Vanguard Explorer Fund Prospectus

More on the FundThis prospectus describes the primary risks you would face as a Fund shareholder. Itis important to keep in mind one of the main axioms of investing: generally, the higherthe risk of losing money, the higher the potential reward. The reverse, also, isgenerally true: the lower the risk, the lower the potential reward. As you consider aninvestment in any mutual fund, you should take into account your personal tolerancefor fluctuations in the securities markets. Look for thissymbol throughout theprospectus. It is used to mark detailed information about the more significant risksthat you would confront as a Fund shareholder. To highlight terms and conceptsimportant to mutual fund investors, we have provided Plain Talk explanations alongthe way. Reading the prospectus will help you decide whether the Fund is the rightinvestment for you. We suggest that you keep this prospectus for future reference.Share Class OverviewThe Fund offers two separate classes of shares: Investor Shares and Admiral Shares.Both share classes offered by the Fund have the same investment objective,strategies, and policies. However, different share classes have different expenses; asa result, their investment performances will differ.Plain Talk About Fund ExpensesAll mutual funds have operating expenses. These expenses, which are deductedfrom a fund’s gross income, are expressed as a percentage of the net assets ofthe fund. Assuming that operating expenses remain as stated in the Fees andExpenses section, Vanguard Explorer Fund’s expense ratios would be as follows:for Investor Shares, 0.51%, or 5.10 per 1,000 of average net assets; forAdmiral Shares, 0.34%, or 3.40 per 1,000 of average net assets. The averageexpense ratio for small-cap growth funds in 2012 was 1.47%, or 14.70 per 1,000 of average net assets (derived from data provided by Lipper, a ThomsonReuters Company, which reports on the mutual fund industry).Plain Talk About Costs of InvestingCosts are an important consideration in choosing a mutual fund. That is becauseyou, as a shareholder, pay a proportionate share of the costs of operating a fund,plus any transaction costs incurred when the fund buys or sells securities. Thesecosts can erode a substantial portion of the gross income or the capitalappreciation a fund achieves. Even seemingly small differences in expenses can,over time, have a dramatic effect on a fund’s performance.7

The following sections explain the primary investment strategies and policies that theFund uses in pursuit of its objective. The Fund’s board of trustees, which oversees theFund’s management, may change investment strategies or policies in the interest ofshareholders without a shareholder vote, unless those strategies or policies aredesignated as fundamental.Market ExposureThe Fund focuses on companies that are considered small-cap by the Fund’s advisors.Stocks of publicly traded companies and funds that invest in stocks are oftenclassified according to market value, or market capitalization. These classificationstypically include small-cap, mid-cap, and large-cap. It is important to understand that,for both companies and stock funds, market-capitalization ranges change over time.Also, interpretations of size vary, and there are no “official” definitions of small-, mid-,and large-cap, even among Vanguard fund advisors. The asset-weighted medianmarket capitalization of the Fund’s stock holdings as of October 31, 2013, was 3.2 billion.Small-cap stocks tend to have greater volatility than large-cap stocks because, amongother things, smaller companies often have fewer customers, financial resources, andproducts than larger firms. Such characteristics can make small-cap companies moresensitive to changing economic conditions. In addition, these companies typicallyprovide little or no dividend income.The Fund is subject to stock market risk, which is the chance that stock pricesoverall will decline. Stock markets tend to move in cycles, with periods ofrising prices and periods of falling prices.To illustrate the volatility of stock prices, the following table shows the best, worst,and average annual total returns for the U.S. stock market over various periods asmeasured by the Standard & Poor‘s 500 Index, a widely used barometer of U.S.market activity. (Total returns consist of dividend income plus change in market price.)Note that the returns shown do not include the costs of buying and selling stocks orother expenses that a real-world investment portfolio would incur.U.S. Stock Market Returns(1926–2013)1 YearBestWorstAverage854.2%5 Years28.6%10 Years19.9%20 Years17.8%–43.1–12.4–1.43.112.09.910.411.1

