VYM Vanguard High Dividend Yield

 

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>    Vanguard Selected Value Fund retreated –13.0% for the first half of its fiscal year, faring worse than its benchmark and the average return of peer mid-capitalization value funds.

>    Pessimism dominated U.S. stock market activity, as nearly every industry suffered losses.

>    The fund was particularly hurt by poor performers in the financials sector.

 

 

 

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.

 

 

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Your Fund’s Total Returns

 

 

 

 

 

1  Derived from data provided by Lipper Inc.

 

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Chairman’s Letter

 

Dear Shareholder,

Vanguard Selected Value Fund lost –13.0% for the six months ended April 30, 2008, as U.S. stocks were adversely affected by a shrinking credit market and a slowing economy.

The fund underperformed its benchmark, the Russell Midcap Value Index, as well as the average return of its peer mid-cap value funds, largely because of poor stock selection in the financials, consumer discretionary, and health care sectors. The lone bright spot in the fund’s holdings was the energy sector.

Economic anxiety weighed on U.S. and international stocks

For the fiscal half-year, the broad U.S. stock market returned –9.9% amid looming fears of an economic recession. The housing slump continued, putting additional pressure on lenders and borrowers. Home prices dropped 7.7% during the first quarter of 2008—the biggest quarterly decline in 12 years. International stocks outperformed their U.S. counterparts, but just about all segments of the global equity markets recorded negative returns.

A mixed picture in bonds as the credit crunch spread

Bonds fared better than stocks during the period, though the fixed income markets were hardly an oasis of calm. The broad taxable bond market returned 4.1%. Much of the return came from U.S. Treasury

 

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bonds. Beyond Treasuries, fixed income returns were modest, as the credit crisis reverberated across the lending markets.

The Federal Reserve Board responded to weakness in the credit markets—and the broad economy—with five cuts to its target for the federal funds rate. At the end of April, the Fed lowered the target to 2.0%—the lowest level since December 2004.

Financial companies suffered from the credit crunch

Even though Selected Value was underweighted in financials relative to its benchmark, the sector remained the fund’s largest weighting. The fund’s sector holdings (–21%) declined substantially more than those in the benchmark and were the biggest detractors from relative performance. Some of the fund’s largest absolute losses were posted by regional banks National City and The South Financial Group, and by commercial lenders such as CIT Group, all of which suffered from the credit-market problems affecting the entire financials sector.

The fund’s consumer discretionary holdings (–19%) were also hit hard by expectations of slowing consumer spending. Phone directory publisher Idearc, a significant gainer for the fund last year, reversed course and was by far the fund’s worst performer for the period. The stock was hurt by a deteriorating sales outlook and by an independent rating service’s downgrade of the company’s finances.

 

 

 

1  Annualized.

 

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The fund’s health care stocks (–22%) likewise faltered. Coventry Health Care, a diversified national managed health care company and a prominent winner for the fund last year, suffered as it lowered profit forecasts because of higher expenses. Shares of Omnicare also fell after the company offered a disappointing 2008 outlook as increasing competition drove prices lower.

The fund’s only sector standout was energy, which returned a combined 7%. Murphy Oil, an integrated oil company, was a notable performer in this group, benefiting from rising energy prices and strong sales.

 

Among all holdings, the top contributor for the period was Ryder System, a transportation and supply-chain management provider in industrials, whose stock rose on reports of increasing quarterly profits driven by robust sales.

More information about the fund’s performance is available in the Advisors’ Report on page 6.

History teaches that recent losses will be temporary

The past six months have tried the patience of all investors. However, long-time investors in Selected Value know that the fund’s advisors execute a strategy that sometimes requires patience before it bears fruit. After all, a value-oriented approach means staying the course even

 

 

 

1  Fund expense ratio reflects the six months ended April 30, 2008. Peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2007.

 

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when stocks believed to be undervalued remain static or drift lower before they attract renewed attention from the market.

