Chair of the Investment Committee of
	HighVista Strategies LLC (private investment firm) since 2005.
Alfred M. Rankin, Jr.
Born 1941	Principal Occupation(s) During the Past Five Years: Chairman, President, Chief Executive
Trustee since January 1993	Officer, and Director of NACCO Industries, Inc. (forklift trucks/housewares/lignite); Director
148 Vanguard Funds Overseen	of Goodrich Corporation (industrial products/aircraft systems and services).
J. Lawrence Wilson
Born 1936	Principal Occupation(s) During the Past Five Years: Retired Chairman and Chief Executive
Trustee since April 1985	Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines) and
148 Vanguard Funds Overseen	AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University
	and of Culver Educational Foundation.
Executive Officers 1
Thomas J. Higgins
Born 1957	Principal Occupation(s) During the Past Five Years: Principal of The Vanguard Group, Inc.;
Treasurer since July 1998	Treasurer of each of the investment companies served by The Vanguard Group.
148 Vanguard Funds Overseen
Heidi Stam
Born 1956	Principal Occupation(s) During the Past Five Years: Managing Director of The Vanguard
Secretary since July 2005	Group, Inc., since 2006; General Counsel of The Vanguard Group since 2005; Secretary of
148 Vanguard Funds Overseen	The Vanguard Group, and of each of the investment companies served by The Vanguard
	Group, since 2005; Principal of The Vanguard Group (1997–2006).

 

Vanguard Senior Management Team
R. Gregory Barton	Kathleen C. Gubanich	F. William McNabb, III	Ralph K. Packard
Mortimer J. Buckley	Paul A. Heller	Michael S. Miller	George U. Sauter

 

Founder

John C. Bogle

Chairman and Chief Executive Officer, 1974–1996

 

 

 

1 Officers of the funds are “interested persons” as defined in the Investment Company Act of 1940.

2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

More information about the trustees is in the Statement of Additional Information , available from The Vanguard Group.

 

 

	P.O. Box 2600
	Valley Forge, PA 19482-2600

 

Connect with Vanguard® > www.vanguard.com

 

 

Fund Information > 800-662-7447	Vanguard , Connect with Vanguard , and the ship logo are
	trademarks of The Vanguard Group, Inc.
Direct Investor Account Services > 800-662-2739
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	respective owners.
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With Hearing Impairment > 800-952-3335
	All comparative mutual fund data are from Lipper Inc.
	or Morningstar, Inc., unless otherwise noted.
	You can obtain a free copy of Vanguard’s proxy voting
This material may be used in conjunction	guidelines by visiting our website, www.vanguard.com,
with the offering of shares of any Vanguard	and searching for “proxy voting guidelines,” or by
fund only if preceded or accompanied by	calling Vanguard at 800-662-2739. The guidelines are
the fund’s current prospectus.	also available from the SEC’s website, www.sec.gov.
	In addition, you may obtain a free report on how your
	fund voted the proxies for securities it owned during
	the 12 months ended June 30. To get the report, visit
	either www.vanguard.com or www.sec.gov.
	You can review and copy information about your fund
	at the SEC’s Public Reference Room in Washington, D.C.
	To find out more about this public service, call the SEC
	at 202-551-8090. Information about your fund is also
	available on the SEC’s website, and you can receive
	copies of this information, for a fee, by sending a
	request in either of two ways: via e-mail addressed to
	publicinfo@sec.gov or via regular mail addressed to the
	Public Reference Section, Securities and Exchange
	Commission, Washington, DC 20549-0102.
	© 2007 The Vanguard Group, Inc.
	All rights reserved.
	Vanguard Marketing Corporation, Distributor.
	Q9340 122007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the cover of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Total Returns

 

 

 

Fiscal Year Ended October 31, 2007
	Ticker	Total
	Symbol	Returns
Vanguard Mid-Cap Growth Fund	VMGRX	26.4%
Russell Midcap Growth Index		19.7
Average Mid-Cap Growth Fund 1		26.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Derived from data provided by Lipper Inc.

 

 

1

 

 

Chairman’s Letter

 

Dear Shareholder,

Vanguard Mid-Cap Growth Fund returned 26.4% for the 12 months ended October 31, 2007. Your fund surpassed the return of its benchmark index by nearly 7 percentage points. It bested the average return of its peers by a much slimmer margin. The success of the fund was fueled by the advisors’ strong stock selections in the health care, information technology, and consumer discretionary sectors.

If you hold shares of the Mid-Cap Growth Fund in a taxable account, you may want to review our report on the fund’s after-tax returns on page 23.

Stocks rode a bumpy path to impressive results

Despite some volatility, the U.S. stock market produced strong results during the fund’s fiscal year. Ongoing problems with low-quality mortgage loans (an unpleasant postscript to the housing downturn) rattled financial markets in the spring and summer, and continued to make investors skittish through the close of the fiscal period. At the end of October, crude oil prices touched historic highs, while the U.S. dollar dipped to record lows versus other major currencies.

 

 

 

 

 

 

2

Still, the broad U.S. stock market returned an impressive 15.3%. Large-capitalization stocks outperformed small-caps, and growth stocks outperformed value stocks—both continuing recent months’ reversals of longer-term trends.

