Preheat your oven to 400° and line a baking sheet with parchment paper.
Place the marshmallows on the baking sheet in a single layer. Bake in the preheated oven for 5-6 minutes, or until golden brown (do not burn). Set aside.
Add the water and sugar to the saucepan. Once the marshmallows are done toasting, scrape them off the baking sheet and add them to the saucepan. Heat the syrup over medium heat, whisking frequently until everything is combined and the marshmallows and sugar are fully dissolved.
Remove from heat and whisk in the vanilla extract. Allow the syrup to cool at room temperature for 15 minutes, then transfer to a syrup bottle or mason jar and store in the fridge for up to 2 weeks.
Notes
It is really important not to burn the marshmallows or you'll end up with little specks of black in your syrup.