The Fund’s top contributor during the fiscal year was Henry Schein. The company hired a new Chief Executive Officer and implemented a strategic cost optimization plan that led to multiple positive earnings revisions. Quanta Services was the Fund’s second-best performing stock during the period. Its earnings were driven by large projects related to grid and utility infrastructure, and the company had substantial earnings revisions during the fiscal year.

The Fund’s main detractors were Fair Isaac (FICO) and Sallie Mae. FICO was impacted by political scrutiny that called into question its pricing power. Sallie Mae was impacted by concerns that artificial intelligence could weigh on employment prospects for recent graduates, which investors expected to lead to higher net charge-offs and delinquencies.

The Fund’s top contributor during the fiscal year was Henry Schein. The company hired a new Chief Executive Officer and implemented a strategic cost optimization plan that led to multiple positive earnings revisions. Quanta Services was the Fund’s second-best performing stock during the period. Its earnings were driven by large projects related to grid and utility infrastructure, and the company had substantial earnings revisions during the fiscal year.

The Fund’s main detractors were Fair Isaac (FICO) and Sallie Mae. FICO was impacted by political scrutiny that called into question its pricing power. Sallie Mae was impacted by concerns that artificial intelligence could weigh on employment prospects for recent graduates, which investors expected to lead to higher net charge-offs and delinquencies.

The Fund’s top contributor during the fiscal year was Henry Schein. The company hired a new Chief Executive Officer and implemented a strategic cost optimization plan that led to multiple positive earnings revisions. Quanta Services was the Fund’s second-best performing stock during the period. Its earnings were driven by large projects related to grid and utility infrastructure, and the company had substantial earnings revisions during the fiscal year.

The Fund’s main detractors were Fair Isaac (FICO) and Sallie Mae. FICO was impacted by political scrutiny that called into question its pricing power. Sallie Mae was impacted by concerns that artificial intelligence could weigh on employment prospects for recent graduates, which investors expected to lead to higher net charge-offs and delinquencies.

The Fund’s positive returns were largely driven by stock selection in the Information Technology sector. Industrials and Communication Services holdings also made meaningful positive contributions. The Consumer Staples and Health Care sectors were the only sectors with negative stock selection of note.

From a stock selection perspective, Lumentum Holdings was the top contributor; the optical components supplier reported strong revenue growth driven by accelerating demand for data-center optical products used in AI infrastructure. Dell Technologies was the second largest contributor; the computer hardware manufacturer reported strong revenue growth supported by record AI server demand.

Due to threshold limits, the Fund held a significant underweight position in mega-cap technology stocks, which was a headwind to relative performance. Out of Fund holdings, Atlassian had the biggest negative impact; although its quarterly results exceeded expectations, shares fell sharply after management pointed to slower near-term cloud growth and an expected deceleration in Data Center revenue.

Allocation effect was a drag on relative performance, primarily due to overweight positions in the Consumer Staples and Financials sectors. The Fund’s active weight constraints helped reduce exposure to market volatility and sentiment shifts.

The Fund’s positive returns were largely driven by stock selection in the Information Technology sector. Industrials and Communication Services holdings also made meaningful positive contributions. The Consumer Staples and Health Care sectors were the only sectors with negative stock selection of note.

From a stock selection perspective, Lumentum Holdings was the top contributor; the optical components supplier reported strong revenue growth driven by accelerating demand for data-center optical products used in AI infrastructure. Dell Technologies was the second largest contributor; the computer hardware manufacturer reported strong revenue growth supported by record AI server demand.

Due to threshold limits, the Fund held a significant underweight position in mega-cap technology stocks, which was a headwind to relative performance. Out of Fund holdings, Atlassian had the biggest negative impact; although its quarterly results exceeded expectations, shares fell sharply after management pointed to slower near-term cloud growth and an expected deceleration in Data Center revenue.

Allocation effect was a drag on relative performance, primarily due to overweight positions in the Consumer Staples and Financials sectors. The Fund’s active weight constraints helped reduce exposure to market volatility and sentiment shifts.

The Fund’s positive returns were largely driven by stock selection in the Information Technology sector. Industrials and Communication Services holdings also made meaningful positive contributions. The Consumer Staples and Health Care sectors were the only sectors with negative stock selection of note.

From a stock selection perspective, Lumentum Holdings was the top contributor; the optical components supplier reported strong revenue growth driven by accelerating demand for data-center optical products used in AI infrastructure. Dell Technologies was the second largest contributor; the computer hardware manufacturer reported strong revenue growth supported by record AI server demand.

Due to threshold limits, the Fund held a significant underweight position in mega-cap technology stocks, which was a headwind to relative performance. Out of Fund holdings, Atlassian had the biggest negative impact; although its quarterly results exceeded expectations, shares fell sharply after management pointed to slower near-term cloud growth and an expected deceleration in Data Center revenue.