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2013.You can see, for example, that although the average annual return on common stocksfor all of the 5-year periods was 9.9%, average annual returns for individual 5-yearperiods ranged from –12.4% (from 1928 through 1932) to 28.6% (from 1995 through1999). These average annual returns reflect past performance of common stocks; youshould not regard them as an indication of future performance of either the stockmarket as a whole or the Fund in particular.Keep in mind that the Fund focuses on the stocks of smaller companies. Historically,small-cap stocks have been more volatile than—and at times have performed quitedifferently from—the large-cap stocks of the S&P 500 Index. This volatility is the resultof several factors, which may include (but is not limited to) less certain growth anddividend prospects for smaller companies, fewer financial reserves during adversemarket conditions, less access to captial funding, and generally greater sensitivity tochanges within the company.The Fund is subject to investment style risk, which is the chance that returnsfrom small-capitalization growth stocks will trail returns from the overall stockmarket. Historically, small-cap stocks have been more volatile in price thanthe large-cap stocks that dominate the overall market, and they often performquite differently. Small companies tend to have greater stock volatilitybecause, among other things, these companies are more sensitive to changingeconomic conditions.Plain Talk About Growth Funds and Value FundsGrowth investing and value investing are two styles employed by stock-fundmanagers. Growth funds generally focus on stocks of companies believed tohave above-average potential for growth in revenue, earnings, cash flow, or othersimilar criteria. These stocks typically have low dividend yields and above-averageprices in relation to measures such as earnings and book value. Value fundstypically emphasize stocks whose prices are below average in relation to thosemeasures; these stocks often have above-average dividend yields. Growth andvalue stocks have historically produced similar long-term returns, though eachstyle has periods when it outperforms the other.Security SelectionThe Fund uses multiple investment advisors. Each advisor independently selects andmaintains a portfolio of common stocks for the Fund.Each advisor employs active investment management methods, which means thatsecurities are bought and sold according to the advisor’s evaluations of companies9

and their financial prospects, the prices of the securities, and the stock market andthe economy in general. Each advisor will sell a security when, in the view of theadvisor, it is no longer as attractive as an alternative investment.Each advisor uses a different process to select securities for its portion of the Fund’sassets; however, each is committed to buying stocks of small companies that, in theadvisor‘s opinion, have strong growth potential.Wellington Management Company, LLP (Wellington Management), uses research andanalysis of individual companies to select stocks that the advisor feels haveexceptional growth potential relative to their valuations in the marketplace. WellingtonManagement considers each stock individually before purchase, and continuallymonitors developments at these companies for comparison with the advisor’sexpectations for growth. To help limit risk, the portfolio is broadly diversified both bynumber of stocks and by exposure to a range of industries.Granahan Investment Management, Inc. (Granahan), groups securities into threecategories as part of its selection process. The first category, “core growth,”emphasizes companies that have a well-known or established product or service and,as a result, have a proven record of growth and a strong market position. The secondcategory, “pioneers,” is made up of companies that offer unique products or services,technologies that may lead to new products, or expansion into new markets.Granahan judges pioneer stocks based on their estimated growth potential comparedwith market value. The third category, “special situation,” includes companies thatlack a record of strong growth but that, in Granahan’s view, are both undervalued inthe market and likely to grow in the next few years. Core growth stocks generallymake up 35% to 70% of the advisor’s share of Fund assets, with the other twocategories generally at 10% to 35% each.Kalmar Investment Advisers (Kalmar) uses original and in-depth fundamental researchto discover solid, well-managed growth companies that may not be appropriatelyunderstood by many growth investors and can therefore be purchased at undervaluedlevels. Kalmar intends to hold these stocks for the longer term. Companies that meetKalmar’s “growth-with-value” investment criteria have, among other things, stronggrowth potential, reasonable valuation, products of value, attractive or improvingbalance sheets and financial returns, and conservative accounting.Century Capital Management, LLC (Century Capital), employs a fundamental, bottomup investment approach that attempts to identify reasonably priced companies thatwill grow faster than the overall market. Independent research is a core tenet. Senioranalysts are expected to make at least 60 to 80 company visits per year, includingmeeting with the second or third tier of management. The ideal investment is areasonably valued, well-managed company with established products or services, ahigh return on equity, high recurring revenues, and improving margins.10

