Investment Strategy
The Portfolio invests in three Vanguard® bond funds and one Vanguard short-term reserves account, resulting in an allocation of 75% of assets to investment-grade bonds and 25% of assets to short-term investments. The percentages of the Portfolio's assets allocated to each Fund are:
Vanguard Total Bond Market II Index Fund (34.5%)
Vanguard Total International Bond Index Fund (22.5%)
Vanguard Short-Term Inflation-Protected Securities Index Fund (18%)
Vanguard Short-Term Reserves Account (25%)
Through its ownership of Vanguard Total Bond Market II Index Fund, the Portfolio indirectly holds a broadly diversified collection of securities that, in the aggregate, approximates the Bloomberg Barclays U.S. Aggregate Float Adjusted Index in terms of key risk factors and other characteristics. The Index measures a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage backed securities and asset-backed securities—all with maturities of more than 1 year. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. Through its ownership of Vanguard Total International Bond Index Fund, the Portfolio indirectly holds government, government agency, corporate, and securitized non-U.S. investment-grade fixed income investments, all issued in currencies other than the U.S. dollar and with maturities of more than 1 year. To minimize the currency risk associated with investment in bonds denominated in currencies other than the U.S. dollar, the fund attempts to hedge its currency exposures.
Through its investment in Vanguard Short-Term Inflation-Protected Securities Index Fund, the Portfolio indirectly holds inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years. The Fund maintains a dollar-weighted average maturity consistent with that of its target index, which generally does not exceed three years.
Through its investment in Vanguard Short-Term Reserves Account, the Portfolio indirectly invests in traditional and separate funding agreements issued by one or more insurance companies, synthetic investment contracts, and shares of Vanguard Federal Money Market Fund. Funding agreements are interest-bearing contracts that are structured to preserve principal and accumulate interest earnings over the life of the investment. Traditional funding agreements may pay interest at a fixed minimum rate and have fixed maturity dates that normally range from 2 to 5 years. The likelihood of timely payment of principal and interest under a traditional funding agreement is a direct reflection of the claims-paying ability of the issuing insurer. Under separate account funding agreements, the insurer holds a portfolio of fixed income securities for the benefit of the funding agreements backed by the separate account and returns will vary based on the performance of the assets in the separate account. SICs are arrangements in which the Trust Fund, not the insurer, owns a fixed income security or portfolio of securities and an insurance company or other financial institution provides a benefit-responsive guarantee.Vanguard Federal Money Market Fund invests in high-quality, short-term money market instruments issued by the U.S. government and its agencies and instrumentalities. For more information about the Vanguard Short-Term Reserves Account, please see the Vanguard Interest Accumulation Portfolio profile.
Note: Vanguard Short-Term Reserves Account's investment in Vanguard Federal Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other government agency. Although the Fund seeks to preserve the value of the investment at $1 per share, it is possible that Vanguard Short-Term Reserves Account may lose money by investing in the Fund.
Investment Risks
Because it invests mainly in bond funds, the Portfolio primarily is subject to low to moderate levels of interest rate risk, credit risk, income risk, call risk, and prepayment risk. The Portfolio also has a moderate level of income fluctuation risk, low to moderate levels of currency hedging risk, country/regional risk, and nondiversification risk, and low levels of manager risk, index sampling risk, and derivatives risk.