International companies performed even better than domestic issues. Stocks in emerging markets fared particularly well, followed by those in the European and Pacific regions (Japan was a notable laggard). The weak U.S. dollar boosted foreign stock returns for U.S.-based investors.

 

Bond investors converged on high-quality issues

As troubles in the subprime credit markets rippled across the financial markets, bond investors sought the relative safety of U.S. Treasury bonds. This “flight to quality” drove prices for Treasuries higher and yields lower, and widened the spread between Treasury yields and the much higher yields demanded by investors for riskier bonds. Declines in Treasury yields were steepest at the short end of the maturity spectrum, aided by the actions of the Federal Reserve Board. The central bank lowered the target for short-term interest rates to 4.50% in two separate rate cuts (half a percentage point in September and a quarter-point on

 

 

Market Barometer
	Average Annual Total Returns
	Periods Ended October 31, 2007
	One Year	Three Years	Five Years
Stocks
Russell 1000 Index (Large-caps)	15.0%	13.8%	14.5%
Russell 2000 Index (Small-caps)	9.3	13.7	18.7
Dow Jones Wilshire 5000 Index (Entire market)	15.3	14.2	15.3
MSCI All Country World Index ex USA (International)	33.0	27.4	26.4
Bonds
Lehman U.S. Aggregate Bond Index (Broad taxable market)	5.4%	3.9%	4.4%
Lehman Municipal Bond Index	2.9	3.7	4.5
Citigroup 3-Month Treasury Bill Index	5.0	4.1	2.9
CPI
Consumer Price Index	3.5%	3.1%	2.9%

 

 

 

 

 

3

October 31). The yield of the 3-month Treasury bill finished the fiscal period at 3.92%, after spending much of the year near 5%. The 10-year Treasury note ended at 4.47%.

For the year, the broad taxable bond market returned 5.4%. Returns from tax-exempt bonds were lower, as these issues did not benefit from the late-summer rally in Treasuries.

Advisors identified pockets of strength that produced excellent returns

The Mid-Cap Growth Fund’s impressive fiscal-year return surpassed both the results for its benchmark and its peer-fund average. It earned positive returns in all nine of the sectors in which it invested, with eight producing double-digit returns. The fund’s performance was roughly equal in both six-month periods of the fiscal year.

Despite a challenging investment environment in the U.S. equity markets, the advisors made strong stock choices in several sectors. Their efforts were most productive in the consumer discretionary, health care, and information technology sectors, which together made up roughly 60% of the fund’s assets on average. The fund’s holdings in each of these outperformed those of the corresponding benchmark sectors.

 

Although concerns about the strength of consumer spending caused by higher energy prices, tighter credit, and a weak dollar grew during the period, the fund’s consumer discretionary stocks fared quite well in certain subsectors—particularly casinos and hotels and providers of education services. The advisors were also successful in their efforts to identify health care companies that seemed to offer prospects of above-average earnings growth, yet were reasonably priced. Numerous sector holdings, especially biotech firms and equipment makers, turned in excellent results, and the overall return for the fund’s holdings was roughly twice that of the corresponding index sector. In information technology, the advisors held several internet software and electronic equipment companies that generated superb returns.

On the negative side, the fund’s comparatively small holdings in the energy and materials sectors were laggards. The fund did not hold several of the benchmark’s strongly performing oil and gas drillers and equipment and service providers, which hurt relative performance. The fund was also notably underweighted in materials, so it missed out on the strong performance of steel makers, mining companies, and other producers of industrial commodities, which profited from the growing global demand for metals.

 

 

 

 

4

The wealth of experience that your fund’s advisors—Chartwell Investment Partners, L.P., and William Blair & Company, L.L.C.—provide helped steer the fund toward its success this period. The fund’s low expense ratio is another important factor, as it enables you to keep a larger portion of the fund’s returns.

To learn more about the fund’s positioning and performance during the period, see the Advisors’ Report on page 7.

The fund’s long-term record has been impressive

The Mid-Cap Growth Fund reaches its ten-year milestone on December 31. Although its performance over shorter time periods has included fits and spells of outstanding and poor performance, its overall average annual return of 13.1% has been—on an absolute and relative basis—excellent.

As you’ll see in the table below, the fund’s average annual return since inception was well over four percentage points ahead of that of its benchmark and the average return of its peers. A hypothetical investment of $10,000 in the Mid-Cap Growth Fund at the fund’s inception would have grown to $33,416 by October 31, 2007. This end result stands substantially above the comparable ending values of investments compounded at the return of the fund’s benchmark and its peer-group average.

 

 

 

Total Returns
December 31, 1997, 2 Through October 31, 2007
	Average
	Annual Return
Mid-Cap Growth Fund	13.1%
Russell Midcap Growth Index	8.2
Average Mid-Cap Growth Fund 3	8.7

 

The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.

 

 

1 Fund expense ratio reflects the 12 months ended October 31, 2007. Peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2006.

2 Fund’s inception date.

3 Derived from data provided by Lipper Inc.

 

 

5

Don’t let unpredictable markets throw your plan off course

One of the great—and frustrating—things about the stock market is that no one can accurately predict its future direction. Even more vexing perhaps is that past performance isn’t of much value in foretelling the future. So what should prudent investors do?