Whether the market overall or mid-cap value stocks in particular will rebound soon is anyone’s guess. But it’s helpful to remember that every time stocks have fallen behind, they have eventually rebounded—to the benefit of those who remained invested when the turnaround came.

With its disciplined focus on out-of-favor midsized companies and its low costs, Selected Value can play a valuable role as part of a well-diversified portfolio that also includes a variety of other large- and small-cap stock funds, bond funds, and cash investments. This balanced approach has proven its mettle over time.

As I close this report to you, it’s my pleasure to introduce the fund’s new president, F. William McNabb III. Bill is a man of great character and integrity who is intimately familiar with all aspects of Vanguard—from how we serve our clients to how we invest for our clients.

 

Bill and I have worked together very closely for more than two decades. I’m thrilled that the fund’s board elected him president, effective March 1, and designated him to succeed me as chief executive officer, a role he will assume within a year, after an orderly transition. Bill and the rest of our team will serve you and our other clients extremely well in the years ahead.

Thank you for your confidence in Vanguard.

Sincerely,

 

 

John J. Brennan

Chairman and Chief Executive Officer

May 16, 2008

 

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Advisors’ Report

 

For the fiscal half-year ended April 30, 2008, Vanguard Selected Value Fund returned –13.0%. 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 percentage and amount 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 half-year and of how their portfolio positioning reflects this assessment. These comments were prepared on May 19, 2008.

 

Barrow, Hanley,

Mewhinney & Strauss, Inc.

 

Portfolio Managers:

James P. Barrow, Founding Partner

Mark Giambrone, Principal

The past six months have been difficult for the market and for this fund. Illiquidity in the financial markets, fear over the housing market and its impact on the economy, and slowing consumer spending have depressed valuations broadly.

As we have discussed in the past, we are substantially underweighted in the financials sector and have specifically avoided areas such as brokers and mortgage originators, as well as homebuilders. However, the rapid

 

 

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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deterioration in credit and the write-downs of mortgage holdings have affected some companies in our portion of the portfolio. We have assessed the risk levels associated with these firms and have exited those we believed to have permanent impairments, while adding to those whose ability to weather this storm should lift valuations substantially in the future. We continue to view our underweighting in financials as appropriate, and are looking for additional opportunities in the sector.

In this period, even the defensive sectors of our portfolio did not hold up, and our overweightings in consumer staples and health care detracted from performance. We continue to find significant value in these areas and have added to the health care portion of the portfolio, in the expectation that this will measurably enhance our results over the next few years.

Our overweighting in industrials and our underweighting in information technology added substantially to performance for the period, and we hold to our belief that these positions are appropriate going forward.

We continue to find businesses with valuation characteristics below those of the market, but with fundamental characteristics superior to those of the market, which we expect to 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, Vice President

As of April 30, 2008, our portfolio continued to meet our criteria of holding a concentrated selection of low price-to-tangible-book-value stocks with attractive long-term earnings potential. Our portfolio currently sells at 93% of tangible book value, 48% of revenues, and 8 times “normalized” earnings. In contrast, stocks in the Standard & Poor’s 500 Index sell at 450% of tangible book value, 143% of revenues, and 16 times normalized earnings.

Our portfolio’s performance lagged the relevant indexes over the fiscal half-year. Semiconductor companies such as Micron, Qimonda, Semiconductor Manufacturing, and Spansion were notable underperformers. An oversupply of memory chips has led to an 80% decline in chip prices over the last 12 months and losses for semiconductor manufacturers. Going forward, capital spending on new chip plants in 2008 is expected to decline substantially, bringing the supply/demand equation into better balance and stabilizing prices.

 

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Two other large underperformers were CNA Financial, an insurance company that has suffered because of concerns over the quality of its investment portfolio, and Domtar, a paper producer that has posted disappointing earnings as a result of higher raw material costs. Our analysis of CNA concludes that the stock sells at a discount to tangible book value even if large charges are taken in its investment portfolio. We expect Domtar to be able to pass through the higher raw material costs in their product pricing, and we are encouraged by the company’s tremendous free cash flow.