Chartwell Investment Partners, L.P. (Chartwell), invests in companies thatdemonstrate strong earnings-per-share growth and, the advisor believes, have strongcompetitive positions and products, while serving a meaningful customer base.Chartwell will invest opportunistically when stocks are attractively valued, yet it willconcentrate holdings in those companies it considers best positioned for rapidgrowth, all with an intermediate-term time horizon in mind.Stephens Investment Management Group, LLC (SIMG), employs a disciplined,bottom-up investment selection process that combines rigorous fundamental analysiswith quantitative screening in an effort to identify companies that exhibit potential forsuperior earnings growth that is unrecognized by the markets. SIMG has twoscreens—one for core growth stocks and one for catalyst stocks. Core growth stockshave strong growth franchises, recurring revenue, and above-average growth rates;catalyst stocks, in comparison, are experiencing change that could lead to acceleratedearnings growth. There are common elements in both types of stocks, such as higherforward growth rates, above-median price/earnings ratios, higher return on equity, andpositive earnings revisions.The Vanguard Group, Inc. (Vanguard), constructs a broadly diversified portfolio ofsmall-cap domestic growth stocks based on its assessment of the relative returnpotential of the underlying securities. Vanguard selects securities that it believes offera good balance between reasonable valuations and attractive earnings growthprospects relative to their small-cap domestic growth peers. Vanguard implements itsstock selection process through the use of quantitative models to evaluate all of thesecurities in the Fund’s benchmark, the Russell 2500 Growth Index, while maintaininga risk profile similar to that of the Index.The Fund is subject to manager risk, which is the chance that poor securityselection will cause the Fund to underperform relevant benchmarks or otherfunds with a similar investment objective. In addition, significant investment inthe information technology sector subjects the Fund to proportionately higherexposure to the risks of this sector.Other Investment Policies and RisksIn addition to investing in common stocks of small companies with growth potential,the Fund may make other kinds of investments to achieve its objective.Although the Fund typically does not make significant investments in foreignsecurities, it reserves the right to invest up to 25% of its assets in foreign securities,which may include depositary receipts. Foreign securities may be traded on U.S. orforeign markets. To the extent that it owns foreign securities, the Fund is subject tocountry risk and currency risk. Country risk is the chance that world events—such aspolitical upheaval, financial troubles, or natural disasters—will adversely affect the11

value of securities issued by companies in foreign countries. In addition, the prices offoreign stocks and the prices of U.S. stocks have, at times, moved in oppositedirections. Currency risk is the chance that the value of a foreign investment,measured in U.S. dollars, will decrease because of unfavorable changes in currencyexchange rates.The Fund may invest up to 15% of its net assets in restricted securities with limitedmarketability or in other illiquid securities.The Fund may invest, to a limited extent, in derivatives. Generally speaking, aderivative is a financial contract whose value is based on the value of a financial asset(such as a stock, a bond, or a currency), a physical asset (such as gold, oil, or wheat), amarket index (such as the S&P 500 Index), or a reference rate (such as LIBOR).Investments in derivatives may subject the Fund to risks different from, and possiblygreater than, those of investments directly in the underlying securities, assets, ormarket indexes. The Fund will not use derivatives for speculation or for the purpose ofleveraging (magnifying) investment returns.The Fund may enter into foreign currency exchange forward contracts, which are atype of derivative. A foreign currency exchange forward contract is an agreement tobuy or sell a country’s currency at a specific price on a specific date, usually 30, 60, or90 days in the future. In other words, the contract guarantees an exchange rate on agiven date. Advisors of funds that invest in foreign securities can use these contractsto guard against unfavorable changes in currency exchange rates. These contracts,however, would not prevent the Fund’s securities from falling in value as a result ofrisks other than unfavorable currency exchange movements.Plain Talk About DerivativesDerivatives can take many forms. Some forms of derivatives—such as exchangetraded futures and options on securities, commodities, or indexes—have beentrading on regulated exchanges for decades. These types of derivatives arestandardized contracts that can easily be bought and sold and whose marketvalues are determined and published daily. Non-exchange-traded derivatives (suchas certain swap agreements and foreign currency exchange forward contracts),on the other hand, tend to be more specialized or complex and may be harderto value.To facilitate cash flows to and from the Fund’s advisors, Vanguard typically invests asmall portion of the Fund’s assets in stock index futures, which are a type ofderivative, and/or shares of exchange-traded funds (ETFs), including ETF Sharesissued by Vanguard stock funds. These stock index futures and ETFs typically providereturns similar to those of common stocks. Vanguard may also purchase futures or12

