Certified Annual Shareholder Report for Management Investment Companies (n-csr)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number : 811-07803

Name of Registrant: Vanguard Scottsdale Funds
Address of Registrant:
P.O. Box 2600
Valley Forge, PA 19482

Name and address of agent for service:
Heidi Stam, Esquire
P.O. Box 876
Valley Forge, PA 19482

Registrant’s telephone number, including area code: (610) 669-1000

Date of fiscal year end: August 31

Date of reporting period: September 1, 2012 – August 31, 2013

Item 1: Reports to Shareholders

Annual Report | August 31, 2013

Vanguard Explorer Value ^™ Fund

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

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 front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: The ship's wheel represents leadership and guidance, essential qualities in navigating difficult seas.
This one is a replica based on an 18th-century British vessel. The HMS Vanguard, another ship of that era, served as the flagship for Admiral Horatio Nelson when he defeated a French fleet at the Battle of the Nile.

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Chairman’s Letter

Dear Shareholder,

Vanguard Explorer Value Fund returned 29.19% for the 12 months ended August 31, 2013, as smaller-capitalization stocks continued to outperform large-cap stocks.

The fund’s return led that of its benchmark index, the Russell 2500 Value Index, by more than four percentage points. The fund also beat the average return for small-cap value funds.

All ten of Explorer Value’s industry sectors recorded double-digit gains for the fiscal year. The fund’s three advisors chose especially strong performers in the financial, telecommunication services, and consumer staples sectors. Only the fund’s information technology and consumer discretionary stocks lagged their counterpart sectors in the benchmark.

If you hold shares of the fund in a taxable account, you may wish to review the information on the fund’s after-tax returns that appears later in this report. Please note that as of August 31, 2013, the fund had realized short-term capital gains of $0.50 per share and long-term gains of $1.06, together accounting for about 5% of fund assets. Gains are distributed in December.

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Stocks posted robust results despite setbacks at the finish
U.S. stocks advanced about 20% during the 12 months despite slipping in June and August. Through most of the fiscal year, stocks surged as the economy continued to show modest growth and investors appeared more receptive to risk.

Much of the market’s recent weakness stemmed from fear that the Federal Reserve would begin scaling back its stimulative bond-buying program. Heightened strife in the Middle East also contributed to anxiety in the global markets.

International stocks in aggregate finished with a return of about 13%. Developed markets in the Pacific region and Europe posted results closer to those of the United States. Returns for emerging-market stocks overall were virtually flat as economic growth slowed in China and Brazil.

Although global economic worries and tensions over conflicts abroad have unsettled markets, Jonathan Lemco, a senior sovereign-debt analyst in Vanguard’s Taxable Credit Research Group, pointed out that investors can still manage risks amid international instability. “Vanguard believes a diversified portfolio is the best way to spread the risk of geopolitical uncertainty,” he said.

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Bond returns turned negative amid worry about the Fed’s next move
Bonds, which maintained slightly positive returns through the first eight months of the period, reversed course in May and then continued to retreat as investors anticipated reductions in the Fed’s bond-buying program.

The broad U.S. taxable bond market returned –2.47% for the 12 months. The yield of the 10-year Treasury note finished at 2.76%, up from 1.56% at the end of August 2012. (Bond yields and prices move in opposite directions.) Municipal bonds suffered more, returning –3.70% for the fiscal year.

Returns for money market funds and savings accounts were minuscule as the Fed kept its target for short-term interest rates at 0%–0.25%.

Advisors’ picks in eight sectors helped the fund top the benchmark
The Explorer Value Fund posted its third straight double-digit gain for a fiscal year as small-cap stocks once again outperformed large-caps in the U.S. stock market. All ten sectors represented in the fund rose at least 11%, with several advancing more than 50%.

The fund’s three advisors, Frontier Capital Management, Cardinal Capital Management, and Sterling Capital Management, employ distinct but complementary methods in identifying

The fund expense ratio shown is from the prospectus dated April 23, 2013, and represents estimated costs for the current fiscal year. For the fiscal year ended August 31, 2013, the fund’s expense ratio was 0.60%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2012.