A hallmark of successful long-term investors is that they don’t get wrapped up in today’s headlines, performance-chasing, or attempts to predict what tomorrow’s “hot” stocks will be. Rather, these investors select carefully considered, balanced portfolios of stock, bond, and money market funds that are appropriate for their unique risk tolerance, circumstances, and goals. Once they have selected such a portfolio, they steadfastly resist the urge to make changes in the face of short-term volatility, regardless of market conditions.

 

As one part of a well-rounded stock portfolio, the Mid-Cap Growth Fund offers access to a skilled team of advisors at a low cost. The fund can help you gain exposure to a dynamic part of the U.S. stock market and help you move toward your investing goals.

 

Thank you for your ongoing confidence in Vanguard.

 

Sincerely,

 

 

John J. Brennan

Chairman and Chief Executive Officer

November 15, 2007

 

 

 

 

 

 

 

 

 

 

 

 

6

Advisors’ Report

 

During the fiscal year ended October 31, 2007, Vanguard Mid-Cap Growth Fund returned 26.4%. This performance reflected the combined efforts of your fund’s two independent advisors. The use of multiple advisors provides exposure to distinct, yet complementary, investment approaches, enhancing the fund’s diversification.

The advisors, the amount and percentage of fund assets each manages, and a brief description of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal year and of how their portfolio positioning reflects this assessment. These comments were prepared on November 19, 2007.

 

William Blair & Company, L.L.C.

 

Portfolio Managers:

Harvey H. Bundy, CFA, Principal

 

Robert C. Lanphier, Principal

David Ricci, CFA, Principal

 

The U.S. mid-capitalization growth market—as measured by the Russell Midcap Growth Index—climbed 19.7% over the 12-month period ended October 31. The five-year bull market continued in the face of deteriorating housing fundamentals and escalating concerns over the health of consumer credit going forward. Strong global growth and slowing, but positive, earnings growth outside of financials and consumer discretionary stocks enabled the market to move higher

 

 

Vanguard Mid-Cap Growth Investment Advisors
	Fund Assets Managed
Investment Advisor	%	$ Million	Investment Strategy
William Blair &	48	619	Uses a fundamental investment approach in pursuit of
Company, L.L.C.			superior long-term investment results from growth-
			oriented companies with leadership positions and
			strong market presence.
Chartwell Investment	48	618	Uses a bottom-up, fundamental, research-driven stock-
Partners, L.P.			selection strategy focusing on companies with
			sustainable growth, strong management teams,
			competitive positions, and outstanding product and
			service offerings. These companies should continually
			demonstrate growth in earnings per share.
Cash Investments 1	4	52	—

 

 

 

 

1 These short-term reserves are invested by Vanguard in equity index products to simulate investment in stocks. Each advisor may also maintain a modest cash position.

 

7

over the year. In this slowing earnings-growth environment, growth stocks outpaced their value stock peers by 10 percentage points over the period, as the Russell Midcap Value Index returned 9.7%. Mid- and large-cap stocks outperformed small-cap stocks.

Over the 12 months, there was a significant divergence between the industrial side of the economy and the consumer side—a dynamic that has played out in sector returns in recent quarters. As crude oil prices jumped from around $60 per barrel to approaching $100 over the period, energy stocks benefited and outperformed all other sectors in the mid-cap growth space. Industrials turned in the next-strongest return, partly because of their role in the strong global economy. On the other hand, the financials sector underperformed because of its exposure to real estate and consumer lending. However, the weakest performers were the consumer discretionary and consumer staples sectors, which were weighed down by the effects of the current housing market and credit-quality issues.

Our successes over the fiscal period were primarily the result of solid stock selection across most sectors. Within health care, our subportfolio benefited from fundamental strength in Express Scripts’ pharmacy benefit-manager business. Some strong financials and consumer discretionary choices allowed the subportfolio to outperform its benchmark in these sectors. Within financials, IntercontinentalExchange witnessed rapid growth in its electronic energy exchange. And two postsecondary education companies, Strayer Education and DeVry, also turned in strong results in an otherwise weak consumer environment.

Stock selection in the industrials sector hurt our subportfolio’s performance, as did an underweighting, or no exposure at all, to some of the traditional cyclical industries, including machinery as well as construction and engineering, which performed well. One industrials holding, Robert Half International, weakened in the face of growing concern over future employment trends.

As always, we continue to build our subportfolio from a bottom-up perspective. That said, our process has led us to trim our health care weighting because of buyouts in this sector. We decreased the sector’s weighting by nearly 600 basis points and redeployed those assets into new holdings across financials, consumer staples, energy, and industrials.

Looking forward, we expect the slowdown in corporate earnings growth to increase investors’ appetites for companies that can increase earnings despite the macro environment of the day. If this turns out to be the case, we would expect it to be conducive to our quality-growth style of investing.

 

 

 

 

 

 

 

8

Chartwell Investment Partners, L.P.