Allocation effect was a drag on relative performance, primarily due to overweight positions in the Consumer Staples and Financials sectors. The Fund’s active weight constraints helped reduce exposure to market volatility and sentiment shifts.

The greatest detractor was stock selection in Industrials, with Trex Company as the weakest name. Security selection within Financials also detracted, led by Robinhood Markets. Selection and an overweight position in Consumer Discretionary, an underperforming sector, weighed on performance, with AutoZone as the largest drag, as did selection and an overweight position in Utilities, where CMS Energy was the largest detractor. Selection within Health Care (IQVIA Holdings), Materials (Vulcan Materials) and Energy (Baker Hughes) also detracted.

The greatest detractor was stock selection in Industrials, with Trex Company as the weakest name. Security selection within Financials also detracted, led by Robinhood Markets. Selection and an overweight position in Consumer Discretionary, an underperforming sector, weighed on performance, with AutoZone as the largest drag, as did selection and an overweight position in Utilities, where CMS Energy was the largest detractor. Selection within Health Care (IQVIA Holdings), Materials (Vulcan Materials) and Energy (Baker Hughes) also detracted.

The greatest detractor was stock selection in Industrials, with Trex Company as the weakest name. Security selection within Financials also detracted, led by Robinhood Markets. Selection and an overweight position in Consumer Discretionary, an underperforming sector, weighed on performance, with AutoZone as the largest drag, as did selection and an overweight position in Utilities, where CMS Energy was the largest detractor. Selection within Health Care (IQVIA Holdings), Materials (Vulcan Materials) and Energy (Baker Hughes) also detracted.

At the sector level, Industrials and Financials remained the Fund’s largest sectors and were overweight relative to the Russell 2000 Index. Stock selection in Industrials was consistently strong, and sector allocation benefited at different points from underweights to Consumer Discretionary and Energy. Health Care led the Fund in late 2025 as several biotech holdings rebounded, while Energy declined amid easing oil prices. Information Technology led during the spring and early summer of 2026, as AI-related demand broadened across more businesses. Detractors included the Fund’s Communication Services holdings, which retreated in the first quarter of 2026 after a long multi-year advance, and its Energy holdings in the second quarter of 2026, as falling oil prices weighed on more leveraged small-cap oil and oil-services companies.

Stock selection was an important source of gains. In late 2025, Rigel Pharmaceuticals rose after raising its revenue outlook and reporting positive clinical-trial results, Hecla Mining benefited from stronger gold and silver prices, and GeneDx advanced as earnings repeatedly exceeded estimates. In early 2026, Advanced Energy Industries benefited from demand in semiconductor and data-center markets, Comfort Systems gained from technology-related mechanical and electrical projects, and Kulicke & Soffa advanced on semiconductor assembly demand. Gains strengthened in the summer of 2026, particularly among holdings connected to AI infrastructure. Credo Technology rose on accelerating demand for AI networking products and stronger-than-expected earnings and guidance. Bloom Energy benefited from demand for reliable power for AI data centers, while Sterling Infrastructure advanced on a robust project backlog and continued spending on data centers and other infrastructure. Kulicke & Soffa and Sanmina also posted strong gains, supported by semiconductor demand and AI-infrastructure-related orders and earnings.

At the sector level, Industrials and Financials remained the Fund’s largest sectors and were overweight relative to the Russell 2000 Index. Stock selection in Industrials was consistently strong, and sector allocation benefited at different points from underweights to Consumer Discretionary and Energy. Health Care led the Fund in late 2025 as several biotech holdings rebounded, while Energy declined amid easing oil prices. Information Technology led during the spring and early summer of 2026, as AI-related demand broadened across more businesses. Detractors included the Fund’s Communication Services holdings, which retreated in the first quarter of 2026 after a long multi-year advance, and its Energy holdings in the second quarter of 2026, as falling oil prices weighed on more leveraged small-cap oil and oil-services companies.

Stock selection was an important source of gains. In late 2025, Rigel Pharmaceuticals rose after raising its revenue outlook and reporting positive clinical-trial results, Hecla Mining benefited from stronger gold and silver prices, and GeneDx advanced as earnings repeatedly exceeded estimates. In early 2026, Advanced Energy Industries benefited from demand in semiconductor and data-center markets, Comfort Systems gained from technology-related mechanical and electrical projects, and Kulicke & Soffa advanced on semiconductor assembly demand. Gains strengthened in the summer of 2026, particularly among holdings connected to AI infrastructure. Credo Technology rose on accelerating demand for AI networking products and stronger-than-expected earnings and guidance. Bloom Energy benefited from demand for reliable power for AI data centers, while Sterling Infrastructure advanced on a robust project backlog and continued spending on data centers and other infrastructure. Kulicke & Soffa and Sanmina also posted strong gains, supported by semiconductor demand and AI-infrastructure-related orders and earnings.

