diff --git a/docs/guide/mode-and-env.md b/docs/guide/mode-and-env.md
index 8dcfb0f7c..16034c1d6 100644
--- a/docs/guide/mode-and-env.md
+++ b/docs/guide/mode-and-env.md
@@ -46,7 +46,7 @@ FOO=bar
 VUE_APP_SECRET=secret
 ```
 
-For more detailed env parsing rules, please refer to [the documentation of `dotenv`](https://github.com/motdotla/dotenv#rules).
+For more detailed env parsing rules, please refer to [the documentation of `dotenv`](https://github.com/motdotla/dotenv#rules). We also use [dotenv-expand](https://github.com/motdotla/dotenv-expand) for variable expansion (available in Vue CLI 3.5+).
 
 Loaded variables will become available to all `vue-cli-service` commands, plugins and dependencies.
 
diff --git a/packages/@vue/cli-service/lib/Service.js b/packages/@vue/cli-service/lib/Service.js
index 0263c21f6..9b8bc885b 100644
--- a/packages/@vue/cli-service/lib/Service.js
+++ b/packages/@vue/cli-service/lib/Service.js
@@ -7,6 +7,7 @@ const merge = require('webpack-merge')
 const Config = require('webpack-chain')
 const PluginAPI = require('./PluginAPI')
 const dotenv = require('dotenv')
+const dotenvExpand = require('dotenv-expand')
 const defaultsDeep = require('lodash.defaultsdeep')
 const { warn, error, isPlugin, loadModule } = require('@vue/cli-shared-utils')
 
@@ -95,8 +96,9 @@ module.exports = class Service {
 
     const load = path => {
       try {
-        const res = dotenv.config({ path, debug: process.env.DEBUG })
-        logger(path, res)
+        const env = dotenv.config({ path, debug: process.env.DEBUG })
+        dotenvExpand(env)
+        logger(path, env)
       } catch (err) {
         // only ignore error if file is not found
         if (err.toString().indexOf('ENOENT') < 0) {
diff --git a/packages/@vue/cli-service/package.json b/packages/@vue/cli-service/package.json
index 2c36ddf06..7e876e50a 100644
--- a/packages/@vue/cli-service/package.json
+++ b/packages/@vue/cli-service/package.json
@@ -44,6 +44,7 @@
     "cssnano": "^4.1.10",
     "debug": "^4.1.1",
     "dotenv": "^6.2.0",
+    "dotenv-expand": "^4.2.0",
     "escape-string-regexp": "^1.0.5",
     "file-loader": "^3.0.1",
     "fs-extra": "^7.0.1",
diff --git a/yarn.lock b/yarn.lock
index 37db63ccd..225ecd3a2 100644
--- a/yarn.lock
+++ b/yarn.lock
@@ -6211,6 +6211,11 @@ dot-prop@^4.1.0, dot-prop@^4.1.1, dot-prop@^4.2.0:
   dependencies:
     is-obj "^1.0.0"
 
+dotenv-expand@^4.2.0:
+  version "4.2.0"
+  resolved "https://registry.yarnpkg.com/dotenv-expand/-/dotenv-expand-4.2.0.tgz#def1f1ca5d6059d24a766e587942c21106ce1275"
+  integrity sha1-3vHxyl1gWdJKdm5YeULCEQbOEnU=
+
 dotenv@^6.2.0:
   version "6.2.0"
   resolved "https://registry.yarnpkg.com/dotenv/-/dotenv-6.2.0.tgz#941c0410535d942c8becf28d3f357dbd9d476064"