Notable outperformers for the half-year included Hudson City Bancorp, Ashland, and Overseas Shipholding.

We added to a number of positions in stocks that demonstrated weakness during the period, including American Financial, Air France KLM, CNA, Micron Technology, Qimonda, and Domtar. Our positions in Flextronics, Hudson City Bancorp, and Pinnacle West were reduced on strength, and Dana was eliminated. Two new names, Puget Energy, a utility, and Ashland, a chemical company, were added.

 

We continue to maintain large holdings in industries that may suffer less from the housing crisis and an economic slowdown, such as insurance and utilities. Our technology holdings generally sell at large discounts to book value, a reasonable gauge of long-term asset value. As always, we will continue to search for low price/book stocks to add to the portfolio and to replace the more highly valued companies.

 

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Fund Profile

As of April 30, 2008

 

 

 

 

 

 

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Investment Focus

 

 

1  Russell Midcap Value Index.

2  Dow Jones Wilshire 5000 Index.

3  30-day SEC yield for the fund; annualized dividend yield for the indexes. See the Glossary on pages 25–26.

4  Annualized.

5  For an explanation of R-squared, beta , and other terms used here, see the Glossary on pages 25–26.

6  The holdings listed exclude any temporary cash investments and equity index products.

 

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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.

 

Fiscal-Year Total Returns (%): October 31, 1997–April 30, 2008

 

 

Average Annual Total Returns: Periods Ended March 31, 2008

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  Six months ended April 30, 2008.

2  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 16 for dividend and capital gains information.

 

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Financial Statements (unaudited)

 

Statement of Net Assets

As of April 30, 2008

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).

 

 

 

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•  See Note A in Notes to Financial Statements .

*  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 92.6% and 7.6%, 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 $9,948,000 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.

 

 

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Statement of Operations

 

 

 

1Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $3,744,000, $8,113,000, and ($76,001,000), respectively.

 

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Statement of Changes in Net Assets

 

 

 

1  Includes fiscal 2008 and 2007 short-term gain distributions totaling $35,554,000 and $25,199,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2  Net of redemption fees of $800,000 and $1,189,000.

3   Net Assets — End of Period includes undistributed net investment income of $18,796,000 and $59,069,000.

 

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Financial Highlights

 

 

 

1  Includes increases from redemption fees of $.00, $.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 (0.03%), (0.02%), (0.05%), (0.02%), 0.01%, and 0.11%.

*  Annualized.

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

 

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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 4:00 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 affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. 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. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

3. 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.

 

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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).

 

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. 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) and for the period ended April 30, 2008, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

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

6. 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.

7. 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.

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 six months ended April 30, 2008, the aggregate investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets before a decrease of $559,000 (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 April 30, 2008, the fund had contributed capital of $322,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.32% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

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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. For the six months ended April 30, 2008, these arrangements reduced the fund’s expenses by $260,000 (an annual rate of 0.01% of 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.

During the six months ended April 30, 2008, the fund realized net foreign currency losses of $23,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.

At April 30, 2008, the cost of investment securities for tax purposes was $3,623,546,000. Net unrealized appreciation of investment securities for tax purposes was $186,154,000, consisting of unrealized gains of $707,878,000 on securities that had risen in value since their purchase and $521,724,000 in unrealized losses on securities that had fallen in value since their purchase.

At April 30, 2008, the aggregate settlement value of open futures contracts expiring in June 2008 and the related unrealized appreciation (depreciation) were:

 

 

 

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

F. During the six months ended April 30, 2008, the fund purchased $296,889,000 of investment securities and sold $811,219,000 of investment securities, other than temporary cash investments.

G. The market value of securities on loan to broker-dealers at April 30, 2008, was $25,105,000, for which the fund received cash collateral of $26,920,000.

H. Capital shares issued and redeemed were:

 

 

 

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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:

 

 

 

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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.

 

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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 0.38%. 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.

 

 

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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.