At the sector level, Industrials and Financials remained the Fund’s largest sectors and were overweight relative to the Russell 2000 Index. Stock selection in Industrials was consistently strong, and sector allocation benefited at different points from underweights to Consumer Discretionary and Energy. Health Care led the Fund in late 2025 as several biotech holdings rebounded, while Energy declined amid easing oil prices. Information Technology led during the spring and early summer of 2026, as AI-related demand broadened across more businesses. Detractors included the Fund’s Communication Services holdings, which retreated in the first quarter of 2026 after a long multi-year advance, and its Energy holdings in the second quarter of 2026, as falling oil prices weighed on more leveraged small-cap oil and oil-services companies.

Stock selection was an important source of gains. In late 2025, Rigel Pharmaceuticals rose after raising its revenue outlook and reporting positive clinical-trial results, Hecla Mining benefited from stronger gold and silver prices, and GeneDx advanced as earnings repeatedly exceeded estimates. In early 2026, Advanced Energy Industries benefited from demand in semiconductor and data-center markets, Comfort Systems gained from technology-related mechanical and electrical projects, and Kulicke & Soffa advanced on semiconductor assembly demand. Gains strengthened in the summer of 2026, particularly among holdings connected to AI infrastructure. Credo Technology rose on accelerating demand for AI networking products and stronger-than-expected earnings and guidance. Bloom Energy benefited from demand for reliable power for AI data centers, while Sterling Infrastructure advanced on a robust project backlog and continued spending on data centers and other infrastructure. Kulicke & Soffa and Sanmina also posted strong gains, supported by semiconductor demand and AI-infrastructure-related orders and earnings.

From a regional perspective, Developed Europe was the largest positive contributor to relative performance, led by holdings in Spain and Italy. Emerging Asia was the only region with negative stock selection, despite holding the Fund’s top three individual contributors, led by South Korean memory-chip maker SK hynix. China posted the worst relative return, with technology hardware maker Xiaomi and jewelry manufacturer Chow Tai Fook the largest detractors. Allocation effect was negative, largely due to the drag from a small cash position in a strong market, partly offset by an underweight to India and an overweight to South Korea.

From a sector view, Financials had the strongest outperformance, led by Spanish banks CaixaBank and Banco Santander. Health Care was the next largest contributor, with Hansoh Pharmaceutical and Ipsen generating strong relative returns. Information Technology was the largest detracting sector because of Xiaomi, although it also held the Fund’s top contributors: SK hynix, Asia Vital Components and Taiwan Semiconductor. Not holding Samsung Electronics and ASML was a meaningful drag on performance.

Industrials was the second largest detracting sector, due mainly to Compagnie de Saint-Gobain and Hoshizaki. Sector allocation was slightly negative, as the benefit of an underweight to Communication Services was offset by the drag from cash.

From a regional perspective, Developed Europe was the largest positive contributor to relative performance, led by holdings in Spain and Italy. Emerging Asia was the only region with negative stock selection, despite holding the Fund’s top three individual contributors, led by South Korean memory-chip maker SK hynix. China posted the worst relative return, with technology hardware maker Xiaomi and jewelry manufacturer Chow Tai Fook the largest detractors. Allocation effect was negative, largely due to the drag from a small cash position in a strong market, partly offset by an underweight to India and an overweight to South Korea.

From a sector view, Financials had the strongest outperformance, led by Spanish banks CaixaBank and Banco Santander. Health Care was the next largest contributor, with Hansoh Pharmaceutical and Ipsen generating strong relative returns. Information Technology was the largest detracting sector because of Xiaomi, although it also held the Fund’s top contributors: SK hynix, Asia Vital Components and Taiwan Semiconductor. Not holding Samsung Electronics and ASML was a meaningful drag on performance.

Industrials was the second largest detracting sector, due mainly to Compagnie de Saint-Gobain and Hoshizaki. Sector allocation was slightly negative, as the benefit of an underweight to Communication Services was offset by the drag from cash.

From a regional perspective, Developed Europe was the largest positive contributor to relative performance, led by holdings in Spain and Italy. Emerging Asia was the only region with negative stock selection, despite holding the Fund’s top three individual contributors, led by South Korean memory-chip maker SK hynix. China posted the worst relative return, with technology hardware maker Xiaomi and jewelry manufacturer Chow Tai Fook the largest detractors. Allocation effect was negative, largely due to the drag from a small cash position in a strong market, partly offset by an underweight to India and an overweight to South Korea.

From a sector view, Financials had the strongest outperformance, led by Spanish banks CaixaBank and Banco Santander. Health Care was the next largest contributor, with Hansoh Pharmaceutical and Ipsen generating strong relative returns. Information Technology was the largest detracting sector because of Xiaomi, although it also held the Fund’s top contributors: SK hynix, Asia Vital Components and Taiwan Semiconductor. Not holding Samsung Electronics and ASML was a meaningful drag on performance.