Peer group: Small-Cap Value Funds.

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undervalued companies that they believe can outperform the market. Their efforts were largely successful, as the fund’s holdings in eight of ten sectors outdistanced the corresponding segments in the Russell 2500 Value Index.

The advisors’ stock selections had the greatest impact in the financial sector, the fund’s largest. These holdings rose more than 32% thanks to strong performances from banks and consumer finance stocks, which benefited from increasing loan business.

The next most significant contributors to the fund’s outperformance were its health care stocks. Although this group made up only about 5% of the fund, the advisors’ selections advanced 51% as companies providing equipment and services for health care and the life sciences recorded strong gains.

The fund’s two smallest sectors actually posted the highest total returns. A handful of holdings in the telecommunications arena, making up only 1% of the fund, soared 92%, providing an outsized boost. Consumer staples stocks, which constituted less than 2% of fund assets, rose an impressive 63%. Together, these two tiny corners of the small-cap value market provided more than one-tenth of the fund’s performance advantage over the benchmark.

The figures shown represent past performance, which is not a guarantee of future results. (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 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.

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Investment insight

Growth stocks versus value stocks: A case for both

Growth and value stocks typically take turns outperforming each other. The chart

here shows how they have switched off during the past 20 years in leading or

lagging a broader market average.

These two styles of investing are typically considered complementary—when growth

is performing well, value typically isn’t, and vice versa. Generally speaking, growth

stocks represent companies that are expected to expand their businesses at a rapid

pace, while value stocks typically represent more established, slower-growing

companies.

Which does better in the long run? Neither. Vanguard research has shown that there

is no significant long-term difference in the risk/reward characteristics of growth and

value stocks. But, because their performance can vary considerably over shorter time

periods, a truly diversified portfolio should have exposure to both.

Rolling 12-month return differences, 1993–2012

Sources: Vanguard and Russell Investments.

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Only two sectors failed to beat their counterparts in the Russell 2500 Value Index: information technology and consumer discretionary. Still, gains in both industries were healthy, at 21% and 36% respectively.

For more about the advisors’ strategies and the fund’s positioning during the 12 months, see the Advisors’ Report that follows this letter.

The fund’s admirable performance needs to be kept in perspective
Since its launch on March 30, 2010, the Explorer Value Fund has done well, outperforming its benchmark index and peer-group average over the full period. At the same time, the small-cap stocks that the fund focuses on have outgained larger-company stocks in the broad market.

It’s very important to keep in mind that small-cap stocks can just as easily underperform large-caps in any given 12-month period. And in fact, they did so for some 12-month periods within the past three years.

Over longer periods, the performance of these two segments of the U.S. market tends to converge, as you can see in the Market Barometer table on page 3. The difference in total return between large-cap stocks (represented by the Russell 1000 Index) and small-cap stocks (the Russell 2000 Index) is noticeable over the past 12 months. But the gap is narrower when returns are averaged over the past three years and is even smaller over five years.

Experienced long-term investors know that all segments of the stock market take turns in the lead, and the market as a whole goes through ups and downs, sometimes lasting for extensive periods. Explorer Value’s outstanding record since its inception should not be taken as an indicator of its future performance, whether short-term or long-term. Stock investors, particularly those exploring the relatively volatile small-cap world, should expect stormy seas and setbacks from time to time.

But over the long term, investing in small-cap value stocks can give you the chance to profit from the resourcefulness of small companies. That’s why we believe Vanguard Explorer Value Fund can play a valuable role in an otherwise diversified and well-balanced portfolio.

The benefit of combining low costs with diversity of thought
Investors sometimes ask why Vanguard uses a multi-manager approach for many of its actively managed equity funds. Just as we recommend diversification within and across asset classes for an investor’s overall portfolio, we think significant benefits can accrue from using multiple advisory firms for a single fund: diversity of investment process and style, thought, and holdings.