 

 

 

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Trustees Approve Advisory Agreements

The board of trustees of Vanguard Selected Value Fund has renewed the fund’s investment advisory agreements with Barrow, Hanley, Mewhinney & Strauss, Inc., and Donald Smith & Co., Inc. The board determined that the retention of the advisors was in the best interests of the fund and its shareholders.

The trustees based their decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the agreements. Rather, it was the totality of the circumstances that drove the board’s decision.

Nature, extent, and quality of services

The board considered the quality of the fund’s investment management over both the short and long term, and took into account the organizational depth and stability of each advisor. The board noted the following:

Barrow, Hanley, Mewhinney & Strauss. Founded in 1979, Barrow Hanley is known for its commitment to value investing. A subsidiary of Old Mutual Asset Managers, Barrow Hanley remains independently managed and its professionals retain significant equity ownership. The firm has advised Vanguard Selected Value Fund since the fund’s inception in 1996.

Using a combination of in-depth fundamental research and valuation forecasts, Barrow Hanley seeks stocks offering strong fundamentals and price appreciation potential, with below-average price/earnings ratios and price/book value ratios, and above-average current yields.

Donald Smith & Co. Founded in 1983, Donald Smith & Co. is a deep-value-oriented firm that manages large-, mid-, and small-cap value portfolios. The firm has advised Vanguard Selected Value Fund since 2005.

Donald Smith & Co. employs a strictly bottom-up investment approach. The portfolio managers invest in out-of-favor companies selling at discounts to tangible book value. Donald Smith & Co. looks for companies in the bottom decile of price/tangible book ratios that have a positive outlook for earnings potential over the next two to four years.

The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory agreements.

Investment performance

The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of a relevant benchmark and peer group. The board concluded that each advisor has carried out the fund’s investment strategy in disciplined fashion, and that performance results have allowed the fund to remain competitive versus its benchmark and the average result of peer funds. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

The board concluded that the fund’s expense ratio was far below the average expense ratio charged by funds in its peer group. The board noted that the fund’s advisory fee rate was also well below the peer-group average. Information about the fund’s expense ratio appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the advisory fee rate.

 

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The board did not consider profitability of the fund’s advisors in determining whether to approve the advisory fees, because the firms are independent of Vanguard and the advisory fees are the result of arm’s-length negotiations.

The benefit of economies of scale

The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules for the advisors. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each firm increases.

The board will consider whether to renew the advisory agreements again after a one-year period.

 

 

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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%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that 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. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

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.

 

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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 fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

 

 

 

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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.

 

 

 

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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.

 

 

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P.O. Box 2600

Valley Forge, PA 19482-2600

 

Connect with Vanguard ^® > www.vanguard.com

 

 

 

 

 

 

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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.

 

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Your Fund’s Total Returns

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Chairman’s Letter

 

Dear Shareholder,

Vanguard Mid-Cap Growth Fund returned –11.2% for the six months ended April 30, 2008. The fund’s performance, which was disappointing on both an absolute and a relative basis, was indicative of the turbulent environment in which the fund—and the broader stock market—struggled to find solid footing. The fund trailed the results of its benchmark—the Russell Midcap Growth Index—and slightly lagged the average return of competing mid-cap growth funds. Most of the fund’s industry sectors posted negative results during the half-year.

Economic anxiety weighed on U.S. and international stocks

For the fiscal half-year, the broad U.S. stock market returned –9.9% amid looming fears of an economic recession. The housing slump continued, putting additional pressure on lenders and borrowers. Home prices dropped 7.7% during the first quarter of 2008—the biggest quarterly decline in 12 years. International stocks outperformed their U.S. counterparts, but just about all segments of the global equity markets recorded negative returns.

 

 

 

 

 

 

 

 

 

 

 

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A mixed picture in bonds as the credit crunch spread

Bonds fared better than stocks during the period, though the fixed income markets were hardly an oasis of calm. The broad taxable bond market returned 4.1%. Much of the return came from U.S. Treasury bonds. Beyond Treasuries, fixed income returns were modest as the credit crisis reverberated across the lending markets.