ETFs when doing so will reduce the Fund’s transaction costs or add value because theinstruments are favorably priced. Vanguard receives no additional revenue from Fundassets invested in ETF Shares of other Vanguard funds. Fund assets invested in ETFShares are excluded when allocating to the Fund its share of the costs of Vanguardoperations.Cash ManagementThe Fund’s daily cash balance may be invested in one or more Vanguard CMT Funds,which are very low-cost money market funds. When investing in a Vanguard CMT Fund,the Fund bears its proportionate share of the at-cost expenses of the CMT Fund inwhich it invests.Temporary Investment MeasuresThe Fund may temporarily depart from its normal investment policies and strategieswhen an advisor believes that doing so is in the Fund’s best interest, so long as thealternative is consistent with the Fund’s investment objective. For instance, the Fundmay invest beyond its normal limits in derivatives or exchange-traded funds that areconsistent with the Fund’s objective when those instruments are more favorablypriced or provide needed liquidity, as might be the case if the Fund is transitioningassets from one advisor to another or receives large cash flows that it cannotprudently invest immediately.In addition, the Fund may take temporary defensive positions that are inconsistentwith its normal investment policies and strategies—for instance, by allocatingsubstantial assets to cash, commercial paper, or other less volatile instruments—inresponse to adverse or unusual market, economic, political, or other conditions. Indoing so, the Fund may succeed in avoiding losses but may otherwise fail to achieveits investment objective.Frequent Trading or Market-TimingBackground. Some investors try to profit from strategies involving frequent trading ofmutual fund shares, such as market-timing. For funds holding foreign securities,investors may try to take advantage of an anticipated difference between the price ofthe fund’s shares and price movements in overseas markets, a practice also known astime-zone arbitrage. Investors also may try to engage in frequent trading of fundsholding investments such as small-cap stocks and high-yield bonds. As money isshifted into and out of a fund by a shareholder engaging in frequent trading, the fundincurs costs for buying and selling securities, resulting in increased brokerage andadministrative costs. These costs are borne by all fund shareholders, including thelong-term investors who do not generate the costs. In addition, frequent trading mayinterfere with an advisor’s ability to efficiently manage the fund.13

Policies to address frequent trading. The Vanguard funds (other than money marketfunds and short-term bond funds, but including Vanguard Short-Term InflationProtected Securities Index Fund) do not knowingly accommodate frequent trading. Theboard of trustees of each Vanguard fund (other than money market funds and shortterm bond funds, but including Vanguard Short-Term Inflation-Protected SecuritiesIndex Fund) has adopted policies and procedures reasonably designed to detect anddiscourage frequent trading and, in some cases, to compensate the fund for the costsassociated with it. These policies and procedures do not apply to Vanguard ETF Shares because frequent trading in ETF Shares does not disrupt portfolio managementor otherwise harm fund shareholders. Although there is no assurance that Vanguardwill be able to detect or prevent frequent trading or market-timing in all circumstances,t

Vanguard Explorer Fund Prospectus The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. This prospectus contains financial data for the Fund thr