 

Portfolio Managers:

Edward N. Antoian, CFA, CPA, Managing Partner

 

Mark J. Cunneen, CPA, Partner

 

U.S. equity markets were characterized by heightened volatility over the last 12 months. Nonetheless, most major averages ended the period with substantial gains. Early in the period, strong corporate earnings—supported by a healthy economy—created a solid foundation for securities markets around the globe. Midway through the period, Asian markets underwent a correction, and the U.S. residential mortgage sector began to show the first signs of weakness. Late in the period, markets rallied yet again, propelled by further strength in corporate earnings and accelerated merger-and-acquisition activity. By fiscal-year-end, markets were faltering amid deepening concerns about credit conditions and the outlook for reduced economic growth, especially in the United States.

In the current economic environment, we are being cautious with our investments in consumer-oriented companies and in the financials arena. We see better opportunities in areas such as business services, which focuses on growth opportunities in outsourcing, and capital spending, which deals mainly with manufacturing and aerospace.

 

In the present volatile economic landscape of declining interest rates and inflationary pressures, our fundamental approach to growth investing continues to find favor, perhaps more so than at any other time in the recent past. The returns of growth stocks have substantially exceeded their value counterparts for the last 12 months. Also, the August market sell-off caused great stress for many investment strategies that use a combination of quantitative algorithms and financial leverage to enhance returns.

Looking ahead, we remain committed to our long-standing focus on fundamentals and a bottom-up approach to investing. We continue to evaluate investment opportunities that meet our hurdles for growth in sales and profits across a full range of business sectors. At the same time, we remain optimistic about the potential for attractive long-term rewards from investing in mid-cap growth stocks.

 

 

 

 

 

 

 

 

9

Fund Profile

As of October 31, 2007

 

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	119	550	4,870
Median Market Cap	$5.0B	$8.3B	$36.8B
Price/Earnings Ratio	27.9x	23.3x	18.2x
Price/Book Ratio	4.7x	4.3x	2.9x
Yield	0.3%	0.8%	1.7%
Return on Equity	19.6%	18.7%	18.9%
Earnings Growth Rate	32.0%	25.4%	21.3%
Foreign Holdings	1.5%	0.0%	0.0%
Turnover Rate	70%	—	—
Expense Ratio	0.56%	—	—
Short-Term Reserves	2.8%	—	—

 

 

 

 

 

 

Ten Largest Holdings 4 (% of total net assets)
Life Time Fitness, Inc.	leisure facilities	2.1%
Precision Castparts Corp.	aerospace and defense	2.0
Paychex, Inc.	data processing and outsourced services	1.9
Affiliated Managers Group, Inc.	asset management and custody banks	1.9
Cognizant Technology Solutions Corp.	information technology consulting and other services	1.7
Activision, Inc.	home entertainment software	1.7
McDermott International, Inc.	industrial conglomerate	1.6
FTI Consulting, Inc.	diversified commercial and professional services	1.6
Fastenal Co.	trading companies and distributors	1.5
Pharmaceutical Product Development, Inc.	life sciences tools and services	1.5
Top Ten		17.5%

 

 

Investment Focus

 

 

 

1 Russell Midcap Growth Index.

2 Dow Jones Wilshire 5000 Index.

3 For an explanation of R-squared , beta , and other terms used here, see the Glossary on page 26.

4 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

 

10

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: December 31, 1997–October 31, 2007

Initial Investment of $10,000

 

 

 

	Average Annual Total Returns
	Periods Ended October 31, 2007			Final Value
	One	Five	Since	of a $10,000
	Year	Years	Inception 1	Investment
Mid-Cap Growth Fund 2	26.39%	18.51%	13.05%	$33,416
Dow Jones Wilshire 5000 Index	15.28	15.31	7.02	19,485
Russell Midcap Growth Index	19.72	19.21	8.19	21,677
Average Mid-Cap Growth Fund 3	26.07	17.18	8.72	22,759

 

 

 

 

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the fund’s inception: December 31, 1997.

2 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Derived from data provided by Lipper Inc.

 

 

11

 

Fiscal-Year Total Returns (%): December 31, 1997–October 31, 2007

 

 

Average Annual Total Returns: Periods Ended September 30, 2007

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000. Note: See Financial Highlights table on page 18 for dividend and capital gains information.

 

 

12

Financial Statements

 

