Vanguard US government bond fund tracking error

Tracking error is one means of measuring active manager performance against an appropriate market index. Vanguard's U.S. government bond funds are actively managed, defined asset class funds. The funds include three nominal treasury bond funds, structured across three bond maturity levels: short, intermediate, and long term bonds; an inflation protected securities fund, investing in real return bonds, and a GNMA fund, which invests in full faith and credit government backed  mortgage securities.

Tracking error
Table 1. provides long term average tracking errors for Vanguard's U.S. government bond funds. Data extends from 1993 to present for the Short, Intermediate, and Long term Treasury fund investor shares (which began the first full year of operations in 1992). Admiral share class data covers the period from 2002 (the first full year of operations of the share class) to the present. Data extends from the first full year of operations (2001 investor shares/ 2006 admiral shares) to present for the Inflation Protected Securities fund. The funds' historical yearly tracking errors are larger than the yearly tracking errors of bond index funds, although, historically, over longer holding periods, the funds have provided tracking errors virtually matching their expense ratios. Detailed annual tracking error data, along with additional statistical measurement of fund returns, are provided in the footnote tables.

The relative performance of investor and admiral share classes can be best illustrated by viewing performance over a common holding period. The following table examines the average tracking error performance of each fund over the period beginning with the first full year of admiral share performance to the present. The lower expense admiral shares provide for lower tracking errors to benchmark performance.