The Federal Reserve Board responded to weakness in the credit markets—and the broad economy—with five cuts to its target for the federal funds rate. At the end of April, the Fed lowered the target to 2.0%—the lowest level since December 2004.

 

Fund met with poor returns in nearly every sector

By some measures, the past six months should have been a fine period for the Mid-Cap Growth Fund: Mid-cap stocks outpaced small- and large-caps, and growth stocks fared better than value stocks. Still, that was not enough to overcome the steep and broad market downdraft that ultimately carried the fund to a –11.2% return. It was one of the worst six-month spans for stocks of any size or stripe in several years.

Most of the Mid-Cap Growth Fund’s areas of investment posted negative results. The fund’s overall performance rested largely on the results of its five

 

 

 

 

 

 

 

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largest sectors (information technology, consumer discretionary, industrials, health care, and energy), which represented more that 85% of the fund’s assets, on average, during the period. Of those sectors, the only positive standout, as you might expect, was energy.

The IT sector, returning –16%, was the fund’s largest-weighting, and also constituted the biggest drag on fund performance during the half-year. Individuals and businesses grew more tentative in making technology purchases or upgrades. Semiconductor firms, communication-equipment makers, and IT services companies were among the weaker performers.

 

Consumer discretionary stocks also suffered (–20%) from a softer spending environment, particularly among companies in leisure-related categories like hotels and resorts, casinos, and fitness centers. In industrials, the fund returned –6%, which outpaced the benchmark but still detracted from the fund’s result. A handful of airplane-equipment companies were largely responsible for the negative sector return. And health care stocks retreated –10% for the period on disappointing results from medical-service providers and equipment makers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The energy sector was the lone bright spot among sectors. The fund’s energy holdings returned 19%, outpacing the benchmark sector’s result. Companies focused on exploring for and producing oil and natural gas accounted for the bulk of the group’s positive performance.

The fund’s smaller remaining areas of investment posted negative returns, ranging from –9% for telecommunications services to –41% for consumer staples.

Choppy markets remind us to balance and diversify

It was a volatile first half of the fiscal year for the Mid-Cap Growth Fund as it experienced positive or negative returns of more than 6% in three of the six months (November and January had weak results; April brought a strong return). The broader stock market experienced similar convulsions.

A bumpy stretch like we have recently experienced could be labeled “Exhibit A” in the case for maintaining a balanced and diversified investment strategy. A portfolio that is balanced among different asset classes (such as stock, bond, and money market funds), and diversified within those groups, can dampen the overall impact when one area hits a rough patch. With its targeted exposure to mid-sized companies with growth potential, we believe the Mid-Cap Growth Fund can play an important role in such an investment strategy.

As I close this report to you, it’s my pleasure to introduce the fund’s new president, F. William McNabb III. Bill is a man of great character and integrity who is intimately familiar with all aspects of Vanguard—from how we serve our clients to how we invest for our clients.

Bill and I have worked together very closely for more than two decades. I’m thrilled that the fund’s board elected him president, effective March 1, and designated him my successor as chief executive officer, a role he will assume within a year, after an orderly transition. Bill and the rest of our team will serve you and our other clients extremely well in the years ahead.

Thank you for investing with Vanguard.

Sincerely,

John J. Brennan

Chairman and Chief Executive Officer

May 15, 2008

 

 

 

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Advisors’ Report

During the fiscal half-year ended April 30, 2008, Vanguard Mid-Cap Growth Fund returned –11.2%. 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 brief descriptions 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 period and of how their portfolio positioning reflects this assessment. These comments were prepared on May 19, 2008.

 

William Blair & Company, L.L.C.