Statement of Net Assets

As of October 31, 2007

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

			Market
			Value •
		Shares	($000)
	XTO Energy, Inc.	101,238	6,720
*^	Cal Dive International, Inc.	469,820	6,216
*	Exterran Holdings, Inc.	52,955	4,459
*	Complete Production Services, Inc.	26,770	533
			109,783
Financials (8.3%)
*	Affiliated Managers Group, Inc.	190,215	25,023
	Lazard Ltd. Class A	257,990	12,951
*	Nasdaq Stock Market Inc.	201,520	9,411
	Jones Lang LaSalle Inc.	84,970	8,100
*	Philadelphia Consolidated Holding Corp.	182,170	7,433
	Assurant, Inc.	123,020	7,189
*	IntercontinentalExchange Inc.	38,430	6,848
	Digital Realty Trust, Inc. REIT	152,310	6,700
	National Financial Partners Corp.	119,040	6,508
*	The Blackstone Group L.P.	235,965	6,001
	BOK Financial Corp.	108,670	5,927
*	CB Richard Ellis Group, Inc.	183,945	4,485
			106,576
Health Care (10.5%)
	Pharmaceutical Product Development, Inc.	455,438	19,238
*	IDEXX Laboratories Corp.	126,936	15,458
*	Gen-Probe Inc.	184,180	12,896
	C.R. Bard, Inc.	140,879	11,779
*	Healthways, Inc.	192,882	11,708
*	DaVita, Inc.	166,605	10,861
*	Covance, Inc.	126,770	10,459
*	Henry Schein, Inc.	164,730	9,867
	Allergan, Inc.	138,250	9,343
*	Hologic, Inc.	112,760	7,660
	Brookdale Senior Living Inc.	154,860	5,713
*	ResMed Inc.	132,104	5,473
	IMS Health, Inc.	176,365	4,446
			134,901

 

 

 

 

 

 

 

 

 

 

13

 

 

			Market
			Value •
		Shares	($000)
	Electronic Equipment & Instruments (3.7%)
	Jabil Circuit, Inc.	706,415	15,350
*	FLIR Systems, Inc.	213,378	14,806
	Amphenol Corp.	250,495	11,089
*	Trimble Navigation Ltd.	151,530	6,319
	Internet Software & Services (2.3%)
*	j2 Global Communications, Inc.	348,377	11,737
*	VistaPrint Ltd.	231,980	11,035
*	VeriSign, Inc.	222,360	7,580
	IT Services (7.0%)
	Paychex, Inc.	601,427	25,128
*	Cognizant Technology Solutions Corp.	527,260	21,860
*	VeriFone Holdings, Inc.	306,495	15,150
*	Iron Mountain, Inc.	418,950	14,550
	Global Payments Inc.	176,210	8,381
*	Global Cash Access, Inc.	288,205	2,879
*	Gartner, Inc. Class A	116,200	2,545
	Semiconductors & Semiconductor Equipment (4.3%)
*	Silicon Laboratories Inc.	335,665	14,669
	Microchip Technology, Inc.	298,124	9,889
	Maxim Integrated Products, Inc.	261,045	7,077
	National Semiconductor Corp.	260,100	6,539
	Intersil Corp.	208,080	6,313
*	MEMC Electronic Materials, Inc.	83,354	6,103
*	FormFactor Inc.	113,032	4,421
	Software (4.7%)
*	Activision, Inc.	923,434	21,839
*	Autodesk, Inc.	212,960	10,414
	FactSet Research Systems Inc.	139,655	9,848
*	MICROS Systems, Inc.	133,565	9,593
*	Business Objects S.A. ADR	141,065	8,451
			333,784
Materials (2.4%)
	Ecolab, Inc.	303,720	14,326
*	RTI International Metals, Inc.	133,095	10,405
	Airgas, Inc.	130,893	6,606
			31,337
Telecommunication Services (1.4%)
*	American Tower Corp. Class A	279,315	12,340
*^	Clearwire Corp.	276,035	5,667
			18,007

 

 

 

 

 

14

		Market
		Value •
	Shares	($000)
Exchange-Traded Fund (0.5%)
2 ^ Vanguard Mid-Cap ETF	82,700	6,687
Total Common Stocks
(Cost $1,007,612)		1,209,416
Temporary Cash Investments (7.4%) 1
Money Market Fund (7.1%)
3 Vanguard Market Liquidity Fund, 4.955%	74,488,234	74,488
3 Vanguard Market Liquidity Fund, 4.955%—Note G	16,586,900	16,587
		91,075
	Face
	Amount
	($000)
U.S. Agency Obligation (0.3%)
4 Federal Home Loan Bank
5 4.548%, 2/1/08	4,000	3,954
Total Temporary Cash Investments
(Cost $95,015)		95,029
Total Investments (101.2%)
(Cost $1,102,627)		1,304,445
Other Assets and Liabilities (–1.2%)
Other Assets—Note C		17,999
Liabilities—Note G		(33,747)
		(15,748)
Net Assets (100%)
Applicable to 61,649,785 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization)		1,288,697
Net Asset Value Per Share		$20.90

 

 

1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 97.1% and 4.1%, respectively, of net assets. See Note E in Notes to Financial Statements .

2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.

3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

4 The issuer operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government. If needed, access to additional funding from the U.S. Treasury (beyond the issuer’s line of credit) would require congressional action.

5 Securities with a value of $3,954,000 have been segregated as initial margin for open futures contracts.

6 See Note E in Notes to Financial Statements for the tax-basis components of net assets.

ADR—American Depositary Receipt.

REIT— Real Estate Investment Trust.

