First, interest rate guessing is a tough, tough game. Second, the transactions that your trading generates are borne by the investors remaining in the fund. This is why fund companies such as Vanguard want to make sure that investors are good long-term investors. Yes, it is. In addition, the yields are very generous, so mortgages look attractive now.
Duration is the amount that a bond price changes for a given change in interest rates.
In essence, duration measures the price sensitivity of a bond to changing interest rates. Bond funds are different than money market funds. That said, investors who have horizons of two to five years would do better in a short-term bond fund than in a money market fund over most periods. Much of the difference is pricing-related. The index uses Lehman's prices whereas the Vanguard portfolio uses a different pricing service, and often during periods of high price volatility, the pricing sources can result in different returns.