Portfolio Managers:

Harvey H. Bundy, CFA, Principal

Robert C. Lanphier, Principal

David Ricci, CFA, Principal

 

Investment environment

Over the past six months, the U.S. stock market experienced its first major setback in five years. The mid-capitalization growth market finished the period down –8.4% (as measured by the Russell Midcap Growth Index). Although the market has been digesting the liquidity and credit crisis for the last nine months, the most recent few months have been even more challenging as worsening economic data points have continued to pop up on

 

 

 

 

 

 

 

 

 

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investors’ radar. Sluggish consumer spending and confidence, weak employment figures, and an unstable housing market have been the main contributors to falling stock prices. The worst of the returns came in early 2008 before a variety of fiscal and monetary stimuli by the Federal Reserve Board calmed investors’ fears. As of April 30, the market was actually in positive territory since these actions were taken.

Within the mid-cap growth benchmark, the energy sector (+11%) once again led all sectors as crude oil prices continued to climb. The materials (–1%) sector also outperformed the market’s other segments, while the typically defensive consumer staples (–6%) and utilities (–7%) sectors performed marginally better than average as well. Consumer discretionary turned in the worst result (–16%) as the weakening housing market continued to take its toll on the profits of consumer-oriented companies. Financials stocks (–13%) also performed poorly as problems plagued the financial system. Finally, the information technology sector (–13%) underperformed as investors began to question the health of corporate IT budgets going forward.

Portfolio’s shortfalls

The Mid-Cap Growth Fund’s performance relative to that of the benchmark was hindered by market headwinds and poor stock selection within certain sectors during the period. Within consumer staples, both Hansen Natural and Whole Foods Market grossly underperformed. The financials sector also dragged down relative performance as National Financial Partners announced weak earnings due to soft retail life-insurance sales. Life Time Fitness (a consumer discretionary holding) and Healthways (in health care) were also notable detractors.

Portfolio’s successes

Meanwhile, the energy sector was a large source of positive relative performance. The portfolio’s exposure to North American natural gas exploration companies was advantageous as natural gas prices rose even faster than crude oil prices. And Fastenal, within the industrials sector, continues to buck the trend as the company has posted solid earnings growth despite obvious U.S. economic headwinds.

From our perspective, the market environment over the last nine months has been a whipsaw for our style of investing. The onset of the credit crunch last fall pushed investors to more-durable growth companies. However, the market’s consensus view of an impending recession during the first part of 2008 then caused investors to question stocks with higher price/earnings ratios, those that had previously been seen as more-durable growers. This has been a big headwind for our investing approach. Going forward, we feel our portfolio has maintained its growth characteristics, but has shed considerable valuation risk. We will continue to build the portfolio from the bottom up and will look for opportunities across sectors in this volatile period.

 

 

 

 

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Chartwell Investment Partners, L.P.

 

Portfolio Managers:

Edward N. Antoian, CFA, CPA,

Managing Partner

Mark J. Cunneen, Managing Partner

and Senior Porfolio Manager

 

Investment environment

Several recurring concerns weighed on the market over the past six months: credit quality, consumer confidence, housing weakness, manufacturing activity, commodity prices, the weak U.S. dollar, and billions of dollars in losses and write-offs among the world’s largest financial institutions. The period ended strongly, with encouraging earnings reports from nonfinancial companies and further governmental attention to the stress on financial systems. We reiterate that the cloud of uncertainty remains, though it does not seem as ominous as it did in the last quarter of 2007 and first quarter of 2008.

 

Portfolio’s successes

Business service companies were our top performers, including FTI Consulting, whose outsourced services were in great demand during the economic downturn. In energy, Range Resources was a notable performer as it continued strong earnings’ growth and announced plans to effectively extract natural gas from a large area of Appalachia.

 

Portfolio’s shortfalls

Stock selection detracted from both the consumer services and basic industry sectors. In particular, Life Time Fitness offered cautious earnings guidance for 2008, responding to current economic conditions. We feel the company was overly conservative in that it targets higher-end consumers, who tend to be more resilient in times of economic uncertainty.

 

 

 

 

 

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Fund Profile

As of April 30, 2008

 

 

 

 

 

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Investment Focus

 

 

 

 

 

 

 

 

 

 

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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.