 

15

Statement of Operations

 

 

	Year Ended
	October 31, 2007
	($000)
Investment Income
Income
Dividends 1	4,262
Interest 1	3,484
Security Lending	158
Total Income	7,904
Expenses
Investment Advisory Fees—Note B
Basic Fee	2,302
Performance Adjustment	279
The Vanguard Group—Note C
Management and Administrative	2,492
Marketing and Distribution	234
Custodian Fees	8
Auditing Fees	25
Shareholders’ Reports	26
Trustees’ Fees and Expenses	2
Total Expenses	5,368
Expenses Paid Indirectly—Note D	(53)
Net Expenses	5,315
Net Investment Income	2,589
Realized Net Gain (Loss)
Investment Securities Sold 1	72,276
Futures Contracts	2,188
Realized Net Gain (Loss)	74,464
Change in Unrealized Appreciation (Depreciation)
Investment Securities	149,138
Futures Contracts	765
Change in Unrealized Appreciation (Depreciation)	149,903
Net Increase (Decrease) in Net Assets Resulting from Operations	226,956

 

 

 

 

 

 

1 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $82,000, $3,277,000, and $0, respectively.

 

 

 

16

Statement of Changes in Net Assets

 

 

	Year Ended October 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	2,589	1,799
Realized Net Gain (Loss)	74,464	127,742
Change in Unrealized Appreciation (Depreciation)	149,903	(44,202)
Net Increase (Decrease) in Net Assets Resulting from Operations	226,956	85,339
Distributions
Net Investment Income	(1,834)	(177)
Realized Capital Gain 1	(111,529)	—
Total Distributions	(113,363)	(177)
Capital Share Transactions—Note H
Issued	526,218	344,941
Issued in Lieu of Cash Distributions	105,477	163
Redeemed	(249,311)	(199,378)
Net Increase (Decrease) from Capital Share Transactions	382,384	145,726
Total Increase (Decrease)	495,977	230,888
Net Assets
Beginning of Period	792,720	561,832
End of Period 2	1,288,697	792,720

 

 

 

 

 

 

 

 

 

 

 

 

1 Includes fiscal 2007 short-term gain distributions totaling $7,296,000. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed net investment income of $1,704,000 and $1,244,000.

 

 

17

Financial Highlights

 

 

For a Share Outstanding	Year Ended October 31,
Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$19.12	$16.58	$14.28	$14.22	$10.34
Investment Operations
Net Investment Income (Loss)	.044	.055	.00	(.01)	(.01)
Net Realized and Unrealized Gain (Loss)
on Investments	4.455	2.490	2.30	.07	3.89
Total from Investment Operations	4.499	2.545	2.30	.06	3.88
Distributions
Dividends from Net Investment Income	(.044)	(.005)	—	—	—
Distributions from Realized Capital Gains	(2.675)	—	—	—	—
Total Distributions	(2.719)	(.005)	—	—	—
Net Asset Value, End of Period	$20.90	$19.12	$16.58	$14.28	$14.22
Total Return	26.39%	15.35%	16.11%	0.42%	37.52%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$1,289	$793	$562	$442	$247
Ratio of Total Expenses to
Average Net Assets 1	0.56%	0.50%	0.44%	0.45%	0.63%
Ratio of Net Investment Income (Loss)
to Average Net Assets	0.27%	0.26%	0.01%	(0.05%)	(0.18%)
Portfolio Turnover Rate	70%	159%	80%	102%	106%

 

 

 

 

 

 

 

 

 

 

 

 

1 Includes performance-based investment advisory fee increases (decreases) of 0.03% for 2007, (0.04%) for 2006, (0.09%) for 2005, (0.05%) for 2004, and (0.06%) for 2003.

See accompanying Notes , which are an integral part of the Financial Statements .

 

 

18

Notes to Financial Statements

 

Vanguard Mid-Cap Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund files reports with the SEC under the company name Vanguard Whitehall Funds.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

 

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

 

Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets . Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

 

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

5. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.

 

6. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

 

 

19

B. Chartwell Investment Partners, L.P., and William Blair & Company, L.L.C., each provide investment advisory services to a portion of the fund for fees calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee for Chartwell Investment Partners is subject to quarterly adjustments based on performance since January 31, 2006, relative to the Russell Midcap Growth Index. The basic fee for William Blair & Company, L.L.C. is subject to quarterly adjustments based on performance since July 31, 2006, relative to the Russell Midcap Growth Index.

 

The Vanguard Group manages the cash reserves of the fund on an at-cost basis.

 

For the year ended October 31, 2007, the aggregate investment advisory fee represented an effective annual basic rate of 0.24% of the fund’s average net assets before an increase of $279,000 (0.03%) based on performance.

 

C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2007, the fund had contributed capital of $101,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.10% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. The fund’s custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2007, these arrangements reduced the fund’s management and administrative expenses by $52,000 and custodian fees by $1,000. The total expense reduction represented an effective annual rate of 0.01% of the fund’s average net assets.

 

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.

 

The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $295,000 from undistributed net investment income, and $9,611,000 from accumulated net realized gains, to paid-in capital.

 

For tax purposes, at October 31, 2007, the fund had $38,663,000 of ordinary income and $30,339,000 of long-term capital gains available for distribution.

 

At October 31, 2007, the cost of investment securities for tax purposes was $1,103,646,000. Net unrealized appreciation of investment securities for tax purposes was $200,799,000, consisting of unrealized gains of $227,018,000 on securities that had risen in value since their purchase and $26,219,000 in unrealized losses on securities that had fallen in value since their purchase.