All of these elements can lead to less risk and better results. Because not all investment managers invest the same way, their returns relative to the benchmark don’t move in lockstep.

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As with many other investment topics, however, there are some misconceptions about the benefits of using a multi-manager approach. For example, it is often suggested that the best ideas of the advisors are diluted when they are combined in one portfolio. Recent Vanguard research has found otherwise.

Conventional wisdom also suggests that multi-manager funds tend to be expensive. At Vanguard, this is not the case, because low costs are a hallmark of all our offerings. And Vanguard research indicates that low costs can contribute greatly to investing success, helping investors keep more of a portfolio’s return. (You can read more in Analyzing Multi-Manager Funds: Does Management Structure Affect Performance? at vanguard.com/research.)

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
September 13, 2013

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Advisors’ Report

For the fiscal year ended August 31, 2013, Vanguard Explorer Value Fund returned 29.19%. Your fund is managed by three independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.

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 year and of how their portfolio positioning reflects this assessment. (Please note that the Frontier and Sterling discussions refer to industry sectors as defined by Russell classifications, rather than by the Global Industry Classification Standard used elsewhere in this report.) These comments were prepared on September 17, 2013.

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Cardinal Capital Management, L.L.C.

Portfolio Managers:

Amy K. Minella, Managing Partner Robert B. Kirkpatrick, CFA, Managing Partner Eugene Fox III, Managing Partner

The strong performance of domestic equities during the fiscal year was consistent with a more optimistic view of the economy and of U.S. growth prospects. Although government sequestration and higher taxes have been felt, the salutary effects of the housing recovery, combined with the “wealth effect” produced by higher stock prices, have led to higher consumer spending.

Long-term interest rates rose sharply after the Federal Reserve indicated that it would begin tapering its asset purchases if the economy continued to improve. The question is whether this major increase in interest rates will derail the modest economic recovery that is underway, given that overseas economies remain weak, as Europe has been in recession and growth has slowed in China and other emerging markets.

Our portfolio’s relative performance benefited from stock selection in the consumer staples and financial sectors. The stock of Herbalife, a global nutrition company, climbed on strong results and the expectation that the company would accelerate its share-repurchase program, although a change in auditor delayed that.

Shares of CapitalSource, a California-based commercial lender, rose sharply on the announcement of its merger with PacWest Bancorp.

Detractors from relative performance included stock selection in the information technology and industrial sectors and the drag that came from holding residual cash in a strong market. Shares of IAC/InterActiveCorp, a leading media and Internet firm, declined modestly as investors questioned whether the company’s profitability and strong growth rates would suffer from the migration to mobile devices. Atlas Air Worldwide, an international air-freight logistics provider, lagged as the company lowered guidance in expectation of a less-profitable peak season.

Our investment outlook remains cautiously optimistic: cautious because of Europe’s problems, political headwinds in the United States, and a continued slowdown in government spending at all levels; optimistic because of several positive influences that should support the U.S. stock market, including easy monetary policy, improvement in the housing market and its related wealth effect, and tame inflation. Further, companies are holding record levels of cash, and a rebound in mergers and acquisitions should support corporate earnings growth. As business confidence and credit markets have continued to improve, the corporate managements of companies in our portfolio have been actively employing their free cash flow and debt capacity to make acquisitions and share repurchases.

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Sterling Capital Management LLC

Portfolio Managers:

Eduardo A. Brea, CFA, Managing Director Timothy P. Beyer, CFA, Managing Director

The capital markets are adjusting to the eventual tapering of the Federal Reserve’s purchases of U.S. Treasury and agency obligations. Treasuries and other yield-oriented bond and stock investments, the “darlings of the market” over the past few years, began to recede as intermediate interest rates rose. Our underweighting of these richly valued, yield-oriented sectors of the market enhanced our results relative to the benchmark.

Our relative performance also benefited from both stock selection and sector selection. Financial services provided the lion’s share of the outperformance, led by E*TRADE Financial, Lincoln National, and Investment Technology Group. We also witnessed a sharp recovery in Lexmark International and Omnicare, while Life Technologies announced that it was being acquired by Thermo Fisher Scientific at a significant premium to our cost.