 

Fiscal-Year Total Returns (%): October 31, 1997–April 30, 2008

 

Average Annual Total Returns: Periods Ended March 31, 2008

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.

 

 

 

 

 

 

 

Note: See Financial Highlights table on page 16 for dividend and capital gains information.

 

 

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Financial Statements (unaudited)

 

Statement of Net Assets

As of April 30, 2008

 

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).

 

 

 

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REIT—Real Estate Investment Trust.

 

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Statement of Operations

 

 

 

 

 

 

 

 

 

 

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Statement of Changes in Net Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Financial Highlights

 

 

 

 

 

 

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

 

 

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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. 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) and for the period ended April 30, 2008, and has concluded that no provision for federal income tax is required in the fund’s 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.

 

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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.

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 six months ended April 30, 2008, 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 $190,000 (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 April 30, 2008, the fund had contributed capital of $104,000 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 six months ended April 30, 2008, these arrangements reduced the fund’s management and administrative expenses by $34,000 and custodian fees by $2,000. 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.

At April 30, 2008, the cost of investment securities for tax purposes was $1,209,054,000. Net unrealized appreciation of investment securities for tax purposes was $112,402,000, consisting of unrealized gains of $174,294,000 on securities that had risen in value since their purchase and $61,892,000 in unrealized losses on securities that had fallen in value since their purchase.

 

 

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At April 30, 2008, the aggregate settlement value of open futures contracts expiring in June 2008 and the related unrealized appreciation (depreciation) were:

 

 

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

F. During the six months ended April 30, 2008, the fund purchased $497,375,000 of investment securities and sold $345,062,000 of investment securities, other than temporary cash investments.

G. The market value of securities on loan to broker-dealers at April 30, 2008, was $24,614,000, for which the fund received cash collateral of $25,442,000.

H. Capital shares issued and redeemed were:

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

 

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.

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Trustees Approve Advisory Agreements

 

The board of trustees of Vanguard Mid-Cap Growth Fund has renewed the fund’s investment advisory agreements with Chartwell Investment Partners, L.P., and William Blair & Company, L.L.C. The board determined that the retention of the advisors was in the best interests of the fund and its shareholders.

The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the agreements. Rather, it was the totality of the circumstances that drove the board’s decision.

Nature, extent, and quality of services

The board considered the quality of the fund’s investment management over both the short and long term, and took into account the organizational depth and stability of each advisor. The board noted the following:

• Chartwell Investment Partners . Founded in 1997, Chartwell has expertise in small- and mid-cap equity management. The firm employs a fundamental bottom-up strategy seeking companies with superior growth potential at lower relative valuations. Chartwell has advised the fund since 2006.

• William Blair & Company. Founded in 1935, William Blair & Company is an independently owned full-service investment firm. The firm utilizes an investment process that relies on thorough, in-depth, fundamental analysis. Based on this process, the advisor invests in high-quality growth stocks of companies that the advisor believes have superior long-term earnings-growth potential, combined with a proven and sustainable competitive advantage as a result of market/brand position, technology position, or a unique asset base. The firm has advised the fund since 2006.

The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory agreements.

Investment performance

The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of a relevant benchmark and peer group. The board concluded that each advisor has carried out the fund’s investment strategy in disciplined fashion, and that performance results have allowed the fund to remain competitive versus its benchmark and its average peer fund. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.

Cost

The board concluded that the fund’s expense ratio was far below the average expense ratio charged by the fund’s peer group. The board noted that the fund’s advisory fee rate was also well below that of the peer-group average. Information about the fund’s expense ratio appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the advisory fee rate.

The board did not consider profitability of Chartwell and William Blair in determining whether to approve the advisory fees, because the firms are independent of Vanguard and the advisory fees are the result of arm’s-length negotiations.

 

 

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The benefit of economies of scale

The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each firm increase.

The board will consider whether to renew the advisory agreements again after a one-year period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that 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. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

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.

 

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Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

 

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

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

 

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P.O. Box 2600

Valley Forge, PA 19482-2600