 

20

At October 31, 2007, the aggregate settlement value of open futures contracts expiring in December 2007 and the related unrealized appreciation (depreciation) were:

 

 

			($000)
		Aggregate	Unrealized
	Number of	Settlement	Appreciation
Futures Contracts	Long Contracts	Value	(Depreciation)
S&P MidCap 400 Index	44	20,066	998
E-mini S&P MidCap	136	12,405	269
E-mini NASDAQ 100	224	10,091	435

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

 

F. During the year ended October 31, 2007, the fund purchased $883,881,000 of investment securities and sold $631,924,000 of investment securities, other than temporary cash investments.

 

G. The market value of securities on loan to broker-dealers at October 31, 2007, was $15,809,000, for which the fund received cash collateral of $16,587,000.

 

H. Capital shares issued and redeemed were:

 

 

	Year Ended October 31,
	2007	2006
	Shares	Shares
	(000)	(000)
Issued	27,357	18,499
Issued in Lieu of Cash Distributions	6,062	9
Redeemed	(13,225)	(10,943)
Net Increase (Decrease) in Shares Outstanding	20,194	7,565

 

 

I. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, and is effective for the fund’s fiscal year beginning November 1, 2007. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that as of October 31, 2007, no provision for income tax would be required in the fund’s financial statements.

 

 

 

 

21

Report of Independent Registered Public Accounting Firm

 

To the Trustees of Vanguard Whitehall Funds and the Shareholders of Vanguard Mid-Cap Growth Fund:

 

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Mid-Cap Growth Fund (the “Fund”) at October 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2007 by correspondence with the custodian and broker, and by agreement to the underlying ownership records for Vanguard Market Liquidity Fund, provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

 

December 6, 2007

 

 

---

Special 2007 tax information (unaudited) for Vanguard Mid-Cap Growth Fund

This information for the fiscal year ended October 31, 2007, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $109,841,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.

 

The fund distributed $1,878,000 of qualified dividend income to shareholders during the fiscal year.

 

For corporate shareholders, 8.9% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

 

22

Your Fund’s After-Tax Returns

 

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

 

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2007. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

 

Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

 

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

 

 

Average Annual Total Returns: Mid-Cap Growth Fund 1
Periods Ended October 31, 2007
	One	Five	Since
	Year	Years	Inception 2
Returns Before Taxes	26.39%	18.51%	13.05%
Returns After Taxes on Distributions	23.61	17.98	11.66
Returns After Taxes on Distributions and Sale of Fund Shares	19.51	16.19	10.93

 

 

 

 

 

 

 

 

 

1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

2 December 31, 1997.

 

 

23

About Your Fund’s Expenses

 

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

 

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

The table below illustrates your fund’s costs in two ways:

 

• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

 

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading “Expenses Paid During Period.”

 

• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

 

Six Months Ended October 31, 2007
	Beginning	Ending	Expenses
	Account Value	Account Value	Paid During
Mid-Cap Growth Fund	4/30/2007	10/31/2007	Period 1
Based on Actual Fund Return	$1,000.00	$1,128.51	$2.95
Based on Hypothetical 5% Yearly Return	1,000.00	1,022.43	2.80

 

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include the account service fee described in the prospectus. If such a fee were applied to your account, your costs would be higher. Your fund does not charge transaction fees, such as purchase or redemption fees, nor does it carry a “sales load.”

 

 

1 The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.55%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.

 

24

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

Glossary

 

Beta . A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. A fund’s beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

 

Earnings Growth Rate . The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

 

Equity Exposure . A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

 

Expense Ratio . The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.

 

Foreign Holdings . The percentage of a fund represented by stocks or depositary receipts of companies based outside the United States.

 

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 measured from the inception date.

 

Median Market Cap . An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

 

Price/Book Ratio . The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.

 

Price/Earnings Ratio . The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

 

R-Squared . A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0.

 

Return on Equity . The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

 

Short-Term Reserves . The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

 

Turnover Rate . An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

 

Yield . A snapshot of a fund’s income from interest and dividends. The yield, expressed as a percentage of the fund’s net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of income provided by securities in the index.

 

26

 

 

 

 

 

 

 

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The People Who Govern Your Fund

 

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

 

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals.

 

Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members’ responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers.

 

Each trustee serves a fund until its termination; or until the trustee’s retirement, resignation, or death; or otherwise as specified in the fund’s organizational documents. Any trustee may be removed at a shareholders’ meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

 

 