We did face a sharp decline in EarthLink, a long-time portfolio holding. We have become less convinced that the mature local-exchange carrier services can maintain their strength against strong competitive cable offerings for small businesses. Forest Oil and Itron also performed poorly. Forest is selling assets to reduce its large debt balances, something that we expect to improve the remaining equity value. Itron, which sells electric, gas, and water metering equipment globally, is facing a weaker backlog following large order fulfillments in its North American business.

We focus on finding exceptional, well-managed businesses whose stocks are selling at attractive prices. We define quality businesses as those that generate substantial levels of free cash flow, have numerous reinvestment opportunities at attractive returns, and enjoy competitive advantages. We think a quality management team is shareholder-oriented and allocates capital to increase shareholder value.

Although the geopolitical landscape remains uncertain (when isn’t it?), the recent rise in interest rates has important implications for investors. Companies with growing earnings and reinvestment plans will be increasingly favored over bonds and high-yield-oriented equities. The merger-and-acquisition marketplace appears to be heating up as well. This backdrop should favor our investment process, which is built on finding companies poised to return to more favorable free cash flows, balance-sheet strength, and low valuations.

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Frontier Capital Management Co., LLC

Portfolio Managers: Thomas W. Duncan, Jr., Senior Vice President William A. Teichner, CFA, Senior Vice President

Our portion of the fund benefited from both stock selection and sector selection relative to our benchmark, with outperformance largely driven by financial services, producer durables, and materials and processing.

Our portfolio’s ten largest contributors were spread over five sectors. They included three financial services companies, one energy stock, and two stocks each from producer durables, materials and processing, and health care.

The most significant contributor was Saia, a leading freight carrier operating in 34 states. Saia generates revenue by collecting, aggregating, and delivering shipments from customers that do not have enough freight for dedicated truckloads. Its stock climbed after the company reported earnings that exceeded consensus estimates. Saia’s profitability came from higher rates and improved productivity. We believe the company can continue to expand its operating margin in coming years.

The portfolio’s largest detractors also were spread over several sectors; they included four technology holdings and two companies each from consumer discretionary and producer durables. The technology stocks were from three different industries within that sector.

The holding that hurt results most was Pericom Semiconductor, which sells chips that improve the speed and quality of data in electronic devices. In January, the company announced weaker-than-expected revenues for its fiscal second quarter, attributing the shortfall to challenging global macroeconomic conditions and softness in the personal computer industry. We continue to own the stock, as most of Pericom’s end-markets—telecommunications and networking, for example—offer better growth and profitability characteristics than its personal computer business. Furthermore, the stock is inexpensive, trading below its historical median valuations on measures such as tangible book value and enterprise-value-to-sales.

During the period we bought 20 new stocks and also sold 20 holdings. The purchases were spread across eight sectors; the sales were across six. The net effect was primarily an increase in technology and energy stocks and a reduction in holdings within the financial services and materials and processing sectors. As is typical for Frontier, the changes were based on company-specific factors rather than top-down positioning.

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Explorer Value Fund

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 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.

Cumulative Performance: March 30, 2010, Through August 31, 2013
Initial Investment of $10,000

Small-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the inception date for both the fund and its comparative standards.

See Financial Highlights for dividend and capital gains information.

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Explorer Value Fund

Fiscal-Year Total Returns (%): March 30, 2010, Through August 31, 2013

Average Annual Total Returns: Periods Ended June 30, 2013
This table presents 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.

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Explorer Value Fund

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See Note A in Notes to Financial Statements.
* Non-income-producing security.
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 96 . 5 % and 3 . 7 %, respectively, of net assets.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7 -day yield.
3 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
4 Securities with a value of $ 6 00,000 have been segregated as initial margin for open futures contracts.
5 The issuer was placed under federal conservatorship in September 200 8 ; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for senior preferred stock.
See accompanying Notes, which are an integral part of the Financial Statements.

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