Industrials was the second largest detracting sector, due mainly to Compagnie de Saint-Gobain and Hoshizaki. Sector allocation was slightly negative, as the benefit of an underweight to Communication Services was offset by the drag from cash.

The Fund’s holdings benefited from improving fundamentals, attractive valuations and greater clarity around pharmaceutical pricing and tariff policy during the fiscal year, as investor confidence recovered following an extended period of policy, reimbursement and utilization-related uncertainty. However, results varied significantly across the Fund’s sub-industries.

The Fund’s pharmaceutical and biotechnology holdings were among its strongest, supported by positive clinical developments, improving capital markets, increased merger and acquisition activity and continued innovation in areas such as oncology, obesity and immunology. The Fund’s medical device and equipment holdings lagged, as tariff-related cost pressures and limited pricing flexibility weighed on margins.

The Fund’s holdings benefited from improving fundamentals, attractive valuations and greater clarity around pharmaceutical pricing and tariff policy during the fiscal year, as investor confidence recovered following an extended period of policy, reimbursement and utilization-related uncertainty. However, results varied significantly across the Fund’s sub-industries.

The Fund’s pharmaceutical and biotechnology holdings were among its strongest, supported by positive clinical developments, improving capital markets, increased merger and acquisition activity and continued innovation in areas such as oncology, obesity and immunology. The Fund’s medical device and equipment holdings lagged, as tariff-related cost pressures and limited pricing flexibility weighed on margins.

The Fund’s holdings benefited from improving fundamentals, attractive valuations and greater clarity around pharmaceutical pricing and tariff policy during the fiscal year, as investor confidence recovered following an extended period of policy, reimbursement and utilization-related uncertainty. However, results varied significantly across the Fund’s sub-industries.

The Fund’s pharmaceutical and biotechnology holdings were among its strongest, supported by positive clinical developments, improving capital markets, increased merger and acquisition activity and continued innovation in areas such as oncology, obesity and immunology. The Fund’s medical device and equipment holdings lagged, as tariff-related cost pressures and limited pricing flexibility weighed on margins.

The Fund benefited from continued investment in artificial intelligence (AI) during the fiscal year, as the largest technology companies continued to spend heavily on data centers and computing infrastructure. The Fund’s semiconductor holdings remained a major beneficiary, and strength broadened to its holdings in semiconductor equipment, networking equipment and other areas tied to the AI buildout, which were among the Fund’s best performers.

The Fund’s Software and IT Services holdings were notable exceptions and were among its weaker areas for much of the period, as investors became increasingly concerned that advances in AI could disrupt the traditional business models of companies in those industries. Overall, the Fund’s holdings that supply or enable AI infrastructure generally performed well, while those viewed as potentially vulnerable to AI disruption faced a much more challenging environment.

The Fund benefited from continued investment in artificial intelligence (AI) during the fiscal year, as the largest technology companies continued to spend heavily on data centers and computing infrastructure. The Fund’s semiconductor holdings remained a major beneficiary, and strength broadened to its holdings in semiconductor equipment, networking equipment and other areas tied to the AI buildout, which were among the Fund’s best performers.

The Fund’s Software and IT Services holdings were notable exceptions and were among its weaker areas for much of the period, as investors became increasingly concerned that advances in AI could disrupt the traditional business models of companies in those industries. Overall, the Fund’s holdings that supply or enable AI infrastructure generally performed well, while those viewed as potentially vulnerable to AI disruption faced a much more challenging environment.

The Fund benefited from continued investment in artificial intelligence (AI) during the fiscal year, as the largest technology companies continued to spend heavily on data centers and computing infrastructure. The Fund’s semiconductor holdings remained a major beneficiary, and strength broadened to its holdings in semiconductor equipment, networking equipment and other areas tied to the AI buildout, which were among the Fund’s best performers.

The Fund’s Software and IT Services holdings were notable exceptions and were among its weaker areas for much of the period, as investors became increasingly concerned that advances in AI could disrupt the traditional business models of companies in those industries. Overall, the Fund’s holdings that supply or enable AI infrastructure generally performed well, while those viewed as potentially vulnerable to AI disruption faced a much more challenging environment.

During the period, the Fund’s performance was largely driven by its concentration in the Intermediate-Term debt sector, which trailed the Short-Term debt sector, but outperformed the Long-Term debt sector. The Fund sold its position in the Long-Term debt sector and added a position in the Short-Term debt sector, which helped performance, as the Short-Term debt sector outperformed both the Intermediate- and Long-Term debt sectors.

From a security-selection standpoint, the Fund’s use of the Vanguard Intermediate-Term Bond Index Fund hurt performance, as it trailed its active counterparts.