Chairman of the Board, Chief Executive Officer, and Trustee
John J. Brennan 1
Born 1954	Principal Occupation(s) During the Past Five Years: Chairman of the Board, Chief Executive
Trustee since May 1987;	Officer, and Director/Trustee of The Vanguard Group, Inc., and of each of the investment
Chairman of the Board and	companies served by The Vanguard Group.
Chief Executive Officer
148 Vanguard Funds Overseen
Independent Trustees
Charles D. Ellis
Born 1937	Principal Occupation(s) During the Past Five Years: Applecore Partners (pro bono ventures
Trustee since January 2001	in education); Senior Advisor to Greenwich Associates (international business strategy
148 Vanguard Funds Overseen	consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business
	at New York University; Trustee of the Whitehead Institute for Biomedical Research.
Rajiv L. Gupta
Born 1945	Principal Occupation(s) During the Past Five Years: Chairman, President, and
Trustee since December 2001 2	Chief Executive Officer of Rohm and Haas Co. (chemicals); Board Member of
148 Vanguard Funds Overseen	the American Chemistry Council; Director of Tyco International, Ltd. (diversified
	manufacturing and services) since 2005; Trustee of Drexel University and of the
	Chemical Heritage Foundation.
Amy Gutmann
Born 1949	Principal Occupation(s) During the Past Five Years: President of the University of
Trustee since June 2006	Pennsylvania since 2004; Professor in the School of Arts and Sciences, Annenberg School
148 Vanguard Funds Overseen	for Communication, and Graduate School of Education of the University of Pennsylvania
	since 2004; Provost (2001–2004) and Laurance S. Rockefeller Professor of Politics and
	the University Center for Human Values (1990–2004), Princeton University; Director of
	Carnegie Corporation of New York since 2005 and of Schuylkill River Development
	Corporation and Greater Philadelphia Chamber of Commerce since 2004.

 

JoAnn Heffernan Heisen
Born 1950	Principal Occupation(s) During the Past Five Years: Corporate Vice President and
Trustee since July 1998	Chief Global Diversity Officer since 2006, Vice President and Chief Information
148 Vanguard Funds Overseen	Officer (1997–2005), and Member of the Executive Committee of Johnson &
	Johnson (pharmaceuticals/consumer products); Director of the University Medical
	Center at Princeton and Women’s Research and Education Institute.
André F. Perold
Born 1952	Principal Occupation(s) During the Past Five Years: George Gund Professor of Finance
Trustee since December 2004	and Banking, Harvard Business School; Senior Associate Dean, Director of Faculty
148 Vanguard Funds Overseen	Recruiting, and Chair of Finance Faculty, Harvard Business School; Director and Chairman
	of UNX, Inc. (equities trading firm) since 2003; Chair of the Investment Committee of
	HighVista Strategies LLC (private investment firm) since 2005.
Alfred M. Rankin, Jr.
Born 1941	Principal Occupation(s) During the Past Five Years: Chairman, President, Chief Executive
Trustee since January 1993	Officer, and Director of NACCO Industries, Inc. (forklift trucks/housewares/lignite); Director
148 Vanguard Funds Overseen	of Goodrich Corporation (industrial products/aircraft systems and services).
J. Lawrence Wilson
Born 1936	Principal Occupation(s) During the Past Five Years: Retired Chairman and Chief Executive
Trustee since April 1985	Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines) and
148 Vanguard Funds Overseen	AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University
	and of Culver Educational Foundation.
Executive Officers 1
Thomas J. Higgins
Born 1957	Principal Occupation(s) During the Past Five Years: Principal of The Vanguard Group, Inc.;
Treasurer since July 1998	Treasurer of each of the investment companies served by The Vanguard Group.
148 Vanguard Funds Overseen
Heidi Stam
Born 1956	Principal Occupation(s) During the Past Five Years: Managing Director of The Vanguard
Secretary since July 2005	Group, Inc., since 2006; General Counsel of The Vanguard Group since 2005; Secretary of
148 Vanguard Funds Overseen	The Vanguard Group, and of each of the investment companies served by The Vanguard
	Group, since 2005; Principal of The Vanguard Group (1997–2006).

 

Vanguard Senior Management Team
R. Gregory Barton	Kathleen C. Gubanich	F. William McNabb, III	Ralph K. Packard
Mortimer J. Buckley	Paul A. Heller	Michael S. Miller	George U. Sauter

 

Founder

John C. Bogle

Chairman and Chief Executive Officer, 1974–1996

 

 

 

1 Officers of the funds are “interested persons” as defined in the Investment Company Act of 1940.

2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

More information about the trustees is in the Statement of Additional Information , available from The Vanguard Group.

 

 

	P.O. Box 2600
	Valley Forge, PA 19482-2600

 

Connect with Vanguard® > www.vanguard.com

 

 

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	All comparative mutual fund data are from Lipper Inc.
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	You can obtain a free copy of Vanguard’s proxy voting
This material may be used in conjunction	guidelines by visiting our website, www.vanguard.com,
with the offering of shares of any Vanguard	and searching for “proxy voting guidelines,” or by
fund only if preceded or accompanied by	calling Vanguard at 800-662-2739. The guidelines are
the fund’s current prospectus.	also available from the SEC’s website, www.sec.gov.
	In addition, you may obtain a free report on how your
	fund voted the proxies for securities it owned during
	the 12 months ended June 30. To get the report, visit
	either www.vanguard.com or www.sec.gov.
	You can review and copy information about your fund
	at the SEC’s Public Reference Room in Washington, D.C.
	To find out more about this public service, call the SEC
	at 202-551-8090. Information about your fund is also
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	publicinfo@sec.gov or via regular mail addressed to the
	Public Reference Section, Securities and Exchange
	Commission, Washington, DC 20549-0102.
	© 2007 The Vanguard Group, Inc.
	All rights reserved.
	Vanguard Marketing Corporation, Distributor.
	Q3010 122007